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It’s a Spending Problem… So Why Pick on Taxes?

May 16th, 2008 . by economistmom

I’m inspired by Drew’s last comment to “Mommy, Why Do Revenues Grow?”

Tax cut proponents love to argue that the longer-term fiscal challenge is a spending problem–due to the aging population and the associated projected rise in entitlement spending (Social Security, Medicare, and Medicaid).  And if it’s a spending problem, why should taxes have to be raised?  After all, taxes as a share of the economy exceed that magic 40-year historical average and are projected to rise even if the Bush tax cuts were to be permanently extended.  (You can refer back to the basic budget math on this.)

But this is a very backward way of budgeting, and a family would never do it that way.   Families face new “spending pressures” all the time.  As a family faces new priorities and the associated new expenses, they figure out how they’re going to make it work–how to line up those necessary or desired expenses with their income.  With every new expense, does the family say “gee, up to now our income has been just fine at covering our ongoing expenses, so why should we have to change anything?…we’ll just have to do whatever we can to avoid those new expenses.”  Do families tell their college-bound kids:  “Hey, this is a college expense problem, not a problem with anything else in our family budget …If you don’t get into college for free, you’re not going to college”?  I don’t think so.  Even with a very rational weighing of costs versus benefits (which I will argue later is hard for parents to do), families who recognize the benefits of a college education are willing to do whatever is necessary to make it something they can and will afford

Budgeting responsibly means first, considering the relative value the family or society places on certain types of spending, and second, figuring out how much of that spending is worth doing, given how easy or hard it is to pay for it.   There’s a logical sequencial order:  (i) what do you want to do/accomplish, and (ii) how are you going to pay for it?   As Drew commented, there’s not a problem if you decide you want to do more, and you’re willing to pay for it.  And there’s not a problem if you decide to do less and hence pay less.  The problem is doing more (or at least spending more), without paying for it.  That’s not responsible budgeting.  That’s not even budgeting, period.  That’s acting as if there are no constraints and immorally passing the burden–and even tighter constraints–onto our children and grandchildren.

So that’s why we have to pick on taxes, too.

17 Responses to “It’s a Spending Problem… So Why Pick on Taxes?”

  1. comment number 1 by: Mike Harmon

    I came across your blog on Technorati. Nice site layout. I will stop by and read more soon.

    Mike Harmon

  2. comment number 2 by: Brooks

    Diane,

    Another excellent, 100% sensible post.

    As I’ve always said, with regard to fiscal policy choices, economics helps us identify and quantify the trade-offs associated with policy alternatives, and we then choose which trade-offs we wish to make based on our values/morals and priorities. What level and types of overall taxation, what level and types of spending, and how much debt to carry all involve trade-offs that must be first identified and quantified (in terms of economic and human impact) as best we can. Once we’ve done that (albeit with some inevitable disagreement, e.g., on degrees of revenue feedback effects, return on investment from certain types of spending, etc.), we can then discuss and debate what trade-offs reflect our values and priorities. But most certainly this rational approach is the responsible approach and the one that maximizes utility (however defined), as opposed to choosing policy based on ideology or overly broad principles like those seen among many partisans who refuse to consider tax increases or who refuse to consider cuts in entitlements or other spending.

    For those who oppose tax increases, unless they are putting forth a (dubious) pure “starve the beast” type argument (that any dollar in additional revenue will cause at least one incremental dollar in spending, thus not reducing deficits), they have two questions to confront, one economic and one political.

    The economic question: How much would spending have to be cut (from projected spending) to sufficiently mitigate our projected, unsustainably large deficits over the next several decades without tax increases? What types of harm of what magnitudes would that do to people (e.g., harm to seniors from cuts in Medicare and Social Security; harm to the poor from cuts in Medicaid)? Would you really prefer all those types and those degrees of harm over somewhat less harm combined with SOME tax increases?

    The political question: Is it realistic to expect that Congress and the White House will solve our long-term fiscal imbalance entirely on the spending side? If not, tax increases are an inevitable part of the solution. Given that inevitability, and the fact that the longer we wait the greater the burden will be (because of the added debt and interest expense), then opposing tax increases now just means deferring them and compounding the eventual size of the tax increases to such an extent that the NPV of such an approach is negative (i.e, the additional pain later makes deferring it a bad deal overall).

    I HIGHLY recommend the following paper to everyone, and I applaud the efforts of this group: http://www.heritage.org/Research/Budget/upload/takingbackourfiscalfuture.pdf

    By the way, Diane, I tried to visit the Concord Coalition website to link to this pdf there, but it seems to be down.

  3. comment number 3 by: Brooks

    Also, to those who myopically argue that we needn’t be concerned by current deficits since they are not particularly high as a percent of GDP by historical standards, I point out, as Diane has so well in her post, that we obviously have to consider anticipated growth in expenses, just as parents with college-bound children would. We know that projected entitlement growth under current policies will grow total spending as a percent of GDP to intolerable levels, and that at current levels of taxation, deficits and debt-to-GDP would grow to an unsustainable (let alone undesirable) point. Just as a household needs to do financial planning, so does a nation. Not a radical concept, but one even many pundits overlook…or pretend to.

  4. comment number 4 by: B Davis

    Drew wrote:

    I apologize to Mr. Davis for my incorrect gender guess. Jeffrey, I agree that federal spending is a big part of the equation, but doesn’t it just make sense to cut spending BEFORE cutting taxes?

    Since this reply inspired a new thread, I’m posting this under that thread. Regarding the apology, none required of course! Regarding the proposition that spending be cut BEFORE cutting taxes (or at least at the same time), I totally agree. First of all, it puts pressure on the politicians who are pushing for the tax cut to do the hard work of finding a spending cut that Congress can agree on implementing and insuring that it actually occurs. Secondly, it is much easier to get the population at large to agree to a spending cut if they are receiving a tax cut at the same time.

    Don’t tax and don’t spend is also sustainable, but politicians have found that promising tax cuts is easier than standing for fiscal restraint and a balanced budget.

    Agreed. It’s amazing that some people will label politicians who push through tax cuts or spending increases as courageous. In fact, it takes no courage to give potential voters money. All they have to put up with are negative comments from a few of us deficit hawks! Meanwhile, they leave all the truly hard work of fiscal restraint to future politicians who don’t have any of the political capital afforded by the tax cuts and spending increases. This seems like the peak of political cowardice.

    Supply-side economics seems to be their favorite subterfuge that allows them to claim their pandering is really good economics.

    Agreed. I suspect that many of them want tax cuts for other reasons and they simply find the “free lunch” argument the easiest one to sell.

  5. comment number 5 by: economistmom

    sorry guys, my spam blocker’s being overly aggressive, which is why you might not see your comments post right away until I go in and unblock them… Diane

  6. comment number 6 by: Brooks

    Diane, Drew, B Davis (of whichever gender),

    I’d be interested in your thoughts on how to change the political calculus by the politicians in Washington such that fiscal responsibility becomes a net political positive or at least less of a political negative.

    Obviously public education should be part of such an effort. The work of the Concord Coalition, the Fiscal Wake-up Tour”, the upcoming movie I.O.U.S.A., the Peter G. Peterson Foundation, other organizations, blogs like Diane’s and Capital Gains and Games, etc., can all increase public awareness of the importance of fiscal responsibility and the preferability of taking our fiscal medicine sooner rather than later. Needless to say, all of the above efforts will need to be leveraged by effective P.R. to generate media buzz and reach people who are not going out of there way to find out about this issue, meaning the vast majority of Americans.

    I also support a bi-partisan commission such as the one sought by Senators Gregg and Conrad http://www.wilsoncenter.org/index.cfm?fuseaction=events.event&event_id=274709 . We need to provide political cover for fiscal responsibility, and such a commission, and the accompanying legislation (requiring an up or down vote) has a chance at working.

    If we don’t change the political calculus, we’ll continue to have in Washington a perverse form of Darwinism: Survival of the least responsible.

  7. comment number 7 by: Bob Murphy

    The problem is doing more (or at least spending more), without paying for it. That’s not responsible budgeting. That’s not even budgeting, period. That’s acting as if there are no constraints and immorally passing the burden–and even tighter constraints–onto our children and grandchildren.

    This is a recurring theme on this site, so I’m wondering if you can clear up something: Does this conclusion rest on the fact that foreigners are financing a large portion of the federal budget deficit?

    I ask because in a closed economy, where all US government borrowing were obtained from US investors, then deficit spending today really wouldn’t be burdening “our grandchildren.” It would rather be burdening some of our grandchildren and helping the ones who inherit the Treasury debt from the original lenders.

    This really isn’t a joke; I am being serious. If you think about it, the interest payments the government will have to make 80 years from now (in the case where all US gov’t debt were financed by Americans) would just consist of taking money from American taxpayers and then giving it to American holders of Treasurys.

    So there’s a lot of bad things about that scenario, but I wouldn’t describe it as burdening that entire generation.

    To summarize and repeat my question, then, when you keep saying that current deficit financing represents this generation’s selfish consumption at the expense of grandchildren, are you relying on the fact that right now Americans in general benefit from higher consumption at the expense of Asian savers, and then in 80 years the wealth transfer will go the other way?

  8. comment number 8 by: B Davis

    Brooks wrote:

    I’d be interested in your thoughts on how to change the political calculus by the politicians in Washington such that fiscal responsibility becomes a net political positive or at least less of a political negative.

    Obviously public education should be part of such an effort.

    Agreed. I think that you need to attempt public education at all levels. My views are likely affected by the fact that I became interested in this topic back during the 1992 Presidential campaign. Regardless of his qualifications to be President, I think that Perot’s infomercials and pamphlets were a good low-level introduction for many people. Then Pete Peterson’s book “Facing Up” was published in 1993 and served as a higher-level introduction for many people. He and others have published a number of books since then that have further explored fiscal responsibility and related topics. These, of course, just reach readers so their effect, though it may be strong may also be limited. On this count, the movie I.O.U.S.A. will likely reach a wider audience, especially if it creates some media buzz. The Fiscal Wake-up Tour will also likely reach many people who have enough current interest to attend one of the forums or watch it on You-Tube.

    I also support a bi-partisan commission such as the one sought by Senators Gregg and Conrad.

    I likewise support these though I haven’t followed them closely enough to know their success rate. I know that the base-closing commissions have been successful but that the recommendations of one or two Social Security commissions have been generally ignored, even by politicians who called for them. On this count, it would be helpful if we could take any unnecessary pressure off politicians so that they could more easily do the right thing. Back during the 1995-96 election cycle, I looked at the campaign financing and the cost of all of the federal elections was a small fraction of one percent of the budget. I think that we are paying a very high price in raising this relatively small amount of money via our current campaign finance system. I’ve heard it compared to a system in which baseball umpires are paid by voluntary contributions from the teams that they umpire. This would not prevent them from making honest calls but it would create a huge conflict of interest. This is likely a longer-term reform but it could serve to address many problems.

    I have heard or thought of some other possibilities. In years of following political debate, it seems like much of the same bad data and questionable ideas come up over and over again. It would be nice if there was some way to organize debates such that the questions that are most important to the most people would “bubble to the surface” and the key participants in the debate would be forced to address them. Also, a system that would enable more fact-checking would be useful. As you can tell, this is not a fully-formed idea. Still, it does seem that many new technologies, like the Internet, could be leveraged in some very useful ways.

    If we don’t change the political calculus, we’ll continue to have in Washington a perverse form of Darwinism: Survival of the least responsible.

    Agreed.

  9. comment number 9 by: economistmom

    In response to Bob Murphy’s query:

    “…when you keep saying that current deficit financing represents this generation’s selfish consumption at the expense of grandchildren, are you relying on the fact that right now Americans in general benefit from higher consumption at the expense of Asian savers, and then in 80 years the wealth transfer will go the other way?”

    I guess at least part of my intergenerational inequity story does relate to the fact that since 2001, the additional public debt we’ve accumulated has mostly been financed by foreign investors–more than 75 cents of every dollar of additional debt is accounted for by increased foreign holdings. And of the total (stock of) outstanding public debt, foreign investors own about half (MORE than half of marketable debt).

    But I’d feel that sense of intergenerational inequity to our kids and grandkids either way, even without foreign investors holding so many Treasuries, because our fiscal profligacy has imposed its negative saving and the implications of that onto these younger generations, involuntarily. Even if some Americans were doing a better job of privately saving for their kids, national saving (the sum of public plus private saving) would still be lower because we were running budget deficits. Younger generations as a whole are going to have fewer resources and a weaker economy to inherit, compared with a world without deficits, and that doesn’t depend on who is getting the stream of interest payments associated with the debt.

    But the fact that foreign investors will get the bulk of those interest payments does indeed make it worse, when thinking about the intergenerational inequity of the situation, because our American kids will be paying the bulk of the interest on the debt not to other younger Americans, but to the younger people of other nations.

  10. comment number 10 by: Jeffrey

    I budget my household based upon what I can afford. I don’t assume I’ll magically get additionally revenue in the future i.e., a tax rate increase. My biggest debt is my mortgage. I based it upon my current income in order to service my debt (and not upon expected income increases in the future.

    I’m all for finding savings. Then why don’t we stop earmarks? Don’t hold your breath. What about stopping the subsidies for agriculture that mainly go to large corporations? Stop the ethanol subsidies? Won’t happen. Assuming the historical % of GDP as the magical guide to what is proper assumes there is no padding in the numbers. I’ve just named a few which I’m sure is the tip of the iceberg of porkbarrel spending. There is an editorial in the WSJ today that outlines a Medicaid scam that keeps costs high.

    Us supply siders…I prefer classical liberal economics :)…tend to think those who want cuts before tax relief have an ulterior motive. To increase the tentacles of government into our private lives i.e. power. So if the best the Democrats can offer is to find some offsetting expenditure cut before taxes, then by all means offer away. I don’t expect any to be forthcoming (other than maybe defense).

  11. comment number 11 by: Gene Callahan

    “But I’d feel that sense of intergenerational inequity to our kids and grandkids either way, even without foreign investors holding so many Treasuries, because our fiscal profligacy has imposed its negative saving and the implications of that onto these younger generations, involuntarily. Even if some Americans were doing a better job of privately saving for their kids, national saving (the sum of public plus private saving) would still be lower because we were running budget deficits.”

    You might ‘feel’ this, but it’s plainly wrong. If all gov. debt were funded by American bond holders, the effect on net savings is zero, since the dis-savings of the deficit is exactly balanced by the savings of the bondholders.

  12. comment number 12 by: economistmom

    To Gene: I think you’re assuming that increases in private saving would exactly offset increases in the deficit (public dissaving), so that national saving would be constant (independent of deficits)–a theory known as “Ricardian Equivalence.” But just because Americans could theoretically hold all the Treasury bonds doesn’t mean that deficits wouldn’t affect national saving in that case. (Those Americans who would hold Treasuries might view them as a substitute for other investments/saving instruments, rather than as a substitute for their consumption.) My presumption is that government deficits decrease national saving, no matter who holds the Treasuries.

  13. comment number 13 by: Gene Callahan

    “Those Americans who would hold Treasuries might view them as a substitute for other investments/saving instruments, rather than as a substitute for their consumption.)”

    No, my point is indifferent to this — Treasury Bonds are themselves are form of savings, so it doesn’t matter if the funds come out of private savings. Now, to whatever extent what the government does with the savings is less efficient than what would be done with private savings, then it does make a difference — but here, the point is orthogonal to the question of taxes versus defecit spending.

  14. comment number 14 by: Bob Murphy

    Thanks for the clarification, EconomistMom. Especially with the back-and-forth between you and Gene Callahan, I think the three of us are actually all agreed (even though on the surface it seems we’re not). Government deficit spending, regardless of who finances it, leaves our children poorer than they otherwise would be.

    Where Callahan and I disagree with you, I think, is on whether raising taxes today to close the deficit would be more responsible. Callahan and I are thinking no, because the poverty is inflicted on future generations through the wasteful spending today on consumption, rather than investment. And we are much more skeptical than you are (I gather) that government taking money from taxpayers and spending it could ever be as productive as people investing in the private sphere.

  15. comment number 15 by: B Davis

    Gene Callahan wrote:

    You might ‘feel’ this, but it’s plainly wrong. If all gov. debt were funded by American bond holders, the effect on net savings is zero, since the dis-savings of the deficit is exactly balanced by the savings of the bondholders.

    Even if the dis-savings of the deficit is exactly balanced by the savings of the bondholders, this would seem to create a large burden on those taxpayers who are not fortunate enough to be born into a family of bondholders. With a much larger debt, they are very likely to face higher taxes and/or lower government benefits.

    However, I suppose that this is a moot point since most new public debt is now being bought by foreign investors. From 2001 to 2007, the debt held by foreign investors increased from 30.3 percent of the public debt to 44.5 percent now. Over that period, the total public debt increased $1.716 trillion and the foreign-held public debt increased $1.235 trillion. Hence, in effect, about 72 percent of the total increase in the public debt since 2001 has been borrowed from foreign sources.

  16. comment number 16 by: B Davis

    Bob Murphy wrote:

    Thanks for the clarification, EconomistMom. Especially with the back-and-forth between you and Gene Callahan, I think the three of us are actually all agreed (even though on the surface it seems we’re not). Government deficit spending, regardless of who finances it, leaves our children poorer than they otherwise would be.

    Where Callahan and I disagree with you, I think, is on whether raising taxes today to close the deficit would be more responsible. Callahan and I are thinking no, because the poverty is inflicted on future generations through the wasteful spending today on consumption, rather than investment. And we are much more skeptical than you are (I gather) that government taking money from taxpayers and spending it could ever be as productive as people investing in the private sphere.

    Even assuming that government deficit spending (as opposed to ill-advised tax cuts) is what leaves our children poorer, aren’t we more responsible for that spending than our children? Are we just going to leave them a note with all that debt that says “Sorry, we said all kinds of awful things about spending but the government just wouldn’t stop”. We’re the only ones in a position of doing something about spending. It’s therefore our responsibility to either cut our spending or to pay for it.

  17. comment number 17 by: Frodo82801

    The reason that it’s a spending problem is that no matter where the tax rates have gone over the last 50 or 60 years, the govt gets about 18.3% of GDP. But it spends at around 20.5%.

    So, the govt needs more revenue. it raises taxes and still gets 18.3%. Meanwhile, that tax increases have stymied the economy to some degree. But if it cuts taxes, the economy grows and the govt gets 18.3% of a larger GDP.

    If the govt wants to make a dent in the debt, it needs to cut spending down below 18.3% of GDP.

    Yes, common sense works well in thinking about this, but this is govt. Common sense was thrown out the window years ago. Cutting wasteful spending alone would be enough to get us there.

    The value argument falls a little flat also. Yes, college is nice, but at the end of it, the student will be paying off the debt with increased earning potential. The govt doesn’t have this increased earning potential because tax increases hurt the economy and increase the need of citizens thereby increasing debt further.

    Live within your means and save for the future. That’s what families do. You get a baby and start saving for college from day 1. That’s the smart way to do it.