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Richard Klass Headshot

We Have a Revenue Problem

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A ritual refrain of the GOP is that we have a spending problem, not a revenue problem. On ABC News on St. Patrick's Day, House Speaker John Boehner (OH) put it bluntly, stating that President Obama got all the tax increase he was going to get in the 1 January fiscal cliff compromise and and now any "talk about raising revenue is over. It's time to deal with the spending problem." So deep is this embedded in GOP lore that House Budget Chairman, Paul Ryan (WI) presented a budget for FY14 that purported to balance the budget in ten years solely with spending cuts.

Spending cuts are surely required to deal with medium and long term budget needs. Between FY76 and FY97 federal budget outlays averaged above 21 percent of Gross Domestic Product (GDP). (Twenty-two percent during the administrations of Ronald Reagan and George H. W. Bush.) They stayed in the 18-19 percent range until FY08 when they edged up to 20.8 percent as the recession started and burgeoned to 25.2 percent in FY09, the last budget submitted by President George W. Bush. They remained above 24 percent for two years before beginning to edge down. In a $15 trillion economy, a 1-percent difference is $150 billion. So the outlays were $400 to $600 billion larger than the norm in the FY09-FY11 time frame

Handling the surge in outlays caused by the "Great Recession" was a formidable problem. Unfortunately the picture on the revenue side was even worse. During the 1990s receipts averaged close to 19 percent of GDP. In FY01, Clinton's last budget, the figure was 19.5 percent. The next year, after the first Bush tax cut, receipts fell nearly two points to 17.6 percent and the next two years, FY03 and FY04, they fell to 16.2 and 16.1 percent. They then recovered during the end of the housing bubble before plunging to 15.1 percent in FY09, 15.1 percent in FY10 and 15.4 percent in FY11. Using 19 percent as the norm, this resulted in receipt shortfalls of approximately $600 billion per year, a clear revenue problem.

So why will the GOP not admit that we also have a revenue problem? For some it is the Grover Norquist pledge not to raise taxes. For Ryan and the Tea Party wing of the GOP, it seems to be a desire to reduce the size and reach of the federal government. But this denial seems most of all to be a matter of self-interest. If more revenue is to be raised, it is surely not going to come from low-income groups likely to bear the brunt of spending cuts. And while some revenue and some spending cuts will come from middle-income groups, this cohort has seen a decade of stagnant incomes despite high productivity gains while the income gap between them and the upper income cohort has widened at an increasing rate. So, the needed additional revenues must come largely from the upper income groups a strong segment of the GOP base. And there are many provisions in the tax code that give the upper income folks advantages hard to justify such as the cap on income subject to the social security tax, the "carried interest" provision and the lower tax rate on capital gains. If revenues are on the table, which they must be if a budget deal is forthcoming, these and other tax breaks that give upper income groups special advantages are a prime target.

Those looking to raise revenue will target upper income tax breaks for the same reason Willie Sutton gave when asked why he robbed banks: "Because that's where the money is."