Filling the Gap

Consistent with its present policies the editors of the Washington Post argue against trying to reduce the gap between federal spending and revenue and thereby the growth in the burgeoning debt by increasing taxes:

Budget reforms must be based primarily on spending constraints, not tax hikes. While some moderate tax increases could help reduce the deficit, it is not feasible to structure a tax system in which revenue grows faster than the economy every year, which is what would be necessary given current spending projections.

Even boosting revenue as a share of GDP to the highest levels in American history would close less than half of this year’s deficit, and such a large tax hike would destroy economic growth. No major tax proposal on its own, except perhaps a national value-added tax, comes anywhere near closing the deficit when the effect on economic growth is properly accounted for.

The graph at the top of the page illustrates their depiction of the limited effects of various tax increases.

More specifically taking all of the steps they list in raising taxes, e.g. increasing the personal income tax, a higher rate on the richest earners, a wealth tax, a higher corporate income tax, and a value-added tax, together would still not be enough to close the gap.

Even treating the chart’s revenue estimates as additive, and making no allowance for adverse effects on growth, the listed tax increases would not close the deficit. But closing it is not the editors’ stated goal nor mine. The aim is to slow the growth of debt relative to the economy. That still requires choices on both sides of the ledger: more revenue and slower growth in spending, particularly health care spending.

That leaves reducing spending.

I’ve already mentioned some of my preferred actions: restoring the income assumptions of the 1983 Social Security reform by raising FICA max, a prebated VAT, and changing out health care system to a capitation system. That last I presume would be anathema to the editors. The bottom line is that both tax increases and spending reductions will be necessary to put our fiscal house in order after years of irresponsibility.

Two more points. The editors’ argument highlights the irony of the Democrats’ “affordability” campaign plank. History tells us their first line of attack in making things more affordable will be to give people more money and that will have nearly the opposite effect they assume. And that our huge debt overhang impedes economic growth will render the Republicans’ preferred strategy, tax reductions, unable to produce enough growth to make the debt less dire is an empirical reality.

We don’t have a choice other than discipline.