Bruce Bartlett explains in clear, succinct language the impasse that causes the federal government to borrow:
Just so people know the round numbers, total spending this year is about $3.6 trillion. At most, $200 billion of that represents stimulus spending, so even if there had been no stimulus bill and the economy had done as well as it has done, we would be looking at a $3.4 trillion budget.
Revenues are only about $2.1 trillion, so we would be looking at a substantial deficit even if the stimulus package was never enacted. Revenues would be even lower if Republicans had gotten their wish and the stimulus consisted entirely of tax cuts. How tax cuts would help people with no wages because they have no jobs or businesses with no profits to tax was never explained. But many right-wingers are convinced that tax cuts are the only appropriate governmental response no matter what the problem is.
Looking at last year’s budget, only 38% was classified as discretionary; that is, under Congress’s control through the appropriations process. All the rest was mandatory: entitlements and interest on the debt. Within the discretionary category, 54% went to national defense. Just $37.5 billion, 3.3% of the discretionary budget, went for international affairs including foreign aid. Over the years I have encountered many conservatives who thought that abolishing foreign aid was just about the only thing needed to balance the budget. Obviously, that’s nonsense.
Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.
Read the whole thing.
In order to balance the budget or even to bring it into some semblance of sanity we can cut spending, raise taxes, borrow, or some of all three. As we saw during the Bush Administration neither Republicans nor Democrats have any particular allergy to spending. They just want to spend money on different things.
We have long passed the point at which cutting taxes will cause the federal government to realize increased revenues. To increase revenues we’ve got to increase marginal tax rates but there is no constituency for increasing taxes. That is what has made borrowing the preferred solution for generations.
However, there’s a bit of a difference with borrowing to make up the difference between operational outlays and income as debt service becomes an ever larger proportion of the budget. As interest rates rise, as they almost certainly will, that will happen even more quickly than it has in the past. And creditors will become more nervous about lending more.
We’ve seen this movie before. It’s being played out in California right now with the state budget and, as is too often the case, California is a bellwether of what is likely to happen on the national scene.
With an insatiable appetite for more federal spending, none at all for more taxes, a national debt that will soon be at historic highs, and no foreseeable level of growth that will save us from ourselves, it’s hard for me to see anything but a train wreck ahead.
My uncharacteristically helpful suggestions:
1) Means test medicare and social security.
2) Index retirement and eligibility to average lifespan.
3) Raise taxes.
4) Increase population via targeted (cherry picked) immigration.
5) Create a new lower tax bracket for start-ups.
6) Create the health care version of the base closing commission.
Not saying any of that’s politically possible.
My own view is that we need to means test Medicare and Social Security and increase the upper marginal tax rates slightly. I don’t think those will be enough.
We really need a major overhaul on the tax system. We’re overdue on that by a decade or more. We should abandon the corporate income tax (or at least allow year of purchase expensing on all business expenses, the norm in OECD countries) and change the basis for calculating the income tax from income to compensation.
I don’t find much to like, or new, in Bartlett’s commentary.
“How tax cuts would help people with no wages because they have no jobs or businesses with no profits to tax was never explained. But many right-wingers are convinced that tax cuts are the only appropriate governmental response no matter what the problem is.”
Pure sophistry. The recent change in employment rate is a small fraction of the overall population and represents a small fraction of the total consumer outlay. Many (most?) employed people have cut back their spending and would be benefitted by a tax cut, either income or payroll. Further, corporations pay no taxes, but that’s for another day.
“Over the years I have encountered many conservatives who thought that abolishing foreign aid was just about the only thing needed to balance the budget.”
Silly analysis. I’ve encountered people who believe in space aliens, but I don’t cite them in essays like Mr. Bartlett’s.
“All the rest was mandatory: entitlements and interest on the debt.”
Rubbish. Labeling something as “mandatory” doesn’t make it so, its a convenient way for pols to not have to debate the merits of the program and the efficasy of its administration.
I agree with Dave that a train wreck is coming. This has been a long time in the making, its amazing how long it has taken to get to a point of extremis. But the recent acceleration in Congressional spending proclivities, the demographically driven fatal flaw in both the Medicare and SS programs and the increasing difficulty in financing the debt are converging.
I would love to see SS means tested to finally expose it to everyone as the welfare program it was always destined to become. When the means test is set with a bar high enough to save meaningful money an awful lot of people are going to be pissed off and feel swindled.
I suppose you could increase marginal rates on, say, those making $750K to a million a year or more, although I really wouldn’t advise it. It will just get spent. But the problem is that raising significant revenues requires dipping down further, like all the way to $1ooK. That’s far enough that people really will change their behavior. The revenuers will be disappointed. And they will probably spend it anyway.
A meaningful essay would have addressed the long standing irresponsibility of the American voter, conned into the notion of a free lunch. I hold no brief for politicians, but they are simply capitalizing on voter greed and ignorance as voters pull the lever year after year for the candy promising pol…….all on someone else’s nickel of course.
The simple fact of the matter is that neither foreign aid nor “welfare queens” nor “wasteful Pentagon spending” have created our current spending problem. Rather, we have created a massive transfer payment infrastructure dedicated to the lower middle class to middle class, with obscene amounts of the tax revenues siphoned off in its administration. Milton Friedman’s quip is apropos as ever: “I’m resigned to the fact that I get only $1 of defense for every $3 I pay for……..but after all, its the government.”
A negative income tax would go along way to wiping out that inefficiency. But as Michael noted, its not politically feasible.
I hope you have a seat belt on when the train wrecks.
““Over the years I have encountered many conservatives who thought that abolishing foreign aid was just about the only thing needed to balance the budget.â€
I believe this refers to the polls which have shown that a majority of people believed that foreign aid made up about 15% of the federal budget. Google it if you wish, not hard to find.
Steve
I’d increase the brackets, creating a new one at $1 million personal income and another one at $5 million personal income. That would actually be a throw-back, in some ways (from what I’ve read, the top bracket in Eisenhower’s time would have been about $5 million in real dollars today). You could keep or lower the $250,000 bracket to 30%, and set the other brackets at, say, 35% and 40%, or 40% and 45%.
I’d also combine that with a steeply increased gas tax (which would help in constraining oil consumption and dependency, since the overwhelming majority of oil consumption happens in the transportation sector), and possibly a carbon tax. I’m tempted to have a federal sales tax (and lower payroll taxes at the same time), but I’d personally prefer to leave that tax at the state level.
I’d also increase the estate tax, particularly above a certain amount. It helps to break up concentrations of wealth across generations, or at least encourages people to donate some of their estate to charity upon death.
That’s the “tax” side.
You act as though this is some surprise. Social Security was always intended as a kind of welfare pension program for the elderly in order to minimize extensive poverty among the elderly.
Brackets mean very little when it comes to actual taxes paid. Take a look at these CBO numbers. Marginal rate under Reagan dropped from 70% to 28%, yet for the top 1% of earners, the effective tax rate only dropped 11 points and have risen since. As a metric, I don’t think marginal rate mean much of anything considering the complexity of our tax code.
That’s actually a very densely-packed comment, Andy. IMO effective tax rates are too low at all brackets.
A key issue is how is income calculated? That’s why I emphasize the importance of taxing compensation, still somewhat slippery, as opposed to wages.
Still the numbers are incontrovertible. Either we reduce costs or we increase taxes or we borrow or some combination. Unless the country experiences unimaginable growth rates that means that a lot of people are going to have significantly lower standards of living. And that assumes we don’t increase costs by adding new entitlements which seems like a more remote possibility every day.
I agree Dave, taxes need to rise pretty much across the board, but the tax base should also be widened.
One interesting not from the CBO numbers is that taxes are actually more progressive now than they probably ever have been, despite the Reagan and Bush cuts for the upper brackets. The lowest quintiles effectively pay almost no taxes. Besides the train wreck you identify in this post, government revenue streams that are dependent on a relative few ( the upper-most quintile) is not wise since it ties the fortunes of government solvency to how much income the wealthy are producing. You mention California, and the same is true there to a degree – a lot of California’s revenue problems are because rich people have seen their incomes drastically reduced, which then drastically reduced tax revenue.
Something that I didn’t work into this particular post is that, since prospective revenue streams, e.g. incomes, retail sales, housing prices, are unlikely to grow either rapidly or even at the rate we saw in the recent past, increased taxes means more pain and slower economic growth.
That’s something I think was missing from the Bartlett article that was the stepping-off point for this post. In the absence of spending austerity, you have a choice among massive borrowing or greatly increased taxes which will both tend to increase the need to borrow or increase taxes.
Brett –
I simply must repeat my earlier observation. You can raise the tax rates on very high income earners and, say, Bradd Pitt won’t decline his next movie deal. Fine. But a person who is calculating real risk and reward might be affected. Admittedly, this will be less so in the very upper income brackets, but be careful when you go low, which will be required for significant tax revenue. You may be very dissapointed, and with costs.
Concerning SS. This program has been marketed forever as a you pay in, you get out system. When it becomes – especially retroactively – you pay in, sorry you don’t get anything out system – a pure welfare system. Look out. WTFU.
Andy –
Marginal rates mean everything. When the marginal return increases the marginal effort increases. This increases overall income and results in the effective stat you cite. In your second post you put your finger on it: With a high marginal rate the effective income stat vaporizes. With low ones the income is produced…………and effective progressivity exhibits the behavior you cite.
We should not punish success through the tax code. It truley is insanity.