We have a taxing problem, not just a spending problem

12 Jul

The Bush tax cuts were not supposed to last forever. Alan Greenspan, whose oracular endorsement was perhaps the single most decisive event in their passage, made it very clear that they were a temporary solution to a temporary surplus. “Recent data significantly raise the probability that sufficient resources will be available to undertake both debt reduction and surplus-lowering policy initiatives,” Greenspan said in 2001.

Okay, so maybe he wasn’t so clear. But everyone knew what he meant. And, broadly speaking, they agreed. We had a big surplus. It was time to do something with it. Brad DeLong, a former Clinton administration official and an economist at the University of California at Berkeley, didn’t want to see the surplus spent on tax cuts. He wanted to see it spent on public investments. “Nevertheless,” he wrote in 2001, “it is hard to disagree with Greenspan’s position that — if our future economic growth is as bright as appears likely— it will be time by the middle of this decade to do something to drastically cut the government’s surpluses.”

Ten years later, there is no surplus. It turned out that our future economic growth wasn’t as bright as had seemed likely in 2001. That, plus $2 trillion in tax cuts and a few trillion more in wars and assorted spending, left us with large and growing deficits.

The next step, then, is obvious. The Bush tax cuts were scheduled to expire after 10 years. Congress extended them for two years in 2010, as you don’t want a massive tax increase in the middle of a deep recession. But as we look toward our future deficits, it seems we’ll need to let at least some of the tax cuts expire. Indeed, Greenspan now says we should let all of the Bush tax cuts expire.

But the Republican Party refuses to let any of them expire. And forget admitting that tax cuts meant for surpluses don’t make sense during deficits; they refuse to admit that tax cuts have anything to do with deficits at all.

It’s this belief that stands in the way of a debt deal. “We have a spending problem, not a taxing problem,” Republicans say. If the federal government defaults on Aug. 2, that sentence will be to blame. What a shame, then, that the sentence is entirely, obviously, wrong.

“I’m an ‘and’ guy, not an ‘or’ guy,” says Donald Marron, who served as an economist in George W. Bush’s White House and now leads the Brookings/Urban Tax Policy Center. If you look at the numbers, it’s easy to see why economists like Marron think we have both a spending problem and a taxing problem. In 2001, revenues were at 19.5 percent of gross domestic product and spending was at 18.6 percent of GDP. That was our surplus. In 2010, revenues were at 14.9 percent of GDP while spending was at 23.9 percent. That’s our deficit: Revenues are down and spending is up. It’s “and,” not “or.”

If you’re worried about the deficit, then, the solution is plain: some mix of tax increases and spending cuts. If Democrats are being honest, they’ll tell you they’re worried about the deficit, but that the right time to address the deficit is after a real recovery takes hold, which means we shouldn’t begin serious deficit reduction until 2013 or later. If Republicans are being honest, they’ll tell you they’re worried about the deficit, but resisting tax increases is their top priority, because keeping taxes low means that government will shrink.

In practice, empirical analyses have found that tax rates do not drive the long-term growth in government. But it is driving Republican strategy on the budget. That’s why the GOP preferred a $2 trillion deficit reduction deal with no taxes to a $4 trillion deficit deal that would have included some taxes, but also, according to reports out of both parties, raised the Medicare eligibility age and cut Social Security benefits.

In rejecting that deal, which liberals would have loathed, Speaker of the House John Boehner (R-Ohio) might have inadvertently saved President Obama from facing a primary challenge. But more to the point, he might have locked in higher taxes down the road. Few noticed that the White House offer of $1 trillion in revenues in return for $3 trillion of spending cuts would have taken the expiration of the Bush tax cuts off of the table. That would mean the tax debate concluded this year, a time when the debt ceiling gives the GOP leverage, rather than next year, when the Bush tax cuts are set to expire and the White House has most of the leverage.

In other words: If Republicans could have agreed with Democrats now, taxes would have gone up by $1 trillion. If they can’t agree with Democrats next year, they’ll go up by more than $4 trillion. And Republicans had a better hand this year than they will next year. I expect they’ll come to wish they’d played it.