The Brutal Arithmetic of the Budget Deficit
Right
now, U.S. citizens are paying $2.4 trillion for their government.
That’s what federal revenue added up to this year, according to the
Congressional Budget Office. Some 46 percent of that total comes from
individual income taxes, 35 percent from payroll taxes meant for Social
Security and Medicare, 10 percent from corporate income taxes, and the
last 9 percent from estate and gift taxes, excise taxes, and others.
Now
consider the $1.1 trillion which, also according to the CBO, the
government will borrow by year’s end to make up the difference between
revenue and expenditures. That’s the budget deficit, and if there was
one thing the presidential candidates agreed on during the campaign, it
was this: The deficit is unignorable. Mitt Romney said the gap needs to
be closed entirely through spending cuts. Obama has maintained that
increased revenue—i.e., increased taxes—must be part of the solution.
Neither pronouncement sufficiently conveys how painful plugging the
budget hole will be.Obama’s right when he says higher taxes are inevitable. Both of the big deficit reduction reports issued during his first term, from his own Simpson-Bowles commission as well as the Rivlin-Domenici task force, recommended a mix of tax hikes and spending cuts to close the gap. The problem is that raising the taxes Obama talked about on the campaign trail doesn’t get anywhere near closing the deficit.
It's mathematically impossible to get more revenue without hitting the middle class.
Take corporate taxes. Since those only make up a tenth of the federal government’s revenue, eliminating various corporate tax breaks, as Obama has promised to do, would have a minimal impact on the budget gap. Then there are the wealthy individuals whom the president says should “pay their fair share.” Obama’s 2013 budget calculates that allowing the Bush tax cuts to expire for earners over $250,000 would decrease the deficit by $968 billion over the next decade. That’s significant, but it’s still only a piece of what’s needed. Rivlin-Domenici recommended $2.3 trillion in new revenue from 2012 to 2020 (in addition to $2.7 trillion in spending cuts) to get the deficit to a manageable size, while Simpson-Bowles assumed that the upper-income tax cuts would expire, and still recommended $1 trillion in additional revenue (plus $2.2 trillion in spending cuts). The commission co-chairs, Erskine Bowles and Alan Simpson, laid out a scenario where that extra money came from eliminating or reducing all tax credits and deductions, including popular ones for mortgage interest and health insurance—credits and deductions aimed squarely at the middle class.
While Obama distanced himself from the Simpson-Bowles recommendations when they were published two years ago, his 2013 budget aims to reduce the deficit by $4 trillion, roughly as much as the commission. Strikingly, though, he proposes getting there by imposing $2.50 in spending cuts for every dollar in new revenue. That may be a concession to the mathematical impossibility of getting more tax revenue without hitting the middle class, but Obama’s ratio tilts more toward cutting than Simpson-Bowles. And since congressional Democrats already regard the commission’s report as the budgetary equivalent of clear-cutting, it’s hard to see the president getting much traction with his own party.
The tax math is unforgiving, and the president and his adversaries will have to confront it immediately. Barring action, almost every tax cut passed by Obama and George W. Bush will expire next year, starting on Jan. 1. At the same time, $1.2 trillion in across-the-board spending cuts will kick in—a “sequester” triggered by the failure of last year’s supercommittee to work out a debt deal. The infamous fiscal cliff will cut the federal deficit by $560 billion by the end of fiscal 2013, but with the likely side-effect of throwing the country back into recession. For those hoping for a deal, there are a few encouraging signs: The day after the election, Speaker John Boehner declared he was open to the idea of new revenue. Whatever the grand bargain, we’re all going to be paying for it. As the famed budget balancer Bill Clinton put it a couple months back, the answer is one word: arithmetic.
The bottom line: Obama and Congress must come to a deficit deal by Jan. 1, before every tax cut of the past decade begins to expire.
Time for a reality check from both parties if they are actually serious and concerned.
ReplyDeleteTying this post to a previous one on Lack of Vision, there are a couple of things that come to mind for me Lou. I don't see spending as the problem it is made out to be. This is not to say that spending shouldn't be cut, or be tied to some benchmark. But I believe the biggest issue is that we don't want to pay full price for what we consume. This dogma is as embedded in our culture the way Eisenhower said the military industrial complex was.
ReplyDeleteFor the longest time, we more or less paid our bills and the wealthy paid a substantial majority of their income into taxes. Starting with Reagan, Republicans made their case that this was some kind of moral crisis and then won that battle. We've lived in debt ever since. Ultimately, there is no consequence to cut taxes and never cut spending....unless you are a Democrat president, THEN it's a crisis of alarming proportions.
At best, we are hearing that we can solve this by a piddling tax increase on the wealthiest and by cutting money from everything BUT the military. This is pure fantasy. You and I both want a leader who will describe what it takes to fix this. However, nobody wants to sacrifice. A cut in military spending means a loss of defense jobs. A cut in farm subsidies means food costs more (allegedly), a cut in any government spending is money that will come out of the economy that will not be replaced. There isn't a person alive who can sell that and get support.
nobody wants to sacrifice.
DeleteThat says it all. The repub's sacred cow the military and tax hikes. The dem's entitlement and raising taxes.
There will be little compromise just a healthy kick of the can landing well down the road.
Shall we take the pain today or another day when the pain today will look like a slap on the wrist compared to the pain tomorrow.
No matter how much you tax the wealthy, we just don't have enough wealthy to cover the deficit. It will take cutting spending, across the board and raising taxes across the board.
DeleteRecession, yes we will have yet another recession is a weak economy. Is it better to have a recession today or a depression tomorrow?
I stand by what I said here, we don't want to pay for what we consume. Before embarking on a plan that will be ridiculous because it will do nothing to address the problem, I would like to hear from all parties that this matter is so serious that we need to attach real and severe penalties on EVERY level of wealth and income in this country if we don't get it under control. Currently, there is a fight to the death to prevent a 5% increase on the wealthiest Americans while there is a suggestion to broaden the base and extract more money from a group who collectively make up 50% of the country but take in only 13% of all the income. This is surreal.
DeleteSince Reagan's day, top tax rates are half what they were and spending never even slowed down. Now that taxes are here and the top 1% control most of the wealth in the country, we are talking about needing to share the pain. It's hard for me to stomach that. For 30 years we have slowly whittled away the middle class, debased the currency, given away all the jobs and NOW want them to pay for the debt that was rung up for the benefit of the wealthy.
I hate to keep beating the same drum Lou, but I keep feeling like the message is that the people who benefited least from the excesses of the last 30 years need to be held as accountable for paying it back as those who benefited the most.
Speaking of beating the same drum..... remember all my references to www.cagw.org (Citizens Against government waste) ? You can go there and seem some very real, very documented cases of massive governmental waste. Spending more and having more to spend will not reduce this wastefulness.
DeleteIt's not that we don't want to pay full price for our services, Max---it's simply that we no longer want to pay three, four or ten times what they should cost, and have the leftovers go into funding governmental bureaucracy.
That's the part libs never seem to get. They argue and argue about how essential everything government is and how spending (and wasting) that much money is not the problem. But it is, Max. It is the problem.
What is so awful about having a leaner government that does things better and more efficiently?
Top O the day Teri, and I vividly remember that link you posted. I disagree however, with your second paragraph. As I said above, since the days of Reagan, we have cut taxes plenty but never made subsequent cuts in spending. We want low taxes, we want a big ass military, we want massive farm bills and we want medicare and social security. Republicans, IMO, have chosen the path of simply cutting taxes when they are in power and leaving the mess for someone else to clean up. Whether we agree with what the money is spent on or not, I'm hard pressed to say that tax and spend is somehow less moral then don't tax but keep spending.
DeleteNow, I would not disagree even slightly that things need to be done more efficiently. However, if, as a starting premise, one half of the political system preaches that everything government does is wasteful, can we really believe they want to work at disproving what they preach? That said, you are missing a little bit what I am saying about paying full price.
At some point, we decided to stop having a discussion about what we did and didn't want to pay for. Bush Sr., was a man who understood that if you truly believe in fiscal restraint, then there needs to be consequence for too much spending. Once he lost and was blamed for going back on his word over taxes, I believe that taxation was permanently removed as being a rational piece of balancing budgets. Republicans have been completely content to let spending go berzerk as long as they did not have to raise taxes. In the midst of TWO wars, we could not even have a DISCUSSION about raising taxes. That, to me, is the epitome of not wanting to pay for what you consume.
Now that they have lost, some Republicans are accepting that they need to accept a tax hit on the wealthiest Americans as part of adult discussions on avoiding the fiscal cliff. They weren't willing to do this as a matter of fiscal sanity, it is only because they lost. Regardless, I hear nothing from that uses the link you provided as part of a meaningful discussion and that's a genuine shame.
I'm sorry...what does your last sentence mean?
DeleteIt stops me from framing a meaningful reply.
Should read I hear nothing from anyone in power that uses your link as part of a meaningful discussion. I believe we could spend the money much more efficiently then we do and that should be a goal. Medicare, for is much as people bitch about it, is actually very rational in how they spend money and contain costs. They pay for treatment that is based on research and they simply won't pay for readmissions for the same condition in a short period of time. Nor will they pay for secondary issues, such as infection, that occur after someone is admitted for treatment.
DeleteStill, I keep coming back to several core issues. One major issue is that dogma has nothing to do with it, or very little anyway. In very simple terms, no matter where you cut spending, you are "breaking someone's rice bowl". You cut defense spending,you are taking away jobs. You blindly trim the government work force, you are cutting jobs. Elected officials want to keep getting elected, this is not a partisan issue.
Hate to say it Max but tax the wealthy. Tax them at a 70% rate. It will do exactly nothing.
DeleteUntil there is an effort to cut spending, across the board, eliminate waste, raising taxes on anyone is a wasted effort as any new money will be spent.
This year, Obama will spend 800 billion more than when he took office. Thanks to the provision that adds 7.5% increase to the budget every year.
Want a major cut? Return the budget to when PO took office. Every department gets exactly the same amount. Freeze the budget at that level for 5 years and limit the growth in federal spending to the percent in tax revenue growth. Goes negative, the government gets a cut in funding. Then Tax the wealthy as it would then have an impact.
I'm against any tax increase when the politicians refuse to cut spending or consider a balanced budget.
It really doesn't matter as we are in for some really bad years as payment is demanded for our debt. The government needs to change the way it does business.
Max says: 'I hear nothing from anyone in power that uses your link as part of a meaningful discussion'
DeleteWell yeah...that's the problem, isn't it?
Any rational discussion of reducing expenditures gets slapped with titles like 'throwing granny off the cliff', 'war on women'and 'Republicans want dirty air and water' from the opposition. Guess what--that kind of nonsense scare tactics works.
ReplyDelete"Time for a reality check from both parties if they are actually serious and concerned."
After millions of words, more than a year of campaigns and an even more divided Congress we get a sensible suggestion.
If they could be locked away in a room with the problem and kept on bread and water until a resolution was reached, you may have a solution.
Somehow it may be necessary to look outside the square. We in Australia are not so dependant on compromise historically, although we have a hung parliament both in my state of Tasmania and nationally at present.
We see from the posts of William Martin that there is an appetite for petitions abroad in the US at present. Why not a national petition telling the government to "extract the digit and get the job done”. Perhaps you could shame them into acting but you would need moderation of the views held by TD and Max. Time for action is now or history will consign you to irrelevance in the great scheme of things. At about the time I was born there was a bloke named Nero, he played the fiddle on the beach while his capital burned!!
In 1814 a mob of Brits did a bit of a job on Washington; this time, without your participation, your government may well do it for you.
Cheers
August 2011: the world was going to end without a budget compromise. 15 months later the so-called cliff looms.
DeletePure unadulterated horse pucky.
Our Obama rally proceeds. Our fed induced 0% interest rates cannot stimulate a turnip.
If Washington DC does indeed burn it will only smolder due to a wet layer of debt.
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DeleteThe zero percent interest are in lieu on the lack of action from congress. Imagine a 5% interest rate, 16 trillion debt soon to be 18 trillion. Currently the average interest rate paid is 3%. For every 1% average increase we pay 160 billion more in interest. We pay close to 500 billion in interest today, think we can afford another 2%/300 billion in interest?
ReplyDeleteAdd 280 billion a year in debt via Obamacare. Not a pretty picture.
Yep, it isn't looking very good. I have yet to hear a single program that can be cut to reduce the debt/deficit by a liberal and all the taxes in the World will not fix our problems. Unless we tax everyone at 100% and become a communist state, our appetite for federal spending will continue, and we all know how communist states treat their citizens...........
DeleteWe don't have a revenue problem, we have a spending problem.
"We don't have a revenue problem, we have a spending problem."
DeleteAgain, we have a maturity problem. If, what we believe is that nothing is more important than whittling every tax rate to a flat ten percent, then we do indeed have a spending problem. Like I said above Gotta, Republicans have become the party that cuts taxes and waits til they are in a minority to start screaming about what needs to be cut. Reagan could have cut spending, but didn't. Bush Jr. could have raised taxes in the midst of two wars, but didn't. Our one and only problem is that we want to spend and prevent any consequence from being applied. Pork knows no party loyalty Gotta. How many Republicans out there are clambering to cut spending to their state? If it was law that taxes would go up some percentage every year if the budget is not balanced, we would make genuine attempts to balance our wants with what taxes we are willing to pay. At best, people like yourself offer one solution, a generic screed to cut spending that even the people you vote for do not support if it means losing jobs in their state. What does that have to do with liberals and communism?
When government finally cuts the waste, programs that add nothing, transfer programs, money spent overseas that brings nothing to the security of the US, then we can look at what we really need. Do we need a healthcare program that gives free BC pills when the individual can buy them for 8.00? Do we need a zero dollar co-pay or does ti encourage unlimited visits to the doctor. Wouldn't it be better to have a basic healthcare program instead of one with the bells and whistles we cannot afford?
DeleteOne day decisions will need to be made on what we really need and what we can really afford. Do alleged poor people really need a cell phone provided by the government? Do we really have 5 million people that we disabled on the job in the last 4 years doubling the numbers from 4 years ago?
or is the government just being irresponsible with our tax dollars then saying, more, more.
Romney nominated Paul Ryan and excited a LOT of people. Then Romney ran away scared when the media whined about medicare reform (which we all know has to be done). Then he became a plain vanilla candidate. No pun intended.
ReplyDelete