Why All-or-Nothing Approaches Won't Fix the Budget

After what was reported to be a productive White House meeting to reach an agreement on the budget—a meeting in which Vice President Biden put Medicare on the table—House Majority Leader Eric Cantor once again took revenue off the table. Thus, the drive to build a consensus behind a balanced approach to America’s impending budget crisis is sputtering. The Gang of Six has shrunk to five. The Democratic win in the New York special election has emboldened some Democrats to oppose any entitlement cuts. And Republicans still won’t brook any discussion of taxes.

Why is this happening? The wings on each side of the ideological spectrum are putting so much pressure on legislators to embrace an all-or-nothing approach that the center is apparently unable to hold at this point. House Republicans have offered a cuts-only solution, which they say will balance the budget and strengthen America. While there is only one Democratic tax-only plan¹ (from the Congressional Black Caucus), both it and the House Progressive Caucus budget make higher taxes, particularly on the rich, the heart of their solution to fixing the budget.

This memo demonstrates how these ideological stances and bumper-sticker agendas fail to solve the problem. Just taxing the rich won’t work because even the most confiscatory tax code one can imagine simply can’t raise enough money to cover the long-term projected deficit. Likewise, the spending cuts as proposed in the House Republican budget would cut all government spending in half except Social Security— an economically and socially untenable proposition. The key findings are:

1. Closing the deficit by only slashing spending would mean cutting all government services, except Social Security, in half. Despite the fact that the nation will have twice as many retirees, the spending levels for health care in 2040 would be the same portion of the economy as they were in 2010. For everything else, the cuts would mean half of the government services we have today: half the number of FBI agents, air traffic controllers, and nuclear power plant safety inspectors.
2. Even if you taxed every American making more than $250,000 at 100%, you would still have more than a $1 trillion deficit in 2040.

As the President's bipartisan Fiscal Commission made clear, a budget deal is going to require compromise. To get a deal, both sides will have to take a “We give/You give” approach. They must show that they are willing to cede some ground on highly-valued issues.

Tomorrow’s Deficit will Dwarf Today’s Deficit

Many people think that the deficit today is too big, but in fact, it’s small compared to the fiscal tsunami that is coming. A combination of legislative decisions since 2001 and the aging of the population are set to drive the deficit and debt to unprecedented highs. The long-term structural deficit is simply too big to solve with spending cuts or tax increases alone.

In January 2001, the Congressional Budget Office projected that the U.S. was on track to eliminate its debt by 2006 and create large surpluses that could have been saved for the baby boomers’ retirements.² Instead, the size of the national debt is now nearly 70% of the nation’s annual economic output. The Great Recession was partly responsible for that reversal of fortune, but by no means the majority of it. According to an analysis by the Pew Charitable Trusts, two-thirds of our deficit woes are rooted in legislation passed since 2001. Most of the change is the result of the Bush tax cuts, growth in net interest, the wars in Iraq and Afghanistan, and growth in non-defense spending.³

The ongoing economic recovery will help to reduce the deficit, but not for long. The Congressional Budget Office projects that tomorrow’s deficit will return to the size of today’s deficit within 11 to 14 years and get much worse afterwards.⁴

The President who takes office in 2033 will face an almost insurmountable task without changes today. The Treasury will be collecting two dollars for every three dollars spent.⁵ Interest on the debt will consume one-fourth of the budget. Health care costs will consume nearly one-third. Social Security will be three years from insolvency, which will require about a 25% cut in benefits.⁶

Three Presidential terms later, in 2046, the deficit will have dwarfed the size of several U.S. industries (finance, manufacturing, retail, and construction) as measured as a percentage of the GDP in today’s economy.⁷

Why Only Cutting the Budget Won’t Work

In his May 9th speech to the Economic Club of New York, Speaker Boehner threw down the gauntlet for the “slash spending” side of the deficit debate, stating that, “We should be talking about cuts of trillions, not just billions…And with the exception of tax hikes—which will destroy jobs—everything is on the table.” He went on to say that, “If we're serious about balancing the budget and getting our economy back to creating jobs, tax hikes should be off the table.”⁸ With all due respect to the Speaker, this is akin to saying that if we’re serious about making a sandwich, no one can use bread.

Not only is the budget passed by House Republicans a political non-starter, but it also shows why spending cuts alone can’t solve the deficit problem. It would eliminate the deficit by 2040 entirely with spending reductions, cutting all government services—except Social Security—in half.⁹

This presents two problems. First, it pretends the nation isn't aging. The House GOP budget spending levels for health care in 2040 would be the same as they were in 2010, when we were paying for 44 million retirees. But in 2040, the nation will have 80 million retirees.

The impact of the cuts would thus fall directly on the nation’s seniors. The lack of federal funds for Medicare would mean higher health care coverage costs. A 65-year would pay nearly $8,000 more per year for his or her health care coverage in 2030 according to analysis based on the Congressional Budget Office.¹⁰

The second problem is that the House GOP budget would require the federal government to discharge its responsibilities with half the resources it has today. Efficiency measures could certainly streamline government services considerably, but not by half.

The choices facing federal managers would be daunting. Would the National Instant Criminal Background Check System that prevents criminals from buying guns shut down on the weekends when most gun purchases occur? How could the nation’s flights be safe with half the number of flight controllers? Food-borne illnesses don’t take the day off, but would food safety inspectors work every other day?

A 50% cut in the federal budget isn’t based on any estimates of savings from eliminating waste. Rather, it is the result of trying to balance the budget by looking at only one side of the ledger—an appealing approach to many on the right, but an economically unfeasible cut as this analysis shows

Why Just Taxing the Rich Won’t Work

It is equally absurd to pretend that taxing the rich will solve the deficit problem when the deficit will dwarf entire U.S. industries. Yet leading liberals such as Robert Reich regularly make this claim:

“If the rich were taxed at the same rates they were half a century ago, they’d be paying in over $350 billion more this year alone, which translates into trillions over the next decade. That’s enough to accomplish everything the nation needs while also reducing future deficits.”¹¹

Indeed, the budget proposed by the House Progressive Caucus follows this logic. It would balance the budget by 2021, largely by taxing the wealthy. It also calls for substantial defense cuts, part of which would be directed toward economic investments such as infrastructure and clean energy.¹²

While conservatives' claims that there is no money at the top are overblown, and progressives are technically correct about the ability to tax our way out of a short-term deficit, neither Reich nor the Progressive Caucus has addressed the much harder problem of the long-term fiscal outlook. Even if the federal government taxed every cent of the income of individuals making $200,000 or more and couples making $250,000 or more, it would not be enough to bridge the long-term financial gap.¹³

As the following chart illustrates, the deficit will grow larger than the income of the wealthy. The gray line shows the after-tax income of individuals making $200,000 or more and couples making $250,000 or more under the assumption that the Bush tax cuts for them will expire. In 2033, the deficit (shown in red) exceeds their after-tax income

In 2040, even if the wealthy were taxed at the higher pre-Bush levels, a deficit of $5.57 trillion (in 2010 dollars) would remain, as illustrated by the red bar in the chart below. Even if government overlooked the economic and political impact of excessive taxation, and took all of the remaining $4.26 trillion dollars from high earners as shown in the blue bar—essentially, a 100% marginal tax rate—it couldn’t erase the deficit.¹⁴

The chart above shows that after the wealthy paid their initial taxes, the deficit would still be so large that if the IRS collected every other remaining dime, the gap could still not be closed. In the long-term, the math is inescapable—we can’t just tax the rich to balance the budget.

Conclusion

The colossal long-term deficit will overwhelm one-sided solutions aimed at reducing it. A spending cuts-only solution would mean a federal government unable to meet its obligations to our nation's citizens. Just taxing the rich won't work because even the rich don't have that much money. The ideological fixes—however politically satisfying—quite simply fall short. Only a combination of spending cuts and revenue increases will stop the nation from hemorrhaging red ink. There are several plans to do this, including the Fiscal Commission and the Obama plan, but an “all-or-nothing” approach will not work on any level.