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Fiscal Follies: No New Taxes? So Now What?

Posted: 05/ 8/11 04:51 PM ET

As of this weekend, it looks like Congress will hammer out some sort of deal to extend the federal debt ceiling and avoid pushing the country to the brink of default. The response from the Washington Post's Ezra Klein is the best we've read so far. "Whew," Klein wrote last week. As Klein tells it, both sides are softening their hard line positions out of a "healthy aversion to unimaginable consequences." Whew indeed.

But regardless of what kind of package Congress agrees on, this is just the beginning. We need to cut spending and raise revenue for years to get the country out of its fiscal mess. Unfortunately, a sizable contingent of Americans still believes we can solve our problems without tax increases -- or at least not any that would affect "me."

More than half of Americans (53 percent) reject the idea of small tax increases and small cuts in Social Security and Medicare to "significantly" reduce the federal debt. Majorities oppose eliminating deductions for home mortgages, state and local taxes, and contributions to charities as "part of a plan to reduce the federal budget deficit." By a margin of two-to-one, the public wants to balance the federal budget by cutting spending rather than raising taxes.

And why wouldn't they? Politicians have been telling the public for years that all we need to do is cut -- even if they stop short of describing the details. So let's take a look at what "no new taxes" really means if that's the way we decide to go.

Our trillion-dollar budget problems will be $3 trillion dollars worse. Since the Bush taxes cuts are set to expire in 2014, "no new taxes" means that Congress will need to extend them. According to the Congressional Budget Office, extending all of the existing cuts (both the Bush cuts and the expanded tax credits put in under President Obama) means government will have about $3.2 trillion dollars less to spend over the next decade. If we were at even-steven now, or even close, that would be one thing, but the United States is some $14 trillion in debt , and on track to have our national debt exceed the size of our entire economy in only 10 years or so. Plus, just about every budget out there, from the left, right, and the center (and including the Ryan plan ) has us adding to the red ink for decades.

The cuts would have to be savage. Okay, for the sake of argument, let's see what it would take to eliminate 2011's $1.4 trillion deficit just by cutting spending. The total budget is about $3.8 trillion, so you have to cut about a third of what government now spends. That might not sound impossible, but once you take a look at the numbers, the task is daunting. To cut the deficit by one-third, you would need to eliminate everything government does except for defense, Social Security, Medicare, Medicaid, and paying interest on the debt. Losing that "non-security discretionary spending" would save $533 billion , but of course, you've also just wiped out the entire departments of agriculture, commerce, education, energy, and labor. We no longer have federal meat inspectors, the Centers of Disease Control, FEMA or Pell grants. Want to sink your teeth into defense spending? That's fine, but to eliminate that $1.4 trillion deficit, entirely, you'd need to cut the entire national security budget: all $900 billion of it in 2011.

People may end up paying more one way or the other, even if it's not called a "tax." The Republicans seem to be backing away from Rep. Paul Ryan's controversial budget plan, which included turning Medicare into a voucher plan. It's a "no new tax" plan, and whatever you think about it overall, it makes one tradeoff perfectly clear: the price for no new taxes is higher medical premiums for seniors. Under his plan, the CBO reported, by 2030 seniors would be paying double what they're currently projected to pay for Medicare. In a philosophical sense, you may have strong feelings about paying higher premiums versus more taxes -- but the cost to your bank account is the same either way.

Taxing fat cats doesn't help as much as you think. It is true that most Americans (although certainly not the purists) do back the idea of raising taxes on people who earn more than $250,000 a year. Unhappily, it doesn't raise that much money. The CBO calculated that raising taxes by 1 percent on the top two income brackets (individuals earning about $175,000 and couples earning about $212,000) would only bring in about $84 billion dollars over the next decade. Unfortunately, our projected deficit for next year is about 10 times that.

There certainly are other options -- larger tax increases for wealthier Americans, higher corporate taxes, higher payroll taxes, modest tax increases on all of us, taxing fossil fuels, and so on. But the "no new taxes" mantra shuts down any reasonable conversation on how to cut spending and increase revenues in the fairest, least destructive way.

The fact is that most government spending is on Social Security, Medicare, and Medicaid, programs the vast majority of Americans value, and there's no way to protect them (even with tweaking) without raising taxes to cover what they cost. Perhaps the worst result for the country is when an immovable fixation against higher taxes on one side hits up against an immovable fixation on the other side that Social Security and Medicare are untouchable. At that point, the math is simply impossible.

In the near-term, Congress may agree on some immediate spending cuts and make some promises about what they'll do in the future. We'll all feel better temporarily. But unless more Americans begin to grasp the facts of the budget, we'll never get out of this. It's easy to say "no new taxes," but in real life, the results are almost unimaginable.

 
 
 

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