There Is Only One Way to Fix the National Budget

The shutdown of the federal government that appears imminent is not just a political failure but also a failure of the imagination. Driving this particular stalemate is a small group of hard-right Republicans incensed over House Speaker Kevin McCarthy’s leadership, immigration issues and, of course, government spending. For years now, Washington has seemed at a loss — adrift at sea — over how to cope with the nation’s deepening budget problems. Cutting entitlements significantly is off the table in both parties. Ditto for military spending. Reductions in other parts of the budget couldn’t possibly be big enough to do the trick. And just letting the deficits run is looking increasingly irresponsible.

There is really only one way out of this jam. Spoiler alert: It’s not reducing funding for the Corporation for Public Broadcasting. It’s also not increasing the economy’s growth rate. That’s a good goal, but as we can see, the red ink has poured out over the past year even though the economy has been at or near full employment.

The solution is more tax revenue. Namely, more effective collection of taxes from people and companies that aren’t paying what they owe, coupled with higher tax rates on corporations and individuals. And not just on the very rich. The financing problem is big enough that taxes will have to go up on a sizable chunk of people in the top half of the income distribution.

You don’t hear this from either Republicans or Democrats because calling for higher taxes is seen in Washington as politically fatal. As I said, it requires imagination. When you step back from the daily tit for tat, it’s hard to imagine any way to fix the nation’s finances in the long term that doesn’t involve more tax revenue. As Sherlock Holmes said, “When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth.”

Congress, alas, is more focused on assigning blame for a shutdown right now than employing Holmesian logic. “We are now firmly ensconced in a system where we are budgeting by crisis,” Shai Akabas, the executive director of the economic policy program at the Bipartisan Policy Center, told me. “There’s really no oxygen in the room to talk about the underlying problems and figure out constructive solutions. It’s all eaten up by ‘Are we going to default?’ or ‘Are we going to shut down the government?’”

Akabas, by the way, is solidly in the more-taxes camp. “When you look at the magnitude of our fiscal challenge,” he said, “it’s inevitable that we’re going to bring in more tax revenue as part of the solution.” (Note that he said “we’re going to,” not “we should.”)

I have never been a deficit hawk. I think balanced budget amendments are silly. It’s smart to run big deficits when the economy is weak; the government’s spending makes up for the shortfall in private consumption and investment, minimizing the loss of jobs. It’s good to run small deficits even when the economy is healthy to offset contractionary forces elsewhere. If the growth rate of the economy exceeds the growth rate of the debt, the ratio of debt to gross domestic product will shrink, making the debt more and more manageable.

The problem now is that big deficits are structural, not just cyclical. They exist even when times are good. And the nonpartisan Congressional Budget Office projects that they will get much larger, as this chart shows.

To be sure, this isn’t necessarily an impending crisis. Even if it reached 180 percent or so, America’s debt-to-G.D.P. ratio would be below where Japan’s is today. “It’s more of a problem that’s kind of insidious, that gets a bit worse every year,” Michael Strain, the director of economic policy studies at the American Enterprise Institute, told me.

One key factor in the worsening financial picture is the graying of America, which is raising spending on Social Security and Medicare. The combined Social Security trust funds are on track to run out in 2034 unless something is done before then, after which they would be able to pay only 80 percent of scheduled benefits.

This is the first place where higher taxes come in. The latest Social Security trustees’ report calculates that making the system solvent for the next 75 years would require an immediate and permanent increase in payroll taxes of 3.44 percentage points, to 15.84 percent; an immediate and permanent cut in benefits to all current and future beneficiaries of 21.3 percent; or some combination of those approaches.

To cut benefits by more than 20 percent would be not just politically impossible but also disastrous for those retirees who rely on Social Security for most of their income. So tax increases are both inevitable and justified.

I’ll skip past the Pentagon except to say that deep cuts in military spending seem unlikely, given rising threats from China and Russia. As for nonmilitary discretionary spending, it has already been shrinking as a percentage of G.D.P. Trying to get all the cuts there would devastate much of what we think of as government, from air traffic control and national parks to food safety inspection and the passport office. Then there are the growing interest payments on the national debt, which are off the table because if they aren’t paid, the government defaults.

A strong nation has effective public services and takes care of its neediest. By that simple standard, the United States is being weakened by its failure to raise the revenue it needs. The expiration of the expanded child tax credit is an example. According to the Census Bureau, the credit’s expansion in 2021, to fight the economic effects of Covid, lifted 2.1 million children above the poverty line. To save money, Congress allowed the expansion to expire last year, and many of those children fell back below the poverty line. That’s unconscionable.

The conventional wisdom is that Republicans like lower taxes and Democrats like higher taxes. That’s not quite right. “We have bipartisan agreement not to raise taxes on the bottom 98 percent of the population,” Strain told me. “One party” — the Democrats — “wants to raise taxes on the top 2 percent a little bit.” His view is that about three-quarters of deficit reduction should come from spending cuts, the rest from higher taxes. He would impose those increases on more households, down to around the middle of the income distribution.

In 2017, Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities, wrote a report titled “Federal Spending and Revenues Will Need to Grow in Coming Years, Not Shrink.” In contrast to Strain, he told me he favors raising taxes on the rich first: “If we can’t raise as much money as we need on that route, then look at people in slightly less exalted income brackets.”

I interviewed two economists, Kimberly Clausing and Natasha Sarin, who worked in the Treasury Department during the first two years of the Biden administration. They wrote a paper released this month by the Brookings Institution’s Hamilton Project on a blueprint for tax reform in 2025, the year many provisions of the Tax Cuts and Jobs Act of 2017 are scheduled to expire. They wrote: “Our message is to use the opportunity of T.C.J.A. sunsets to set ambitious revenue-raising targets, given the fiscal needs facing the U.S. today. And it is important to do so in a progressive way, given increased inequality and wealth concentration.”

“It turns out you can get quite a lot” of deficit reduction by raising the corporate tax rate back to 28 percent, imposing a corporate carbon fee and other measures, Sarin said. She and Clausing estimated that if everything on their list was enacted, it would raise enough revenue for the primary budget deficit (i.e., the deficit excluding interest payments) to be cut in half over 10 years, which, according to estimates by the Congressional Budget Office, would be enough to keep the debt-to-G.D.P. ratio from continuing to rise.

It’s easier and more equitable to raise money on capital income (profits) than on labor income (wages), Clausing told me. And it’s easier to raise money on capital income at its source, from the businesses that earn it, than after it’s paid out to shareholders in dividends and capital gains. “The corporate tax base is concentrated in a couple thousand companies, many of whom have a lot of market power,” Clausing said. “These measures would be a big down payment on deficit reduction.”

The Readers Write

I have one observation about your article on unhappiness among young adults, having been born in 1961. I think helicopter parenting was a mistake. Independence builds self-reliance, and that makes us trust ourselves more. These kids do not trust themselves because they do not know how. They never learned.

Shannon Trimble
San Francisco

Speaking of why higher interest rates don’t count as inflation, here’s another riddle that has puzzled me for a while and may appear naïve or even silly at first, but I have to ask: Why are higher corporate profits not inflationary, yet higher employee wages are inflationary? Why is corporations’ having more money (profits) to spend better than consumers’ having more money (wages) to spend? I guess that’s why it’s called capitalism.

Scott Martin
Richmond, Va.

Another point on interest rates and inflation is the one Alan Blinder made in his recent book “A Monetary and Fiscal History of the United States, 1961-2021.” He observed that when the mortgage rate was still in the Consumer Price Index, there was the potential for a vicious circle effect, especially after Paul Volcker was appointed Fed chairman and put the hammer down: Monetary tightening to control inflation pushed up interest rates, which entered the C.P.I., possibly justifying more tightening and extending the recession.

David T. King
Sarajevo, Bosnia and Herzegovina

In your newsletter about Latin America, you left out one critical piece of the puzzle, which is endemic poverty and gross inequality, from economic to political and judicial. The problem traces back to the conquest and the rise of giant latifundias (estates). It was most recently exacerbated by the United States’ actions in the Cold War, which supported extreme right-wing governments in the region and stifled progressive change and income distribution.

Ricardo Guarnero
Las Cruces, N.M.

Quote of the Day

“If we can have full employment and full production for the negative ends of war, then why can’t we have a job for every American in the pursuit of peace?”

— Walter Reuther, president of the United Auto Workers union, speaking at the March on Washington for Jobs and Freedom (Aug. 28, 1963)

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