Speaker Boehner and President Obama are supposedly close to a fiscal-cliff deal. Based on the details revealed so far, we know a few things: It won’t address our long-term fiscal problems, it would give Congress the ability to increase the debt limit without having to offer spending cuts in exchange, and it continues to be weighted more heavily toward raising taxes on a small number of Americans than cutting spending. I am not sure how Speaker Boehner intends to sell this plan to the House, so the next few days will be interesting.
Either way, I think it is important to put to rest the idea that we can address our long-term problems by going back to Clinton-era levels of tax collection without engaging in serious reforms of Medicare and Social Security, or simply by offering fake spending cuts — a fairly common narrative in Washington these days. That’s the case Reason’s Nick Gillespie and I make over at Bloomberg View this morning. Here is a tidbit:
Obama hasn’t explained precisely how higher tax rates on a small fraction of the population will do much to improve the country’s balance sheet. According to the Congressional Budget Office, increasing taxes on the wealthiest Americans to Clinton- era levels will raise $220 billion over four years — $55 billion a year on average through 2016, the last year of Obama’s presidency.
Over that same period, the White House Office of Management and Budget estimates federal spending at $15.8 trillion, or almost $4 trillion a year on average, and annual deficits of $700 billion.
A little history: 2000 was about the best year ever for federal revenue since 1950. The government raked in slightly more than $2 trillion in nominal dollars and $2.3 trillion in inflation-adjusted (fiscal year 2005) dollars. When measured as a percentage of GDP, revenue reached 20.6 percent, the highest fraction ever recorded in peacetime. Although it’s true that receipts in 2006 and 2007 topped the $2.3 trillion mark in constant 2005 dollars, those totals represent smaller fractions of GDP, 18.2 percent and 18.5 percent, respectively. So it’s fair to call the $2.3 trillion in constant dollars a high-water mark. All these figures are drawn from the 2013 Historical Tables generated by the OMB; see table 1.3.
The high level of revenue — both in constant dollars and as a percentage of GDP — was reached in a roaring economy. And all Americans were taxed at significantly higher levels than they are now.
But even if we could raise as much revenue as the president wants and the speaker is willing to concede, spending is high and is projected to get higher — increasing taxes won’t be enough:
Even if government could attain the revenue levels of seven years ago, it wouldn’t come close to covering spending, which crossed the $3 trillion mark, in inflation-adjusted dollars, in 2009. Neither Republicans nor Democrats are suggesting reducing total year-over-year spending.
The OMB estimates that annual government spending from 2013 to 2016 will average $3.25 trillion in 2005 dollars, or 22.7 percent of GDP. Whether measured in constant dollars or as a percentage of the economy, the government has never once reached that level of revenue, much less sustained it for a number of years.
Given low estimates for economic growth over the coming years, any attempt to reduce the debt-to-GDP ratio before Obama leaves office will thus require significant spending cuts in the near term.
The reality is that the deals so far have been more about raising revenue than addressing spending levels. That’s a recipe for disaster. As I have said before, while cutting spending doesn’t guarantee that the economy will grow in the short run, we know for sure that addressing deficits through higher taxes will make things much worse: In the short run tax increases hurt way more than spending cuts.
Our piece is here.