Taxes At An All-Time Low; Deficits At An All-Time High
The drive to cut taxes is at the heart of the budget mess.
In his review of Obama’s budget, Bruce Bartlett notes that in addition to aging population, one of the biggest drivers of our record-high deficits is our record-low taxes:
According to the historical tables, federal revenues will only consume 14.4 percent of GDP this year – the lowest percentage since 1950. The postwar average is about 18.5 percent and there were many very prosperous years when revenues were considerably higher. In the late 1990s, they averaged more than 20 percent of GDP, which was a key reason why we ran budget surpluses.
He also notes that the President’s budget for future years assumes that the Bush tax cuts will expire and that other revenue increases will happen — a prospect that he and I both find politically dubious given the current state of the Republican Party.
And this is a problem, because the biggest driver of deficits is the drive to cut taxes at all costs. If we were still at Clinton-era tax rates, the deficit would be substantially smaller and much more manageable. And as I’ve noted previously, there does not appear to be any correlation between income tax rates and economic performance, despite the best efforts of conservative pundits to assert the opposite. And as Bartlett rightly notes, not all taxes are created equal:
The budget makes the important point that tax reform is necessary to ensure that the government’s revenue-raising capacity is adequate to fund the health and retirement benefits that people expect. Economists know how to design a tax code that can raise more revenue without increasing the economic burden of taxation. That is because some taxes impose a greater economic burden, which economists call the deadweight cost of taxation, than others. Thus tax reform has the potential to increase revenues while stimulating growth at the same time.
But there is little appetite for such reform by both Republicans and Democrats. Instead, the arguments are simply over whose taxes to cut–and how much? But this is absolutely absurd. That’s because every tax dollar lost in a time of deficits means that a dollar is borrowed. Which means that interest must be paid on it. And simply put, if you care about cutting “government waste,” there is nothing more wasteful than money spent on interest payments. Which makes tax cuts themselves wasteful.
And the cost of tax cuts is enormously high. Consider this:
Starting in 2014, net interest payments will surpass the amount spent on education, transportation, energy and all other discretionary programs outside defense. In 2018, they will outstrip Medicare spending. Only the amounts spent on defense and Social Security would remain bigger under the president’s plan.
This is not to say that spending doesn’t need to be curtailed. I think it does. Indeed, I outlined a few ideas here — including a bigger federal role in curtailing health care costs, because such costs are the biggest driver of increased Federal spending. But the second biggest driver, going forward, is interest on the debt.
And that debt is caused by cutting taxes when the budget is in the red.
And everytime a politician wants to cut taxes without commensurate spending cuts, he is advocating increased spending on debt service. Which is awesome for bondholders. But pretty terrible for the rest of us.