Eliminating the Deficit, Liberal Style

A wise man told me once that when any tax-levying entity operates at a deficit, the possible causes number precisely two: Either it is taxing too little for how much it wants to spend, or it is spending too much for how much it wants to tax. It has either a revenue problem or a spending problem.

In all of its parsimonious glory, this dichotomy lies at the center of the current debate between Democrats and Republicans on the matter of what needs to be done about the gaping U.S. federal budget deficit. Republicans focus their rhetoric on spending, while Democrats fixate on the tax or revenue side.

Part of the rhetorical problem for Republicans is that the most recent Republican president presided over massive increases in spending and the conversion of a budget surplus to a large deficit. According to Office of Management and Budget data, total federal revenue in 2000 (Bill Clinton's last year in office) was just under $2 trillion, while total spending was just about $1.8 trillion-a $200 billion budget surplus. When the books were closed on Bush's last year in office (2008), there was a budget deficit of $500 billion. Why? Although revenue increased 25 percent over Bush's eight years, spending increased 67 percent and settled in at about 18 percent of gross domestic product.

What about Barack Obama? In four years, the deficit has settled in at about $1.3 trillion, a 160 percent increase over George Bush's last deficit. OMB estimates for 2012 show that while annual revenue has increased about 17 percent since Obama took office, annual spending has increased 27 percent, settling in at about 24 percent of GDP.

So, do we have a revenue problem or a spending problem? The data above seem to make the answer obvious because spending growth always outpaces revenue growth. If revenue stays the same or declines while "needs" that only federal spending can solve continue to grow, we arguably have a revenue problem. But revenue has grown -- a lot. It's just that spending has grown a lot faster and now sits at 5-6 percentage points or about 25 percent higher than peacetime historical averages in relation to GDP.

Nevertheless, this argument is a hard sell at best to Democratic Party leaders and liberal pundits. Nancy Pelosi doesn't believe we have a spending problem, nor does Tom Harkin, to provide just two recent examples. As for pundits, count The Daily Kos, Mother Jones, and the omnipresent Paul Krugman as just a few examples of "spending problem deniers."

Alas, this appears to be just another topic on which left and right are hopelessly divided. But I have an idea: Republicans should just concede the point. Let's agree that we have revenue problem. That is, let's erase the deficit using new taxes/revenues alone!

To accomplish this, we have to make some assumptions: First, we have to assume that a $1 increase in tax rate or a tax loophole closure worth $1 actually will yield a $1 increase in tax revenue. Second, we have to assume that large increases in tax rates or big changes in tax policies regarding deductibility, etc., will not adversely affect economic output in general, thus hurting the economy and indirectly reducing tax revenues. Third, we have to assume that the amount of deficit that needs to be captured with new taxes will stay the same; that spending growth will somehow stop dramatically outpacing revenue growth once we've erased the deficit once and for all. Finally, let's assume that new tax revenue from corporations will be increased proportionally to account for their average annual federal tax share of 15 percent of the total (even though the United States already has the highest statutory corporate tax rate in the world); new individual income taxes will have to plug 85 percent of the deficit, or only $1.1 trillion in the first year.

So, what does a $1.1 trillion dollar tax increase look like in practice? One simple way to skin this cat is to look at the distribution of households by income bracket and then distribute across those brackets the new taxes that will be required to eliminate the deficit.

For example we could eliminate the deficit "by getting millionaires and billionaires to pay a little bit more." There are approximately 250,000 households (less than 0.5 percent of all households) in America with annual incomes of $1 million or higher. Most of these households are near the bottom of this bracket and frequently move over and below the $1 million line over time. Be that as it may, asking them to eliminate the deficit would add $4.4 million in new annual taxes per household.

Okay, maybe we can't realistically erase the deficit by asking tens of thousands of Americans to pay (in new, incremental taxes) an amount that is quadruple their total income. But if we expand the definition of "millionaires and billionaires" to households with incomes over $200,000, we now have 4.2 percent of U.S. households to work with. If we reduce the new tax burden on the $1 million plus bucket to about $1 million, we get about a 23/77 percent split between the upper 0.2 percent and the next 4 percent of households. In this scenario, households in the $200,000-$1 million bracket will only have to pay $151,000 in new taxes. However, if we further reduce the new burden on the upper 0.2 percent to $500,000 per household (so they get to keep a few bucks every year to live on between their current and proposed incremental taxes), the additional per household tax bill on those making more than $200,000 goes up to ... just over $200,000.

And remember, the U.S. tax code is already among the most progressive in the world by the government's own analysis. According to the CBO, the top 1 percent of households represents about 17 percent of the income, but bears almost 40 percent of the tax burden. The upper 10 percent represents 43 percent of the income, but about 70 percent of the tax burden. The lower 47 percent are held essentially held harmless in terms of federal income tax burden; a tax policy quirk that you don't see in any other advanced economies.

So, given the hugely imbalanced nature of the current tax system, perhaps the new debt-eliminating tax burden should be shared equally by all households. This would add only about $9,600 in new taxes for every U.S. household, including those in the $0-$25,000 and $25,000-$50,000 brackets (which together make up 47 percent of all households). In other words, their federal income taxes would go from 0 percent (or even below 0 percent in some cases) of income to 20 percent for those at the very top of these brackets and to much higher percentages for everyone else.

You say you want to continue to hold the bottom 47 percent harmless in terms of new income tax burden? Fine. If we equally distribute the deficit-busting new taxes among the remaining six brackets, new taxes for a $1 million household would be $1.1 million; $56,000 for a $200,000 household; $14,000 for a $100,000 household; and $7,800 for a $50,000 household. If we let the millionaire households keep a few bucks to live on and only ask them for around $500,000 each in new taxes, burdens for the remaining brackets go up to $65,000; $16,000; and 9,000 respectively.

The first point of all of this is that there is not one of these scenarios or any other revenue-only deficit-elimination scenario that is remotely feasible by any definition of the term. Even Democrats understand that you can't confiscate all or most of the income of the wealthy. Neither do Democrats (nor Republicans for that matter) have any intention of asking the lower 47 percent of households to begin putting skin in the game with new income taxes, much less 20 percent, 30 percent, 50 percent or more of their incomes. The middle-ground approach described above, while still preposterously confiscatory on millionaires, raises marginal federal income tax rates alone on a $200,000 household to over 50 percent.

The second and more fundamental point is that the Democrats' rhetoric on this topic is desperately cynical and patently dishonest. There is a lot of talk from Democrats about a "balanced approach." But reactions to the possibility of "sequestration" in early 2013 tell the truth of the matter. Best estimates on the "cuts" show they will amount to $85 billion, barely a drop in the bucket. And the truth of the matter is that overall federal spending will still increase over last year and will increase in every category with the possible exception of defense. But even this is being resisted and demagogued to death by Democrats, proving that there is no actual spending cut that is acceptable to them.

If you're not willing to reduce spending, and you accept that there's no practical way to eliminate the deficit through tax increases alone, you are left in an endless, farcical loop that points inexorably to one conclusion: you don't actually care one iota about the deficit, or the resulting debt, or the economic crash that is sure to result from this whole absurd mess.

Dr. R.B.A. Di Muccio is a guest commentator for The Center for Vision & Values at Grove City College. A former assistant professor and chair of the international relations program in the political science department at the University of Florida, he is now vice president of research and advisory services for a global business advisory firm. He received his Ph.D. in international relations from the University of Southern California.

A wise man told me once that when any tax-levying entity operates at a deficit, the possible causes number precisely two: Either it is taxing too little for how much it wants to spend, or it is spending too much for how much it wants to tax. It has either a revenue problem or a spending problem.

In all of its parsimonious glory, this dichotomy lies at the center of the current debate between Democrats and Republicans on the matter of what needs to be done about the gaping U.S. federal budget deficit. Republicans focus their rhetoric on spending, while Democrats fixate on the tax or revenue side.

Part of the rhetorical problem for Republicans is that the most recent Republican president presided over massive increases in spending and the conversion of a budget surplus to a large deficit. According to Office of Management and Budget data, total federal revenue in 2000 (Bill Clinton's last year in office) was just under $2 trillion, while total spending was just about $1.8 trillion-a $200 billion budget surplus. When the books were closed on Bush's last year in office (2008), there was a budget deficit of $500 billion. Why? Although revenue increased 25 percent over Bush's eight years, spending increased 67 percent and settled in at about 18 percent of gross domestic product.

What about Barack Obama? In four years, the deficit has settled in at about $1.3 trillion, a 160 percent increase over George Bush's last deficit. OMB estimates for 2012 show that while annual revenue has increased about 17 percent since Obama took office, annual spending has increased 27 percent, settling in at about 24 percent of GDP.

So, do we have a revenue problem or a spending problem? The data above seem to make the answer obvious because spending growth always outpaces revenue growth. If revenue stays the same or declines while "needs" that only federal spending can solve continue to grow, we arguably have a revenue problem. But revenue has grown -- a lot. It's just that spending has grown a lot faster and now sits at 5-6 percentage points or about 25 percent higher than peacetime historical averages in relation to GDP.

Nevertheless, this argument is a hard sell at best to Democratic Party leaders and liberal pundits. Nancy Pelosi doesn't believe we have a spending problem, nor does Tom Harkin, to provide just two recent examples. As for pundits, count The Daily Kos, Mother Jones, and the omnipresent Paul Krugman as just a few examples of "spending problem deniers."

Alas, this appears to be just another topic on which left and right are hopelessly divided. But I have an idea: Republicans should just concede the point. Let's agree that we have revenue problem. That is, let's erase the deficit using new taxes/revenues alone!

To accomplish this, we have to make some assumptions: First, we have to assume that a $1 increase in tax rate or a tax loophole closure worth $1 actually will yield a $1 increase in tax revenue. Second, we have to assume that large increases in tax rates or big changes in tax policies regarding deductibility, etc., will not adversely affect economic output in general, thus hurting the economy and indirectly reducing tax revenues. Third, we have to assume that the amount of deficit that needs to be captured with new taxes will stay the same; that spending growth will somehow stop dramatically outpacing revenue growth once we've erased the deficit once and for all. Finally, let's assume that new tax revenue from corporations will be increased proportionally to account for their average annual federal tax share of 15 percent of the total (even though the United States already has the highest statutory corporate tax rate in the world); new individual income taxes will have to plug 85 percent of the deficit, or only $1.1 trillion in the first year.

So, what does a $1.1 trillion dollar tax increase look like in practice? One simple way to skin this cat is to look at the distribution of households by income bracket and then distribute across those brackets the new taxes that will be required to eliminate the deficit.

For example we could eliminate the deficit "by getting millionaires and billionaires to pay a little bit more." There are approximately 250,000 households (less than 0.5 percent of all households) in America with annual incomes of $1 million or higher. Most of these households are near the bottom of this bracket and frequently move over and below the $1 million line over time. Be that as it may, asking them to eliminate the deficit would add $4.4 million in new annual taxes per household.

Okay, maybe we can't realistically erase the deficit by asking tens of thousands of Americans to pay (in new, incremental taxes) an amount that is quadruple their total income. But if we expand the definition of "millionaires and billionaires" to households with incomes over $200,000, we now have 4.2 percent of U.S. households to work with. If we reduce the new tax burden on the $1 million plus bucket to about $1 million, we get about a 23/77 percent split between the upper 0.2 percent and the next 4 percent of households. In this scenario, households in the $200,000-$1 million bracket will only have to pay $151,000 in new taxes. However, if we further reduce the new burden on the upper 0.2 percent to $500,000 per household (so they get to keep a few bucks every year to live on between their current and proposed incremental taxes), the additional per household tax bill on those making more than $200,000 goes up to ... just over $200,000.

And remember, the U.S. tax code is already among the most progressive in the world by the government's own analysis. According to the CBO, the top 1 percent of households represents about 17 percent of the income, but bears almost 40 percent of the tax burden. The upper 10 percent represents 43 percent of the income, but about 70 percent of the tax burden. The lower 47 percent are held essentially held harmless in terms of federal income tax burden; a tax policy quirk that you don't see in any other advanced economies.

So, given the hugely imbalanced nature of the current tax system, perhaps the new debt-eliminating tax burden should be shared equally by all households. This would add only about $9,600 in new taxes for every U.S. household, including those in the $0-$25,000 and $25,000-$50,000 brackets (which together make up 47 percent of all households). In other words, their federal income taxes would go from 0 percent (or even below 0 percent in some cases) of income to 20 percent for those at the very top of these brackets and to much higher percentages for everyone else.

You say you want to continue to hold the bottom 47 percent harmless in terms of new income tax burden? Fine. If we equally distribute the deficit-busting new taxes among the remaining six brackets, new taxes for a $1 million household would be $1.1 million; $56,000 for a $200,000 household; $14,000 for a $100,000 household; and $7,800 for a $50,000 household. If we let the millionaire households keep a few bucks to live on and only ask them for around $500,000 each in new taxes, burdens for the remaining brackets go up to $65,000; $16,000; and 9,000 respectively.

The first point of all of this is that there is not one of these scenarios or any other revenue-only deficit-elimination scenario that is remotely feasible by any definition of the term. Even Democrats understand that you can't confiscate all or most of the income of the wealthy. Neither do Democrats (nor Republicans for that matter) have any intention of asking the lower 47 percent of households to begin putting skin in the game with new income taxes, much less 20 percent, 30 percent, 50 percent or more of their incomes. The middle-ground approach described above, while still preposterously confiscatory on millionaires, raises marginal federal income tax rates alone on a $200,000 household to over 50 percent.

The second and more fundamental point is that the Democrats' rhetoric on this topic is desperately cynical and patently dishonest. There is a lot of talk from Democrats about a "balanced approach." But reactions to the possibility of "sequestration" in early 2013 tell the truth of the matter. Best estimates on the "cuts" show they will amount to $85 billion, barely a drop in the bucket. And the truth of the matter is that overall federal spending will still increase over last year and will increase in every category with the possible exception of defense. But even this is being resisted and demagogued to death by Democrats, proving that there is no actual spending cut that is acceptable to them.

If you're not willing to reduce spending, and you accept that there's no practical way to eliminate the deficit through tax increases alone, you are left in an endless, farcical loop that points inexorably to one conclusion: you don't actually care one iota about the deficit, or the resulting debt, or the economic crash that is sure to result from this whole absurd mess.

Dr. R.B.A. Di Muccio is a guest commentator for The Center for Vision & Values at Grove City College. A former assistant professor and chair of the international relations program in the political science department at the University of Florida, he is now vice president of research and advisory services for a global business advisory firm. He received his Ph.D. in international relations from the University of Southern California.