The Republican chairman of the House Budget Committee recently made headlines by announcing that if his party is serious about changing the fiscal path we’re on, it will have to consider raising taxes. Politics is about compromise, so the president is right. Each party has to give a little. However, “putting taxes on the table” is not as simple a solution to our debt problems as some think.
Looking at recent reports from the Congressional Budget Office, there can be no doubt about the fiscal chaos. Annual deficits of $2 trillion will soon become the norm. Interest payments on the debt this year will surpass both defense and Medicare spending and become the government’s largest budget item. Without additional revenue available, the Treasury will have to borrow money to cover these expenses. Meanwhile, we are accelerating toward the Social Security and Medicare fiscal cliffs that we have known about for decades and will reach within a few years.
Speaking about the need for a fiscal commission to address Washington’s mountain of debt, the commission’s chairman, Rep. Jodey Arrington (R-Texas), said Traffic lights“The last time there was a solution to Social Security that addressed solvency for 75 years, it was Ronald Reagan and Tip O’Neill, and it was bipartisan. It had revenue measures and it had program reforms. This is just reality.” He made the comments after some people warned that a tax commission is a gateway only to raising taxes.
I understand the concern. This is what the most recent deficit reduction commission tried to do. And while I don’t believe this is what Arrington is planning, I offer a word of warning to the president and the future commission: If the goal is indeed to improve our fiscal situation, as defined by reducing the ratio of debt to gross domestic product ( GDP) or by reducing the expected gap between revenue and expenditure, the increase in tax revenue should be limited to the minimum politically possible.
For one thing, our deficits are the result of overpromising to special interests – mostly seniors in the form of entitlement spending – without any real payment plan. The problem is ever-increasing spending, not a lack of revenue and taxes. The left’s common view that the rich don’t pay their fair share of taxes is a distraction. Not only is our tax system remarkably progressive, but there aren’t enough rich people to rob to significantly reduce our future deficits.
Furthermore, the work of the late Harvard economist Alberto Alesina established that the best way to successfully reduce the debt-to-GDP ratio is to implement a fiscal adjustment package based primarily on spending reforms. A reform geared primarily toward raising taxes will backfire as the move will slow the economy in the short and long term, causing it to ultimately fail to raise enough revenue to reduce debt relative to GDP. Lawmakers, unfortunately, made this mistake many times without learning any lessons, at least until the agreement concluded in 1997.
Like a 2011 New York Times Catherine Rampell’s article reminded us that, until then, all deficit reduction deals were very fiscally burdensome. What the article fails to mention is that they failed to reduce the deficit. What distinguishes the 1997 agreement is that it cut both spending and taxes. The result was the first budget surplus in decades, aided by a rapidly growing economy. Now, this lesson doesn’t mean that a tax commission should cut taxes, but it cautions against trying to reduce debt largely by raising taxes.
Another risk looms over the idea of a compromise on taxes and spending; that tax increases will be implemented while spending cuts will not. We have many examples of this model, but I’ll highlight just one: In 1982, President Ronald Reagan made a deal with Congress (the Tax Equity and Fiscal Responsibility Act) that would raise revenue by $1 for every $3 in tax cuts. expense.
There have been tax increases, in fact. But instead of spending cuts, Reagan got many spending increases. Remembering the story years later Comment magazine, Steven Hayward wrote, “By one calculation, the 1982 budget deal actually resulted in $1.14 in new spending for every additional tax dollar.”
The moral of this story is that putting revenue on the table to reduce debt has a bad history. Therefore, the president, who I believe is serious about putting the United States on a better fiscal path, will have to be careful about whatever deal he makes.
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