Everyone is confused about the Fiscal Cliffhanger. Obama is
struggling to make a deal to prolong most of the Bush-era tax cuts. The
Republicans are holding back. Yet if a deal is reached, the federal
government and the long-term purpose of the Democratic Party are both
likely to be ruined for years to come. If the deal fails, the
Democratic Party can at long last return to what should be its core
purpose: using government to promote the public wellbeing.
The main point is this. If no deal is reached, the Bush tax cuts end.
We would return roughly to the tax schedule of the end of the 1990s,
when the macro-economy performed reasonably well and the budget was near
balance. Federal government revenues would rise by around 2.5 percent
of GDP per year compared with the current tax schedule. According to
the CBO, the federal tax system would collect 20-21 percent of GDP in
the second half of this decade. This is a bare minimum of what's needed
for effective government.
The Bush tax cuts were never affordable, not then; not now; not for
the "bottom 98 percent" as Obama wants; and certainly not for everybody,
including the rich, as the Republicans want.
If a deal is reached along the lines that Obama and the Republicans
are now discussing (to make the Bush tax cuts permanent for around 99
percent of the population, say for households below $400,000), then the
federal tax system would collect around 18.5 percent of GDP in the
second half of the decade, roughly 2.5 percent of GDP less than if the
Bush tax cuts expire.
Let's be clear. In an ideal world, there are better and more
progressive ways to get to 21 percent of GDP in federal tax revenues
than by personal income taxes alone. A partial list would include: a
wealth tax on large fortunes (e.g. 1 percent on net worth above $5
million); an end to tolerating tax havens like the Cayman Islands; an
end to the tax deferral of overseas corporate income; a crackdown on
abusive transfer pricing; and a tax on carbon emissions). The problem
is that neither the Administration nor the Congress is proposing these
measures, and in the meantime, a deal now that extends the Bush tax cuts
will be a severe loss of revenues for years to come without any
offsetting gains.
If the deal is reached, therefore, the Republicans have won: they
have locked in a federal tax system that collects so little total
federal revenue that government can afford almost nothing aside from the
military, interest payments, retirement programs and health care. Say
goodbye to the rest: science, technology, education, job training,
infrastructure, a functioning justice system, community development,
renewable energy, environment, and more.
How would we divide up 18.5 percent of GDP while bringing the budget
deficit under control? The current mandatory programs are around 13
percent of GDP, and because of population aging will rise to around 13.5
percent of GDP in the second half of this decade. Interest payments
will be around 2.5 percent of GDP. Military outlays are currently
around 4.5 percent of GDP. The discretionary civilian programs are
currently around 3.5 percent of GDP, already a wholly inadequate level.
To bring spending down from this point, even to 20.5 percent of GDP
(leaving a deficit of 2 percent of GDP), would require very deep cuts
somewhere. Suppose that military spending could be cut to 3 percent of
GDP, with the military-industrial complex kicking and screaming in
objection. That sum plus interest payments of 2.5 percent of GDP would
leave around 15 percent of GDP for mandatory programs and civilian
discretionary programs. If the mandatory programs were left unchanged,
civilian discretionary programs would fall to around 2 percent of GDP,
an absurdly low level. Yet if those programs were protected (as they
should be), something else would have to give: vital support for the
poor, or any hope of getting the deficit under control.
In short, something terrible would have to give. Either we'd have to
gut life-sustaining programs for the poor (Medicaid, Food Stamps,
etc.), or gut civilian government (education, science, environment), or
bust the budget with trillions of dollars more in public debt.
The point is that prolonging the Bush-era tax cuts, whether it's for
everybody (as the Republicans want) or "only" for the bottom 98 percent
as Obama wants, or someplace in between, would leave the government
without the federal revenues needed for basic services, support for the
poor, and public investments for training, education, infrastructure,
science, and the environment. So, if a deal is struck, we likely face a
decade of shrinking civilian programs, more suffering of the poor, and
mounting public debt.
That's what is called "successful" deal making in Washington these days.
So why is Obama pushing so hard for a deal? There are two purported
reasons, with anybody's guess on their relative importance. First, he
has continually promised continued tax cuts for 98 percent of
households, going all the way back to promises in the 2008 campaign and
repeated until today. This promise was probably necessary for his
election and reelection given the populist bent of our politics, though
it's devastating from a budgetary and economic point of view in the long
term. Second, he is worried about the short-term aggregate demand
consequences of a sudden rise in tax rates. If it's the latter reason,
Obama is ready to squander long-term budgetary needs to avoid a little
short-term pain. Either way, the budgetary consequences are terrible.
For the sake of our long-term future, I am therefore hoping that the
current negotiations fail, and that we end once and for all the
unaffordable tax cuts of the Bush era. It is time to awake from the
fiscal fantasy that Bush and Cheney pushed on us during 2001-2003 and
that both parties have continued until now.
HuffingtonPost
