The Agenda

Evan Soltas on Structural Deficits

Evan Soltas makes a useful contribution by estimating the extent of the structural budget deficit, i.e., the budget deficit that remains after we account for the fact that a depressed economy tends to reduce tax revenues and increase outlays on safety net programs. What I find strange about his post, however, is that he frames the fact that the structural budget deficit doesn’t appear to be very large as a reason “deficit hawks” aren’t to be trusted while acknowledging the an aging population and medical cost growth are likely to increase the size of the structural budget deficit considerably in the coming years unless we embrace some kind of structural reform. That is, Soltas’s argument only applies to an extremely vulgar form of deficit-hawkery that groups like the Committee for a Responsible Federal Budget and the Bipartisan Policy Center, among others, explicitly reject.

Some critics of CRFB, BPC, and other “deficit hawk” organizations deride these groups for expressing alarm over the “fiscal cliff,” given that the expiration of the Bush-era tax cuts, the Obama-era fiscal stimulus measures, and various automatic spending cuts will tend to reduce deficits. But of course this reflects the fact that these organizations are primarily concerned with structural budget deficits and the goal of achieving fiscal sustainability over the long-run. One can disagree with the priorities expressed by these groups, but it is important not to caricature their views. 

In fairness to Soltas, it seems that he is concerned with people who are exercised by trillion-dollar near-term deficits as such. His more interesting point, in my view, is only made implicitly: 

Income tax revenues, for example, have become more cyclically volatile as the burden has shifted in recent years toward high earners, whose incomes are less stable.

The federal tax code also encourages overreliance on volatile taxes bases at the state and local level, which is particularly problematic given state-level balanced budget requirements. It could be that we just have to learn to live with a more volatile tax base. But if not, we need to consider relying more heavily on broad-based consumption taxes, with narrow income taxes designed primarily to maintain overall progressivity. 


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