Congressional Republicans seem to think they are being flexible on taxes simply because a few of them have grudgingly admitted that some new revenues can be part of the current fiscal negotiations. We’re unimpressed.
No credit is due to a party that has suddenly accepted the obvious when it has no choice, particularly after two years of irresponsibly reducing the deficit only from the spending side. True flexibility means acknowledging that tax rates for the rich have to go up, and then negotiating how much and which ones. But, so far, Republicans have been just as closed to that reality as they have been for years, ignoring both the election results and the plain arithmetic of deficit reduction.
The Republicans have offered to raise taxes on people with higher incomes by capping deductions, a $727 billion tax increase over ten years, in return for serious entitlement reforms, which are the long-term drivers of our fiscal disaster.
To which the Times editors go on to say that, “fortunately,” President Obama is refusing to make any serious changes to entitlements.
Allowing the top marginal tax rate to return to return to 39.6 percent will not solve our fiscal problems. Let me repeat that: raising the top marginal tax rate to 39.6 percent will not raise enough revenue to solve our fiscal problem.
Here’s the problem: if we keep current tax and spending policies in place—that is, if we extend the Bush tax cuts, continue indexing the Alternative Minimum Tax to inflation, and hold Medicare payment rates constant, deficits and debt will shoot up into dangerous territory by 2020. Here’s how the CBO describes it (PDF):
…deficits would be much larger during the 2013–2022 period than in CBO’s baseline, averaging 4.9 percent of GDP rather than 1.1 percent. With deficits totaling nearly $10 trillion during that decade, debt held by the public would climb to 90 percent of GDP in 2022, the highest percentage since just after World War II. Thus, under that scenario, the United States would quickly head into fiscal territory unfamiliar to it and most other developed nations. Moreover, federal debt would continue to grow over the longer term, more than doubling relative to GDP between 2022 and 2037.
For comparison, the CBO says that between 1957 and 2008, debt ranged between 20-50 percent of GDP. So when debt shoots up to 90 percent of GDP, that’s kind of bad.
So what’s the reason for this? The reason is quite simple: tax revenues would stay near their historical average at 18.5 percent of GDP, but total spending would rise to 23.3 percent of GDP, well above the 21 percent average between 1972 and 2011. But here’s the really scary part: entitlement spending will account for 14 percent of GDP, or more than 75 percent of tax revenues.
So there’s no question, then, that we will need to bring our spending and revenues more in line. The CBO suggests that in 2020, if we reduce (but not eliminate—that would take $1 trillion of savings) our projected deficit by $750 billion, we could keep our deficit at a relatively small and healthy percentage of GDP and put our debt on a gentle, downward-sloping trajectory. In other words, doing so would go a long way toward fixing our fiscal troubles.
But how can we get those $750 billion of savings in 2020? If we extend Bush’s tax cuts for all but the wealthy (which is what Democrats propose), we would only get $110 billion, or 14.7 percent, of the necessary amount of deficit reduction.
So here’s the choice we have, and the choice that Democrats refuse to publicly acknowledge: we can maintain our entitlement programs as-is and not make significant changes, but not only will this mean locking in government spending as a percentage of GDP, and allowing it to rise in the decades ahead, well above historical levels, but it will also mean a dramatic increase in taxes on not only the wealthy, but the middle class, to pay for it.
Republicans themselves like to ignore this as well (what else is Romney’s claim that Obama slashed Medicare as a part of ACA?), but at least they are offering to increase tax revenues while also demanding (vague, ill-defined) reform to entitlements, the serious drivers of our fiscal troubles.
That’s the reality. The Times editors—and Democrats—are choosing to pretend that raising taxes on the wealthy is in and of itself fiscal responsibility. Senator Dick Durbin says that entitlement programs should not even be on the negotiation table for the fiscal cliff, and that they’ll get to entitlement reform next year. (“Trust me.”) President Obama is seeking $1.6 trillion of new revenue and offering just $340 billion of savings from entitlement spending. (Somehow, the President believes that 4.7 times as much revenue as reduction in spending is balanced.)
In reality, tax rates will likely need to rise on the wealthy to fix our collective fiscal disaster. And luckily, the GOP’s insistence that rates stay where they are seems to be softening. But what is truly dodging reality is the idea that we can escape altering our entitlement programs without dramatic changes to the size and scope of our federal government and taxes on the American people.