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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Budget Shadowboxing



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I’ve always thought of as the Ryan budget as a “put up or shut up” budget. If one sees its Medicaid and discretionary spending cuts as draconian, as many do, it raises the question: how do you intend to pay for keeping these programs on their current trajectory?

We have good reason to believe that making the tax code more steeply progressive is not likely to do the trick, as the necessary increases in marginal tax rates would likely have a deleterious impact on work incentives.  Alan Viard has surveyed the evidence on the potential impact of sharp increases in marginal tax rates, as has Arpit Gupta. More recently, Arpit has suggested that we are closer to the top of the Laffer Curve than is commonly understood. And a March 2012 report from the Tax Policy Center by Eric Toder, Jim Nunns, and Joseph Rosenberg examines the top marginal tax rates we’d need to bring debt to sustainable levels without significantly altering the federal government’s spending trajectory and they are strikingly high.  This is part of why a number of neoliberals, including Matt Yglesias and Josh Barro, have argued that we need significant tax increases on middle-income households: the spending cuts we’d otherwise need to achieve fiscal balance are in their view unacceptable. 

So one could see the Ryan budget as essentially an advertisement for tax increases on middle-income households as well as high-income households. That is, it reveals how extremely hard it will be for the federal government to achieve fiscal balance while keeping the tax share of GDP below 19 percent. Ryan’s critics might craft a parallel budget that allows for a more generous growth rate for Medicaid block grants and discretionary spending, but that pays for it through significant tax increases relative to current policy. That is essentially the path taken by the Domenici-Rivlin proposal from the Bipartisan Policy Center, which I see as the most promising basis for a grand bargain. Yet this approach is, for obvious reasons, politically fraught. The result is that we wind up shadowboxing. Democrats declare Ryan’s proposed spending cuts unacceptable without acknowledging that broad-based tax increases are the most realistic way of avoiding them. Republicans, meanwhile, have not generally thought through the impact of (in particular) the Medicaid cuts envisioned in the Ryan budget. 



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