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You Think $9 Trillion Sounds Bad?

August 25th, 2009 . by economistmom

How about $14 trillion?  $9 trillion ($9.051 trillion) is the Obama Administration’s 10-year deficit projection based on their own economic forecast and their own estimate of the costs of their policy proposals (as proposed in their FY2010 budget).  $7 trillion ($7.137 trillion) is the Congressional Budget Office’s 10-year deficit projection based on their economic forecast and policies already in place in current law.  If you start with CBO’s more pessimistic baseline budget outlook of $7 trillion in deficits (by the way, the equivalent pre-policy baseline estimated by the Administration is $6.259 trillion), then add in the CBO-estimated cost of policies that have a good chance of coming true in the future (but aren’t yet written into law), you can come up with a projection that is perhaps more “plausible” than both the Administration’s (optimistic) $9 trillion and CBO’s (naive baseline-constrained) $7 trillion.  That’s what we at Concord try to do when we come up with our “Concord Plausible Baseline,” which based on today’s CBO report shows that current policy would lead to $14.4 trillion in deficits over the next 10 years.

Here’s a link to our press release, where of course, my big soap box is the need for tax reform, or at least a rethinking of whether extending most of the Bush tax cuts (especially via deficit financing) makes any good economic sense:

“Today’s numbers illustrate that we have a revenue crisis in the federal budget as much as a health care crisis. The federal revenue system is clearly failing to keep up with our nation’s spending needs. Since last September, the 10-year revenue forecast has shrunk by over $3 trillion solely due to deteriorating economic conditions. What’s troubling is that even without any more tax cuts and even after the economy is expected to recover, today’s reports show revenues will continue to fall short. It is time to rethink tax policy, from the deficit-financed extensions of the 2001 and 2003 tax cuts proposed by the administration, to an even broader look at how to increase the revenue base,” said Concord Coalition Chief Economist Diane Lim Rogers.

And the bottom line from Concord’s perspective?  My boss, Bob Bixby, says it best:

“The routine budget process has produced an unsustainable outlook. It is unrealistic to think that this will change without some mechanism to compel consideration of the hard choices that have been ducked in the past. Regardless of the outcome of this year’s health care reform debate, there will be a need to address other contributors to the structural deficit such as Social Security growth and inadequate revenues,” Bixby said.

43 Responses to “You Think $9 Trillion Sounds Bad?”

  1. comment number 1 by: beebs

    It is interesting to watch our government collapse before our eyes.

    The printing presses are running around the clock. Maybe I should look into buying some gold.

  2. comment number 2 by: Brooks

    The “Concord Plausible Baseline” is a very important, unique contribution to fiscal policy discussion/debate. I hope is promoted heavily to, and shows up in, a wide variety of media (new & old) reaching a lot of eyeballs. Glad to see Mankiw post on it http://gregmankiw.blogspot.com/2009/08/how-large-is-fiscal-hole.html . It is op-ed-worthy, and obviously more broadly news-worthy. Policy-makers and the public need to see and understand it if we are to choose policies in an informed, rational, responsible way.

  3. comment number 3 by: BillSmith

    “revenue crisis in the federal budget”

    What about some spending cuts?

  4. comment number 4 by: ExZonie

    “The federal revenue system is clearly failing to keep up with our nation’s spending [[needs??].”

    Have we passed the point where discretionary spending is overridden by interest, unfunded obligations and entitlements?

  5. comment number 5 by: jukin

    The federal budget is up 31% year over year.

    It’s not a revenue crisis. IT IS A SPENDING CRISIS!

  6. comment number 6 by: Anandakos

    Mr. Smith,

    On your way to Washington, would you mind letting us know exactly which “spending cuts” you have in mind?

    DOD and the military? Nah, the length of your post shows that you’re yet another neo-con invader.

    Entitlements? Hmmm, those are hard because voters resent you taking them away. Many just one term in Washington, Mr. Smith?

    “Discretionary” budget items? Well….gotta have Homeland Security and Justice to keep the wetbacks out, right?

    Interior, Agriculture, Energy, and Commerce? Hmmm, may be some opportunity to get rid of some of those disgusting scientists there. Then we can sell or burn all the National Forests, Drill, Baby, Drill in the Parks, who needs a National Weather Service anyway? We all know that global warming is a myth, so let it snow, let it snow, let it snow.

    HHS? Ah, here we go! We don’t need no “Death Panels” if we just stop funding the losers! They’ll all die in a few weeks and Voila! A Perfected White society again!

  7. comment number 7 by: Brooks

    Anandakos,

    Why not just stop with your opening question instead of going off with so much presumptuousness, let alone the totally unjustified charge of racism?

    I’ve seen you write very thoughtful comments, so why spew all that garbage?

    You may be completely right about Smith (who may, by the way, also be ExZonie and jukin) or maybe not, but it is unfair, demeaning to yourself, and an impediment to thoughtful discourse for you to respond that way.

    All the guy wrote (if he’s not also the other two handles) is “What about some spending cuts?”. Your response comes across as a bit nutty as well as unfair and unnecessarily ugly.

  8. comment number 8 by: WalkingHorse

    I must agree with Jukin. Unless we do something rational to constrain spending, the ‘ratchet effect’ that has served to exponentially increase government spending for generations will do us in.

    There was a very good reason why Newt Gingrich was able to accurately characterize Bob Dole as the “tax collector for the welfare state.”

    The political class must constrain its appetites, either voluntarily or through coercion by We The People. The electorate must figure out that a sense of entitlement creates nothing and that government is an overhead function.

  9. comment number 9 by: Fred

    Dig Barry, dig !

    The faster you hit bottom, the sooner the US economy can get back to business.

  10. comment number 10 by: Brooks

    It does seem that either we have here one guy without any substance who likes to post under a variety of handles (that’s my guess) or a few guys belonging to some shallow-thinking hyperpartisan group like Redstate.com posting substance-less, worthless, silly snark.

  11. comment number 11 by: SteveinCH

    Why not do it this way?

    Run the budget off of federal tax receipts at a flat say 18.5% of GDP. Clearly in years like this, that’s going to be way high but in a “normal year” it will be a bit low. It would probably average out over time. The question of whether we have a spending problem or a tax problem is whether our spending priorities fit within the 18.5% on average.

    Why 18.5%? It’s a reasonable average of the Federal government’s take over a pretty long period of time, relatively independent of tax policy and so forth. If you think it should be higher, let’s make that case directly to the people and see how it goes. For my part, I’d love it to be lower because the government has long ceased to spend on common goods and externalities but that’s part of the debate we should have.

    I personally think it’s a spending problem because, last I saw, the Obama budget in the outyears was well north of 22% of GDP and that was without health care in the mix.

  12. comment number 12 by: Nick Danger

    Brooks,

    The projections are unsustainable. Without much higher income tax rates and additional taxes such as a VAT tax the federal government will be reduced to just servicing the debt. With the needed new taxes added to the economy any nascent economic recovery, and concomitant job creation, will be killed in the crib.

    But, you, Brooks sound like one of the beknighted statist of either the Democrat or Republican parties who think the average voter is too stupid to take care of thorny issues like healthcare. If you are one of those folks you can kiss my Objectivist ass.

    That is all.

  13. comment number 13 by: SteveinCH

    Nick,

    With due respect, that argument doesn’t make a heck of a lot of sense. The only way the government will be reduced to debt service only is if it continues to run up trillions in deficits. There’s no compelling reason for it to do so.

    What I’d love to understand from you is why you think the Federal government needs to consumer 4% more of GDP than at any time in history (World War II excepted)? To me, that’s the more fundamental question. More taxes without an answer is not something I could ever support.

  14. comment number 14 by: Brooks

    Steve,

    This whole semantic debate over “spending problem” vs. “revenue problem” is a silly distraction.

    The problem is that there is too large a gap between projected spending and projected revenues over the long term. Yes, spending is what is diverging from history as a percent of GDP and “causing” that gap to open up. But so what? Stripped of distracting, meaningless semantic quibbles, we are faced with the choice of how much we want to spend and on what (allocated how), how much to tax and on what basis, and how much debt to carry and related expense to incur. And the answer (in terms of individual preferences and collectively through our political process) is a function of economics (determining what the trade-offs are, considering macroeconomic effects of particular policy options, including the adverse effect on GDP and negative feedback effects on revenue from tax increases) and our values and priorities (which trade-offs we choose).

    So I say drop the meaningless semantic debate and seek to determine the trade-offs and discuss which trade-offs we each consider optimal.

    But a couple of things are clear:
    (1) We are on an unsustainable fiscal course, and the longer we wait to make the necessary sacrifices to change course, the greater the eventual pain will be.
    (2) The only economically and politically feasible solution is a compromise solution with a combination of higher taxation (meaning not just increase in revenues as a percent of GDP vs. history due to bracket creep, but actual increases in tax rates and/or creation of new taxes) and reductions in projected spending.

    Forget 18.5%. No way, no how is that politically feasible, given our demographics (retirement of baby boomers) and excess cost growth of healthcare spending.

    And folks on the left can forget the idea that we can solve the problem just by taxing the rich and cutting Defense. It’s not politically feasible and wouldn’t work anyway.

  15. comment number 15 by: Brooks

    Nick,

    Re: your comment addressed to me, get a clue, man. Seriously, I have no idea what you think you’re responding to.

  16. comment number 16 by: SteveinCH

    Brooks,

    My “semantic” debate was actually simply a response to the way the question was phrased. It’s a framing device used to suggest a solution. I agree wholeheartedly with your point 1 above because this discussion is all a current account discussion. The real issue we have as a country is unfunded liabilities (Medicare primarily).

    As to your point 2, it’s hard to argue but the devil is in the details. If the historical average were 18.5 (it’s actually 17.4 — I checked), I’m not sure why it needs to go higher. You argue demographics. You could equally solve that problem by reducing or means testing benefits. For about 10 years until he died, I paid Medicare taxes to fund my grandfather’s medicare to allow him to leave more money to my father. Not sure that makes a heck of a lot of sense. As to the issue of health care, I firmly believe the solution will be found in making us pay for our medical care as opposed to not. We all do a good job of making choices when they are clear. Medical spending increases are driven by demographics, improving and more costly technology and no pricing transparency. The first two are outside our control but the last one is not.

    I firmly believe we could live within 18.5% if we so chose. Even if you disagree, where you split the difference between 17.4/18.5 and the 24 or 25 that the current administration is heading toward makes a heck of a big difference. Simply saying split the difference doesn’t suggest a solution.

    My broader point is we should pick a point and try to stick to it and then force the politicians to trade off within a budget constraint. Our issues are largely that they face no budget constraint. Fix that, and you at least bound the problem.

  17. comment number 17 by: Brooks

    Steve,

    Addressing your points in order:

    Re: it’s actually 17.4 — I checked

    Obviously you’d need to specify to what time period you are referring. But again, the historical effective tax rate (revenues as % of GDP) is not really relevant to how much we should spend in the future and thus how much we should tax, except that it is perhaps something of a starting point for discussing dynamic effects of increasing taxes.

    Re: You argue demographics. You could equally solve that problem by reducing or means testing benefits.

    My point was not that we could not theoretically solve the problem all on the spending side. Obviously we could. That’s just math (unless one thinks that the dynamic effects [lower long-term GDP and revenues caused by less government spending] would be negative and so greatly negative as to preclude that approach, but I don’t think that argument would hold water. My point is that a spending-side-only approach is absolutely politically unrealistic, and even more so a non-Defense spending-side-only approach (which is what many on the right really have in mind). It is politically infeasible. Why? Because the voting public as a whole will choose some degree of higher effective tax rate (and even legislated tax increases) over the scale of cuts in benefits and/or eligibility in entitlements that would be needed to adequately reduce the long-term fiscal imbalance. And don’t forget that the portion of the population that is 65+ will be growing substantially over the next couple of decades, from 13% now to 20% in 20 or 25 years, and seniors vote at a disproportionately high rate. And of course, non-seniors care about seniors, too. Check out http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-LTBO.pdf for some sense of scale, and note that even those projections understate how rapidly and greatly our fiscal imbalance would grow on our current course, for a number of reasons related to CBO methodology and assumptions. See also the projections referred to in the post at http://www.concordcoalition.org/learn/budget/concord-coalition-plausible-baseline

    As to the issue of health care, I firmly believe the solution will be found in making us pay for our medical care as opposed to not. We all do a good job of making choices when they are clear. Medical spending increases are driven by demographics, improving and more costly technology and no pricing transparency. The first two are outside our control but the last one is not.

    I think there is fairly broad agreement that the disconnect between consumer and payer, combined with our largely fee-for-service insurance structure, is a major contributor to higher healthcare spending (both governmental and private) than we’d have otherwise. One way to go could be to connect the consumers (patients) with the cost as you suggest. Another is rationing (limitation of benefits and/or denial of coverage for particular treatments in particular circumstances, etc.). Another is changing from fee-for-service to more of a fixed payment system (capitation or per diagnosis, etc.). And the preceding can be combined. The options have economic and moral implications, and I haven’t settled on my preferences yet.

    Re: I firmly believe we could live within 18.5% if we so chose. Even if you disagree, where you split the difference between 17.4/18.5 and the 24 or 25 that the current administration is heading toward makes a heck of a big difference. Simply saying split the difference doesn’t suggest a solution.

    I’m not saying “split the difference” if by that you mean some sort of 50-50 calculation. I don’t have a particular number in mind, and such a number would have to come from some conclusion from complex, thorough analysis, not serve as the starting point.

    Re:My broader point is we should pick a point and try to stick to it and then force the politicians to trade off within a budget constraint. Our issues are largely that they face no budget constraint.

    I say we should — or more precisely, an independent commission such as the “SAFE Commission” should — take a comprehensive look at the policy options, pick a target in terms of the publicly-held debt-to-GDP curve over the long term, and either produce a solution for an up-or-down vote or produce alternative solutions reflecting different trade-offs, but which all meet the same standard for the long-term debt-to-GDP.

  18. comment number 18 by: EconRob

    Seriously optimistic GDP growth in this model.

  19. comment number 19 by: SteveinCH

    Brooks,

    Interesting and helpful responses. I appreciate the attention to detail and the additional facts. I don’t really know what is politically feasible between spending cuts and tax increases and like you, I agree the current path is unreasonable and unsustainable.
    To your last point, I personally favor a spending limit versus a debt to GDP curve because I think it is harder to game. I’d be happy with either. It would be great to separate overall spending/debt levels from how to fund those levels from what to spend the money on. Anything that goes in that direction would be a phenomenal improvement on the current process.
    Thanks for a productive exchange!

  20. comment number 20 by: Anandakos

    Brooks,

    The hypotheticals were there because it’s my experience that scratch a “spend less” mantra Conservative and you find that the real message is “spend less on everyone except my group” (usually defined as race and class). That is the bottom line for most of them.

    I am not ashamed of confronting it either. The country has had over 140 years to get over the vicious sickness with which it was born. For a large segment of the population, regardless of Obama’s election, it clearly hasn’t.

    The good news is that within forty years it will, because if there’s anything that public schooling is good at — even in the South — it is providing the opportunity for cross-racial friendships to form. Sure, there are still big white-only, black-only, chicano-only, and even a few Asian-only cliques in schools. But overall the kids graduating in the last twenty years have learned Dr. King’s lesson: they do judge their peers on the basis of their character. So a large enough contingent of the racists will have died in thirty or forty years that the transition to a majority minority nation will be possible without the sort of ranting fireworks we see at the Healthcare town halls.

    People who really are race-neutral make posts like yours, not one liners like those littering the top of this thread.

  21. comment number 21 by: Anandakos

    Brooks and Steven,

    A “commission” is a profoundly un-democratic way of making the hard decisions that are needed. It’s the very epitome of the “elitism” both the left and right decry about the other.

    I will grant you that it’s extremely unlikely that the decisions can be made by political means; with our gerrymandered House the strong majority of representatives know only one big Idea and one kind of people. They cannot work together for fear of being labeled sell-outs or weaklings.

    So the choices will be left to the bond market vigilantes. Such people tend to make much more punitive judgments than would elected politicians, so the future is not bright.

    But leaving these choices to a committee of liberal or conservative “experts” or even some finely balanced conglomeration of “all points of view” would leave out vast segments of the population. That’s because nobody would be appointed to the committee without an Ivy or Stanford education, regardless of skin-pigmentation and political bent. The whole committee would share assumptions like “rational markets” and “globalization” that have become sub-conscious axioms to such people.

    But given that the earth is careening over the cliff of resource exhaustion and radical ecosystem collapse as a result of 200 years of those ideas’ pre-eminence, perhaps the assumptions should be strongly questioned.

  22. comment number 22 by: James

    According to the graph posted on the Concord Coalition web site, they are predicting a “-$14.4 Trillion Deficit”. That’s the same as a +$14.4 trillion surplus, because a negative deficit is a surplus.

  23. comment number 23 by: Brooks

    Anandakos,

    Re: your 4:59, you are practicing a prejudice and bigotry of your own when you leap to such conclusions with so little basis and launch into such ugly personal attacks. You hear “spend less” and you immediately assume the person is racist and launch into an attack with that charge. Come on. It is grossly unfair, it removes what could be some chance of a productive dialogue, and it reflects very poorly on you (and I know you can be much more thoughtful, rational and reasonable than that). It really would be much better all around (including advancing whatever cause or policies you seek to advance) to just ask the (non-rhetorical) question with which you opened (where he would cut spending) and give the person a chance to answer.

  24. comment number 24 by: Brooks

    Steve,

    My pleasure and thanks to you, too. If you’re looking for excellent analysis on this issue with much more objectivity than you’ll find in most places, keep reading Diane’s (EconomistMom’s) posts. And I hope you keep participating as well.

    The reason I’d want to at least start with the debt-to-GDP trend target rather than a spending (as percent of GDP) target is because the latter constitutes a particular choice among trade-offs, which reflects ideology, values and priorities, where as the former (debt-to-GDP targets) is focused solely on fiscal responsibility one way or another, which is first and foremost what we must achieve. But within that debt-to-GDP trend constraint, I guess my ideal would be for a commission to put forth one option (along with alternatives in each direction that were not chosen, but with show different trade-offs), but with amendments possible (shifting the revenue-spending balance or shifting around within spending or within revenues [taxation]) as long as they stay within the debt-to-GDP constraint (as scored by either CBO using a prudent form of dynamic scoring or by some other trusted, non-partisan, non-ideological entity) .

    And I strongly support the SAFE Commission, which I recommend you check out if you haven’t already. I think the SAFE Commission is necessary to break through the political calculus that leads politicians to pander rather than making responsible, but unpopular, fiscal choices.

  25. comment number 25 by: Brooks

    Anandakos,

    A commission would never be empowered to enact budget legislation. It could only put forth a recommendation. Like all legislation it would have to pass Congress and be signed by the president. And it could work such that Congress can amend it as long as the budget plan stays within the established constraints (standards of fiscal responsibility).

  26. comment number 26 by: Anandakos

    Brooks,

    You’re probably right, but I’m beyond caring if I can “find common ground” with the sloganeers. I know they’re going to win the political fight and defeat any sort of health care reform. In 2011 they’ll ride that victory into control of Congress and within three months the “pledge to defend Medicare” their leaders so recently trumpeted against the President’s cruel desire to grind up Granny will be forgotten and “budget discipline” will be administered.

    They are a lying gang of sons of bitches, and if I had the means I would leave this country to its strutting mobs of “Dave The Marine” clones. The only thing I still like about it is the countryside, which is beautiful and varied beyond any other.

    Go ahead; see if your reasonable ideas get any hearing from the unhinged cadres of selfish, self-centered egotists who have hijacked your party.

  27. comment number 27 by: Brooks

    Anandakos,

    This is funny (and sad). I point out that you are being highly and unfairly presumptuous, and in your reply you presume to know my party affiliation. You don’t know my party affiliation, and I rather doubt I’ve given you any basis for even an educated guess.

    As for “sloganeers”, if someone persists with nothing but empty talking points, challenge them to provide substance, and if they don’t, call them out on that basis. No need to be a jerk yourself by getting all presumptuous about all sorts of other matters, let alone accusing him of being an extreme racist.

    As for “lying sons of bitches”, they exist on both right and left in abundance. And since you mention healthcare “reform”, there are plenty of (apparently deliberately) grossly misleading statements by advocates of this “reform”, including Obama and his administration. I hope you’re not kidding yourself into thinking that either side of that debate or the ideological spectrum or political parties in general has a monopoly on “lying” (or more broadly, insincerity and deliberate misrepresentations).

  28. comment number 28 by: EconRob

    Anybody that thinks Obama is being honest is just not being honest. He is selling like all get out.
    Still do the math on the model and tell me the GDP growth rates are realistic. No way.
    I am sick of people bringing up race as the reason people do not agree. It is a sickness.

  29. comment number 29 by: AMTbuff

    The percent of GDP debate obscures an important constraint, analogous to the Laffer curve. If the government taxes everything at 100%, the government can spend 100% of GDP but the GDP will be zero. If the government taxes everything a 0%, the government will also have zero revenue to spend. In between there is a maximum. Where is that maximum?

    I have no idea, but suppose it’s not far from the historic 18.5% level. If so, all the elaborate tax schemes in the world won’t be able to fund Medicare and Social Security for boomers: Total tax revenue will drop AND the economy will go in the toilet. I’m concerned that nobody seems to realize that there is a limit to how much total revenue the government can raise, and that we’ll only discover this after tax increases have caused another major recession.

  30. comment number 30 by: Brooks

    AMT,

    Re: Where is that maximum? I have no idea, but suppose it’s not far from the historic 18.5% level.

    Almost all economists (including conservative economists and even W. Bush’s own top economists) believe that current tax rates are nowhere near revenue-maximizing rates and that we not near the maximum possible level of revenues as a percent of GDP. In other words, it is indeed possible to significantly exceed revenues of 18.5%. That’s why even W. Bush’s top economists and other prominent conservative economists explicitly disagreed with the notion (often repeated by politicians and talk show hosts on the right) that the Bush tax cuts, and tax cuts in general, increase revenues. See http://swordscrossed.org/diary/20081017/no-bush-tax-cuts-have-not-generated-higher-revenues

  31. comment number 31 by: AMTbuff

    Brooks, those studies are on the rates per taxpayer, and I am familiar with them. Revenue is maximized at very high marginal rates for low income, tapering off to zero at the highest income. However the theory does not account for all-or-nothing income decisions such as when to retire.

    What I’m wondering is whether investment capital will dry up and drop the GDP if the tax rates on investors and entrepreneurs (tax rates at the very high end) increase greatly from their current levels. We’ve had much higher rates before, so perhaps this is not a problem. But at some point the taxes will kill GDP growth and the revenue will turn downward. The income tax rates at the high end will, I believe, largely determine when this happens.

    A special circumstance today is that a lot of baby boomers will be choosing when to retire, and high tax rates may push them to retire earlier rather than later. It wouldn’t hurt to give them extra incentives to keep earning income and to keep investing in job creation.

  32. comment number 32 by: Mario Balistreri

    Yesterday on CNBC’s Power Lunch guest host Greg Knapp referred to stimulus spending as “economic crack”. Crack has symptoms of giving you a great quick satisfying high, but leads to negative long term health issues. Knapp mentioned that stimulus spending has the same effects on the economy, it will lead to large, fast economic growth but will ultimately create long term issues (debt and inflation to name a few).

  33. comment number 33 by: Brooks

    AMT,
    Again, the consensus among economists is that we could raise revenues significantly higher than that 18.5% of GDP through tax rate increases. And this applies to tax rates on investment income (capital gains* and dividends) as well as to tax rates on labor income (for example, see Mankiw at the link I provided). And I think the vast majority of economists would also say that raising tax rates on high income earners would increase revenue net of dynamic (negative revenue feedback) effects, even though Art Laffer would disagree (whether sincerely or not).

    Yes, there obviously are some points at which a further increases in tax rates would cause lower revenues, but we are apparently nowhere near those tax rate levels.

    You say “Revenue is maximized at very high marginal rates for low income, tapering off to zero at the highest income.” On what analyses or commentary are you basing that assertion? And are you saying that, for the “highest” income earners, cutting a tax rate in half from, say, 2% to 1% would actually increase revenues, meaning that changing the after-tax proportion from 98% to 99% (i.e., an increase in incentive of only about 1%) would more than double the taxable income of those people? That seems strange and highly dubious, to say the least. See http://swordscrossed.org/node/1672

    Re: A special circumstance today is that a lot of baby boomers will be choosing when to retire, and high tax rates may push them to retire earlier rather than later. It wouldn’t hurt to give them extra incentives to keep earning income and to keep investing in job creation.

    Well, it certainly could hurt, and obviously this is a quantitative question. Sure, if we take an isolated, cherry-picked case of an individual (or segment of individuals) to whom a labor income tax rate increase of X would induce them to retire today rather than continue working, we lose revenue, but to know the overall net effect on revenues of a tax increase, even if the policy question were whether or not to apply a tax increase to seniors (treating their income differently for purposes of this tax change), we’d have to ask how it would affect the income-related decisions and behavior of ALL seniors, not just those whose work/retire decision we presume hinges on whether or not this tax increase occurs, because some seniors will continue to work anyway and pay the higher tax rate. The economic behavior of everyone affected has to be considered to arrive at the net effect on revenues.

    * With a capital gains tax cut (from anywhere near recent or current rates) there is an unlocking effect that can provide a very short-term boost in revenues, but over time the net effect is lost revenue.

  34. comment number 34 by: SteveinCH

    Thanks for that last volley Brooks. It helped me understand why I don’t like debt/GDP as a threshhold metric. Simply put, it puts no check on spending up to the theoretical maximum that could be rasied consistently by taxes. From my pov, that isn’t actually the fundamental question for policy (though I agree it is for funding stability)

    The fundamental question for policy is what level of government (federal, state, local) we want. The only way to get at that is with a spending threshhold that is equal to or lower than the funding threshhold. I’d be arguing for (much) lower but that seems to be the policy disconnect.

    I’ve bookmarked this blog as both the posts and the commentary is more substantive than what I have seen other places

  35. comment number 35 by: AMTbuff

    Brooks, Mirrlees figured out optimal tax rates back in 1971. His Nobel prize lecture is reasonable accessible to non-academics: http://nobelprize.org/nobel_prizes/economics/laureates/1996/mirrlees-lecture.pdf See Figure 3 and the discussion preceding and following it.

  36. comment number 36 by: Brooks

    Steve,

    What I’m saying is that, first and foremost, we need to establish the constraint of a fiscally responsible course, meaning setting and satisfying an appropriate constraint on debt-to-GDP over time. Exceeding responsible, sustainable levels of debt-to-GDP means avoiding choices among trade-offs (including how much to tax and spend overall) in the short/medium-term and forcing greater total sacrifice later. So the first constraint should be one of responsibility (essentially coming sufficiently close to paying our bills, whether we choose to spend more or spend less, rather than running up a huge credit card balance), not of ideology, values or priorities.

    Then, within that constraint, the battle can be had over degrees of increases in projected revenues vs. decreases in projected spending. I think one should only arrive at a constraint on spending after thinking through the policy implications, (1) in terms of economics (e.g., dynamic effects on GDP and revenue of tax rates or effective tax rate going up another given increment), (2) the adverse impact on people who would benefit from exceeding that spending level (e.g., to what extent the spending constraint would likely mean reducing projected spending on Medicare and Social Security and to what extent that would harm some people), and why that adverse impact is preferable to higher taxation, and (3) political feasibility (ability to pass and sustain the practice).

    But there is nothing stopping someone (or our political process) from going through such considerations and then setting an overall spending constraint (% of GDP over time or even in real dollar terms) that also meets the first constraint of debt-to-GDP levels. And nothing about setting the debt-to-GDP constraint precludes or inhibits the ability to set a spending constraint. It’s just like a household saying “First and foremost, here’s the most we’re going to put on our credit card over time. Now let’s determine how much we want to spend within that constraint.”

    Glad you bookmarked this blog. It’s really a gem of the blogosphere (most blogs lack Diane’s objectivity and/or her expertise). Hope to discuss more stuff with you here, and also feel free to email me to discuss anything, share info, etc. at Brooksbud [@] aol.com (I just didn’t write it out with the “@” because apparently spammers pick up email addresses that way).

  37. comment number 37 by: Brooks

    AMT,

    Thanks for the link, but after spending a few minutes with that document, I’d prefer to ask you what you think is indicated by Figure 3 and how that addresses my question regarding net revenue impact of cutting the tax rate from 2% to 1% (by the way, Figure 3 and its Y axis has no title other than “Marginal Tax Rates”. Does he mean “Revenue-maximizing Marginal Tax Rates”?) Are you saying (and are you saying that that paper asserts) that for a particular level of high income earners, higher tax rates would not increase revenues? And if so, what level are you saying that would be, and what would be the revenue-maximizing tax rate for that segment (or some sub-segment at a given specific income percentile)?

  38. comment number 38 by: Frank the salesforecaster

    FDR’s tax rates would fix our little deficit.

  39. comment number 39 by: AMTbuff

    Actually, I think it’s welfare-maximizing tax rates, which is a little different because it accounts for the fact that societal welfare is also improved when people spend their own money, not merely when the government spends it for them. Specific values for these curves depend on assumptions such as elasticity and what function you choose to measure societal welfare. Saez makes a living doing that, although IMHO he slants his assumptions to the left. The general shape of these curves is not in dispute, however. At the very high end the rate needs to go down near zero, but that very high end might be in Bill Gates territory. There’s plenty of wiggle room to make the theory fit any preconceived opinions you may hold, as you can see by looking at Saez’s conclusions. Which is why I started with “I have no idea”. I don’t think anyone really knows where that revenue maximum lies.

  40. comment number 40 by: SteveinCH

    Frank,

    Not really. I wasn’t really paying taxes pre-Reagan but as I understand it, the number of things that were deductible or credited at that time was pretty ridiculous (meaning you could deduct credit card interest, margin interest and just about everything else under the sun).

    If you really believe what you said, go back and look at Federal receipts as a percentage of GDP back in the 30s. Federal spending (I found that chart faster) averaged about 10 percent of GDP in the 30s. Obviously higher in WWII so leave that out.

    Since the government wasn’t building huge surpluses in the 30s, that means receipts were about 10 percent of GDP as well. Long term projected spending in the low to mid 20s (higher this year and next). So how is it that FDR tax policies would cover the gap?

  41. comment number 41 by: Brooks

    Steve,

    Good point re: effective tax rate under FDR. By the way, it was even lower than 10% in the 1930s, partly because we ran deficits. See Table 1.2 at http://www.whitehouse.gov/omb/budget/fy2009/pdf/hist.pdf (I think you’ll find this document a very useful resource for these discussions).

    And of course, the other question is, even if we could close or reduce at least short/medium-term projected deficits entirely through tax increases (i.e., without any cuts in projected spending), would we want to? But my guess is that Frank’s answer to such questions is a reflexive “yes” (at least as long as it’s someone else’s taxes).

  42. comment number 42 by: Brooks

    AMT,

    So Figure 3 (and the paper, I suppose) does not tell us the revenue-maximizing marginal tax rates for each segment of income level. And I’m unclear on whether or not you are speaking of revenue-maximization of welfare-maximization in the rest of your comment, but if the former, do you have links to any analysis or expert commentary that (1) asserts that we are at or near revenue-maximizing rates for some or all brackets on any type of income? (2) Again, the idea that revenue would increase by reducing the marginal tax rate at any level of income from 2% to 1% seems extremely counter-intuitive and highly dubious to me, per my explanation regarding the breakeven magnitude of growth in taxable income relative to the incremental incentive of going from 98% net income of gross to 99% (taxable income would have to double [because the tax rate is halved] as a response to a 1% increase in incentive.)

    Again, most economists apparently agree that we are nowhere near revenue-maximizing tax rates on labor or investment income.

  43. comment number 43 by: Brooks

    Steve,

    And if you want to really go to town analyzing those numbers, you can download to Excel any section you want at http://www.whitehouse.gov/omb/budget/historicals/