Wednesday, April 13, 2011

The U.S. Has a Taxing Problem

Daniel Gross (via Mark Thoma):
First, this has every sign of being another round of the long-running fiscal clown show. For the past 10 years, Washington — regardless of who controls the levers of power — has simply shown no inclination or willingness to take the actions necessary to align the government's resources with its revenues. A new Medicare prescription drug benefit with no funding mechanism? Big tax cuts with no offsetting spending cuts? Expensive wars fought off the balance sheet? A big stimulus program? Payroll tax cuts? No problem. So long as interest rates remain low, there was no reason to fret too much about the sustainability of these initiatives.
In the 1980s and early 1990s, Washington antagonists executed a series of deals that included tax increases and spending reductions. But these days, due to a combination of utter Republican intransigence and Democratic wishy-washiness, no such deals are possible. The legislative and executive branches have no problem working together to massively increase deficits — think about 2009's uni-partisan stimulus package or the more recent bipartisan lame-duck to extend Bush tax cuts and enact a new payroll tax cut. But our government has an extremely difficult time making even symbolic spending cuts. Slashing about $40 billion in spending, an amount equal to 2.5 percent of this year's projected budget deficit, spurred the news networks to create shut-down clocks. And revenue enhancements? The phrase doesn't seem to be in official Washington's vocabulary. President Obama campaigned on letting the tax cuts for high earners expire at the end of 2010, swore up and down that he wanted them to expire throughout 2009 and 2010, and then meekly surrendered.
Second, even if Washington were somehow to get serious, I don't think the public is anywhere near prepared for the truth about our fiscal affairs. That's largely because nobody has bothered to tell the Americans that, as much as they feel overtaxed, the federal government, largely by design, has done an extremely poor job of collecting revenues in the past few years. That failure, as much as spending, lies at the heart of our massive structural deficits. Don't take it from me. Go to the OMB's website and check out Table 1.2, which documents spending and receipts as a percentage of GDP going back several decades. For the last 40 years, federal government spending has generally stood somewhere between 19 and 23.5 percent of GDP. In 2009, when the economy shrank and spending on bailouts and stimulus spiked, the ratio soared to 25 percent. In 2010, it shrank back to 23.8 percent. That's still elevated, but it's almost exactly what it was in the third year of Ronald Reagan's first term (23.5 percent in 1983).
I refuse to vote for any Republican who rules out tax increases.  That is stupidity in its finest form.  I probably ought to refuse to vote for any Democrat who is too big of a pansy to raise taxes, but that would leave me with no one to vote for.

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