Thursday, November 22, 2012

Taxes and Spending, Part 2

See Part 1 here.

I don't think I'm going out on a limb or being partisan when I say that the current fiscal situation is not sustainable. We can't keep running trillion-dollar deficits indefinitely. I think it's only slightly more controversial to say that we can't sustain this level of spending solely through higher income taxes on the wealthy.

To put the last few years in perspective, the Congressional Budget Office has a chart of the U.S. government's surplus or deficit as a fraction of GDP (so we don't have to worry about inflation). Excluding Social Security - currently in a small surplus, and shortly expected to fall into a small but growing deficit - the numbers since 2000 are:

  • 2000 0.9%
  • 2001 -0.3
  • 2002 -3.0
  • 2003 -4.9
  • 2004 -4.9
  • 2005 -4.0
  • 2006 -3.3
  • 2007 -2.5
  • 2008 -4.5
  • 2009 -11.1
  • 2010 -9.5
  • 2011 -9.1

An optimist would say that the situation has improved since 2009, while a pessimist would say that things are still on an unsustainable path.

The 2000 figure was the result of President Clinton and the Republican-controlled Congress's belt-tightening of the late 1990s, combined with a roaring economy, leading to higher tax revenue. One could say that the 2001 figure was also largely driven by President Clinton and the same Republican Congress. 2002 through 2007 reflected two big items: lower tax receipts because of the 2001 (and 2003) Bush-era tax cuts, and substantially higher defense and homeland security expenditures because of post-9/11 domestic spending and the wars in Iraq and Afghanistan. By the middle of the decade, war spending was down a little, I believe, but tax receipts were rebounding.

Then the housing/financial crisis hit. Some of that is reflected in 2008, but much of it was reflected in 2009, including the $800 billion stimulus bill, the GM and Chrysler bailouts, and a second round of bank bailouts. (Banks largely repaid their loans, resulting in higher government receipts at some point. The auto bailouts are a story for another day.) Tax receipts were down substantially because of the recession, and counter-cyclical spending, such as spending on unemployment benefits and food stamps, went up, resulting in a post-World War II record deficit. Again, none of this takes a position on whether the 2008 and 2009 spending was a good or bad thing, necessary or unnecessary; these are just numbers.

Since 2009, with the economy officially out of recession but growing slowly, the U.S. has continued to run trillion-dollar deficits although, as the chart above shows, these deficits reflect a declining share of a (growing) economy. War spending continues to decline as well, and tax receipts are up slightly as more people are working.

What I conclude from this is that we don't have a revenue problem, we have a spending problem. Excluding the "crisis" years of 2008 and 2009, we've gone from the horrible deficit spending of the Bush years to even more abysmal levels: from 3 to 5% of GDP to more than 9% of GDP. The Bush tax cuts aren't to blame for this, as those tax cuts were in place during the Bush years as well. War spending isn't the issue, because war spending has declined. Instead, much of the "emergency" spending that took place in what was arguably a time of crisis has become the new normal. Some of this is increased spending on social services - for example, the number of people on food stamps has gone up substantially, and Congress keeps passing extensions of unemployment benefits.

In the last part, I make the argument that maintaining the current level of spending is going to require substantial tax increases on everyone, not just the rich, or, alternatively, maintaining the current tax level on everyone but the rich will require substantial spending cuts.

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