Submitted by JOSH KING
Should the Bush-era tax cuts be extended? Should they be extended just for those making less than $250,000 a year? A lot of the predictable talking points are being bandied about when it comes to the question of extending the tax cuts – that the rich should “pay their fair share,” or that adding to the tax burden of the wealthy will burden “job creators” and harm our all-too-fragile recovery. But these arguments offer more heat than light.
The answer lies in the difference between two numbers – 15 and 24. The latter represents the percentage of America’s GDP devoted to funding the federal government (including transfers to state and local government); the former the percentage of GDP attributable to federal tax revenue.
Or in other words: federal spending is outpacing revenue by about 60% annually. And for historical perspective? Looking back 50 years or so, both numbers are records . This record low revenue combined with record high spending has created the largest gap – or as I like to call it, “deficit accelerator” – in modern history.
There’s also no doubt that the exceptionally bad economic climate of the last five years has contributed mightily to this gap. Job and wealth losses have compressed tax revenues, and stimulus spending has padded the numbers on the expenditure side. It doesn’t matter what anyone thinks of these policies, because the math is unequivocal: Spending 24% of GDP on tax revenues of 15% is utterly, completely, unsustainable. This gap MUST be closed.
The only way to do so is via a mix of both deep spending cuts and increases in tax revenues – which is where the question of the Bush-era tax cuts comes in. It should be obvious to all that overall tax revenues need to increase, not decrease. Eliminating these tax cuts for all would add roughly 2% of GDP to tax revenue, closing the gap by nearly one-quarter. While that’s not nearly enough – deep spending cuts and even more tax revenue are necessary – it’s a very good start.
Despite the unassailable math at work, a chorus of voices on both the right and the left are calling for an extension of the tax cuts. The leading argument from the right is that the tax cuts drive economic growth; the leading argument from the left is that the tax cuts are a necessary form of stimulus to escape the recession that still plagues us. But neither argument is compelling when faced with the reality of an out-of-control deficit.
First, the myth of economic growth: With tax revenues and marginal tax rates at near-record lows, you’d be hard-pressed to find a credible economist who would argue that eliminating these cuts would present a meaningful disincentive to business investment. But even more importantly, the yawning gap between revenues and spending will, unless corrected, result in much higher interest rates for American businesses. And the theoretical “drag” on investment caused by a few percentage points increase in tax rates is nothing compared to the stark, withering damage that spiraling interest rates inflict on business growth.
And while the stimulus argument is facially compelling – particularly when combined with a call to limit the extension of the tax cuts to a year or two – it also can’t provide value sufficient to offset the harm that accelerating the deficit causes. Cutting taxes is a particularly inefficient form of stimulus, as much of the money left in consumer’s pockets (and particularly with respect to the rich, who receive the lion’s share of this stimulus) goes into savings rather than being directly returned to the economy. If stimulus is the goal, it would be orders of magnitude more effective to reverse the tax cuts and temporarily increase spending for targeted job creation, unemployment insurance, infrastructure or aid to state and local governments. And as an added bonus, such programs are far easier than a tax cut to end once the need for stimulus has passed.
Ultimately, our economic system isn’t sustainable with anything resembling our current gap between spending and revenue. Given our current expectations for government, it’s probably unrealistic to expect that federal spending will dip below 20% of GDP – even with cuts to entitlement spending. With that reality in mind, we’ve got to increase revenue to something closer to that level. If we don’t, we’re all going to be facing much harder questions than whether to extend the Bush-era tax cuts.
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Thanks to Josh King for his submission. Josh is vice president and general counsel of Avvo.com, a site that provides legal and medical information to consumers and connects them with doctors and lawyers rated by Avvo.
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