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Bruce Bartlett on the Inevitability of Tax Increases

July 26th, 2010 . by economistmom

Here’s an excellent interview of Bruce Bartlett on The Economist.  Like the point I tried to make at the Paul Ryan event, Bruce says it’s ridiculous–or even worse–to claim the deficit must be reduced entirely on the spending side of the budget (you know, all diet and no exercise):

Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending—and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc—but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc…

Unfortunately, I don’t think Democrats have the guts or the stamina to put forward a meaningful deficit-reduction programme because they know—as I do—that it will require higher revenues. But facing big losses in the elections this fall I can’t blame them. That leaves us facing political gridlock between the sensible but cowardly party and the greedy, sociopathic party. Not a pleasant choice for those of us in the sensible, lets-do-what-we-have-to-do-for-the-good-of-the-country independent centre…

The key area where Republicans and conservatives continue to live in a fantasy world relates to the inevitability of higher taxes to the long-run solution to our fiscal problem. At present, they all live in a dream world in which massive spending cuts that don’t hurt average Americans are the only solution to the deficit that they will entertain. But sooner or later, they will realise that this is simply not possible and that tax increases are not the worst thing in the world—Ronald Reagan raised taxes 11 times, including in 1982 when the economy was still in recession, and contrary to right-wing predictions Bill Clinton’s 1993 tax increase did not send the economy into a tailspin…

Eventually, we will have to enact measures to reduce the deficit. These measures will necessarily have to include higher revenues. Initially, they may be called user fees, offsetting receipts or other euphemisms, but they will raise revenues…

Read the whole interview for many more quotable Bruce-isms.  He’s a little heavy on the Republican bashing than I would be (his line above about the “cowardly” Democrats is really his only critique of them here), but I pretty much agree with all his substance on tax and budget policy.

28 Responses to “Bruce Bartlett on the Inevitability of Tax Increases”

  1. comment number 1 by: SteveinCH

    Diane,

    I’d welcome comments from you or from Bruce on the following two graphs. Here is spending per cap in constant 2005 dollars, 1950 to the present

    http://www.usgovernmentspending.com/downchart_gs.php?year=1950_2010&view=1&expand=&units=d&fy=fy11&chart=F0-fed&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

    And here is revenue, same metric, same period

    http://www.usgovernmentrevenue.com/downchart_gr.php?year=1950_2015&view=1&expand=&units=d&fy=fy11&chart=F0-fed&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

    My question is very simple. In a world where revenue is rapidly rising over the long term adjusted for population and inflation, how is it possible to claim the issue isn’t spending?

    If you and Bruce are making a practical political argument, that would be one thing, but I don’t think you are.

    In my view, the percent of GDP metric is fatally flawed if we look at government from an efficiency standpoint as we must.

    What, in your view, is the underlying rationale for allowing government spending to increase faster than the rate of growth in inflation and population? Why should we as a society accept this? Your calls (and Bruce’s) for taxes simply ignore the fact that we have not asked our government to be efficient in any sense of the word.

    Interestingly, the only part of the government that has stayed roughly constant using the same metric (at least up until Iraq and Afghanistan) is defense.

    http://www.usgovernmentspending.com/downchart_gs.php?year=1950_2010&view=1&expand=&units=d&fy=fy11&chart=30-fed&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

  2. comment number 2 by: VAT Brat

    At the state level, Republican-controlled Legislatures are more frugal than Democrat. NJ, CA, IL, NY, and CA are the fiscal basket cases, and all are controlled by union-pandering Democrats.

    Republicans in Indiana and Arizona actually increased taxes to address budget shortfalls. So why the difference at the federal level?

    That’s where Bruce Bartlett’s analysis falls short. He doesn’t grasp that at the with a Federal Reserve and no balanced budget constraints of any kind, the federal level of government is without the kinds of boundaries the force state-level officials to be fiscally rational.

    Bartlett is essentially asking Republicans to surrender. If taxes are increased, he offers no guarantees that the deficits will be stopped. It’s the spending side of the ledger that has exploded proportionally far more than the tax side. So it’s up to the Democrats to show the way with offers of permanent spending cuts that are politically difficult. But more important, there must be a < constitutional constraint that provides some assurance that spending increases cannot resume, nor that tax decreases could be enacted without near-term fiscal accountability.

    Speaking of cowardice, I’ve yet to see Bruce Bartlett offer his vision of a fiscally-responsible budget that includes spending cuts and tax increases. Say what you want about its flaws, but Paul Ryan’s Roadmap is the only thing on the table right now. It’s scandalous that the Democrats and left-leaning think tanks (Concord Coalition, Brookings, et. al.) haven’t even responded to his challenge.

  3. comment number 3 by: B Davis

    Read the whole interview for many more quotable Bruce-isms. He’s a little heavy on the Republican bashing than I would be (his line above about the “cowardly” Democrats is really his only critique of them here), but I pretty much agree with all his substance on tax and budget policy.

    Yes, Bruce does go pretty heavy on the Republicans. I can only hope that the entire Republican party is not as “around the bend” on tax policy as Bruce describes. It will make it very difficult to find a solution with one irrational party and one somewhat cowardly one. Still, I always like to read Bruce’s articles as he seems to be an very independent thinker who does his homework.

    Speaking of the difficulty presented by the political dynamics of the parties, Bob Bixby had an interesting talk with the host of the Financial Sense Newshour at this link. If I remember correctly, it starts around the 28 minute mark and goes for about 20 minutes.

  4. comment number 4 by: Underwriterguy

    I’m not an economist. I’m not a Republican or Democrat. I’m not an academic or inside the beltway.

    Maybe others feel as I do. I’m willing to pay more in taxes, but to reduce the deficit, not fund more social spending and entitlements. Therefore, I want to see the spending reductions concurrent with the new taxes. No temporary fixes and a promise for the future.
    Some taxes I would support: treat all employer contributions toward health insurance as ordinary income, tax carbon straight up - no exemptions - we see the cost, add a progressive consumption tax and reduce taxes on capital.

    Some spending cuts that make sense: means test all entitlements, reduce military spending. And I would support major changes to the SS and Medicare/Obamacare, the specifics of which are too lengthy for this post.
    Am I a voice crying in the wilderness?

  5. comment number 5 by: SteveinCH

    Not to me you aren’t. Other than the carbon tax, which I oppose relative to a straight consumption tax, I believe it will be necessary as a matter of politics to solve the debt crisis we face. I will say in passing that I think the need for additional revenue is more a matter of politics than of policy but it doesn’t actually matter.

    I agree with all your list of spending cuts although I would means test all transfers (including things like farm price supports). There’s no justification for taking from the average to give to the well off. And yet, that is a big component of what the Federal government does. I would add to your list delayering government, that is, make one level of government responsible for things (as an example, only one bureaucracy, federal, state or local, runs education).

  6. comment number 6 by: AMTbuff

    There’s no justification for taking from the average to give to the well off. And yet, that is a big component of what the Federal government does.

    According to Mancur Olson that’s the primary objective of governments since the dawn of civilization. Everyone should read his last book: http://books.google.com/books?id=BX3cZqSbHlMC

  7. comment number 7 by: Curt Doolittle

    Actually, the premise is entirely incorrect.

    If we slow deflation by a Republican plan that puts people to work (and yes, we have a plan, and it will work), we can inflate our way out of the debt at a somewhat gradual rate. The social security program will require 2% gdp to rescue. We can absorb that with the debt reductions from inflation against overseas debt. We will have to fix medicare and the new ridiculous healthcare provisions, because they will be ruinous to the system not just to our taxation.

    To politicians, for whom taxes and regulations are a hammer, everything they see looks like a nail. To monetarists and Keynesians, everything looks like a different type of nail. But a nail none the less. Taxes and monetary policy are not sufficient levers to move an economy. They are gentle pressures and nothing else.

    I am only working as economic policy advisor for one candidate. But I’ll add two or three more next month. And then two or three more the month after that. Fixing the economy is a grinding problem of political consensus, not one of economic impossibility.

    We have an opportunity that may not occur again, to repair the economy for the long term. And the consequences of failure for the American Empire are catastrophic. Not only because every day that passes, some part of our labor force atrophies, and some segment of consumers changes its behavior, but because the federal government is beyond losing public favor — it’s losing its legitimacy.

  8. comment number 8 by: BillSmith

    Inflation screws the poorer among us and it’s been going on for a long time. Wages just don’t keep up with inflation.

    Likely it hurts the middle class too but most are confused by the increase in nominal numbers.

    Deflation screws those dependent on savings and the borrowers.

  9. comment number 9 by: economistmom

    Steve: You asked:

    What, in your view, is the underlying rationale for allowing government spending to increase faster than the rate of growth in inflation and population? Why should we as a society accept this?

    My presumption is that most of the things government spends money on are things I consider “luxury (public) goods”–things like a more adequate social safety net, a cleaner environment, higher quality health care, better public schools, and yes, some income redistribution–which I believe we can afford more of, and in fact as a society desire more of (as a share of our income), as we get richer. But if you don’t agree with that presumption, then of course my argument would appear flawed to you.

    It just seems to me that those who clamor for keeping taxes/GDP at around 19 percent are simultaneously unwilling to see spending/GDP come down toward 19 percent. That is, they have a mutually inconsistent desire for more of those luxury goods but less of the taxes that would pay for them. If we as a society could choose and agree to pare spending down to 19 percent of GDP, then of course the “right” level of taxation would be just 19 percent. I think when you get right down to what it would take to keep spending that low, it’s far from just getting rid of “wasteful” spending, and so the sacrifice is just way more than we Americans are willing to make. We’re just hoping we can keep our spending and our tax cuts, too. (It’s the delusional diet and exercise program that clearly doesn’t work.)

  10. comment number 10 by: BillSmith

    Actually there are plenty of people who would cut spending down to that 19% level you talk of. Just that not enough people can agree on the same cuts :)

  11. comment number 11 by: SteveinCH

    But even luxury good should be susceptible to economies of scale shouldn’t they?

    For the record, I tend to believe that the right answer is somewhere in the 20 to 21 range and that 19 is a bridge too far; however, I don’t think we look to our government with an eye for efficiency and the spending to GDP ratio reinforces that. It’s like looking at corporate overhead. As the company gets larger, the ratio should come down not go up.

    I guess I’m pushing on the argument that it can’t be done (which I hear you and Bruce making a lot). The argument that we don’t want to do it is a different and less authoritative argument.

  12. comment number 12 by: SteveinCH

    And thanks for the direct reply Diane. I appreciate it.

  13. comment number 13 by: AMTbuff

    There’s a well-earned shortage of trust of politicians. When the budget doesn’t balance, politicians threaten to cut the most popular spending: schools, roads, or anything else that directly affects a majority of the public. Voters know by now that money is fungible and that a new tax to save the schools has the actual effect of saving less popular spending.

    Some spending is highly unpopular with voters. As one example, if you asked voters whether they favor decreasing public assistance of all sorts to non-citizens, they would agree. Californians did so in 1994, but a lower court overruled the voters and Governor Davis refused to defend the vote by appealing.

    Other spending is seen by the voters as delivering poor value. Right or wrong, this includes foreign aid, military spending, welfare programs, and government-funded medical care. Social Security is probably viewed favorably.

    The voters are willing to make the hard choices. Yet politicians deny that choices need to be made or they slant the choices in absurdly partisan fashion. Judges revoke the voters’ choices if the voters try to bypass the politicians. The system is rigged in favor of higher spending.

    So yes, under these conditions, spending cannot be cut. The conditions need to change. A government bond market crash will accomplish this. I don’t see what else will.

  14. comment number 14 by: SteveinCH

    I’ve been thinking more about the luxury good argument and I don’t think it works. First off, most of what government spends money on is transfers and services. Transfers are not a luxury good. Services may be but I’m trying to think about what additional services we get that we didn’t get in say 1980.

    It would be one thing if you could make the case that we were adding additional goods and services to the mix and providing more things than we were, but I simply don’t think that’s the case. There are relatively few “new” goods and services that government offers today that it didn’t offer in the 80s. If this is true, it’s not a question of new stuff, it’s a question of more of the same. But if we’re getting more of the same, it ought to be better and I just don’t see any evidence that it’s twice as good as it was.

    Government is like the country’s overhead if the country were a business. No growing company lets overhead grow in line with revenue. At best, it grows with inflation and, in some cases, number of employees. Why shouldn’t we ask government to work the same way?

  15. comment number 15 by: Arne

    I don’t know whether it is reasonable to call medical care a luxury, but its huge increase in cost has been entirely rational. More people are getting older and more people have more money that they can choose to spnd on staying alive.

    Over 50 years health care has growth from 4 percent to 16 percent of GDP. Medicare has grown from zero to 20 percent of that. Veterans and government employee benefits add to that. As long as spending on medical services is increasing and government is paying for any medical services, the government share of GDP will be increasing.

  16. comment number 16 by: Arne

    [government-funded medical care] is seen by the voters as delivering poor value.

    But so is insurance covered medical care.

  17. comment number 17 by: AMTbuff

    But so is insurance covered medical care.

    Correct. Third-party payment is the root cause, and that remains the case whether the third party is an insurer or the government. People get much better value when they are spending their own money.

    I’m not saying that elimination of third party payment wouldn’t be horrible, only that it might be less horrible than following the third party payment path to its inevitable conclusion. That conclusion, analogous to schools in urban areas, is hugely expensive and vastly inferior care for those who cannot afford to pay again out of pocket for private care.

  18. comment number 18 by: SteveinCH

    But Arne,

    I return to my original point, what are we getting today that we weren’t getting 30 years ago? Why should we allow government to increase spending faster than inflation plus population?

    PS I agree with AMT on 3rd party payment although it’s really dollar 1 (or near dollar 1) plans that put the icing on the cake.

  19. comment number 19 by: Arne

    At least for Medicare and SS the budget increases with inflation plus population plus lifespan.

  20. comment number 20 by: SteveinCH

    Not true. SS budget increases with the COLA which is higher than inflation. Medicare budget has nothing to do with inflation, even medical inflation.

  21. comment number 21 by: Arne

    I’ll try again. The question was “Why should we allow government to increase spending faster than inflation plus population?”

    My answer was that spending should also be expected to go up with lifespan.

    The question is “what are we getting today that we weren’t getting 30 years ago?”

    My answer is we are getting more services because people are living longer.

  22. comment number 22 by: BillSmith

    SS Budget increases also with ‘easing’ terms of entry - DI Fund for instance. See CBO report released on Monday.

  23. comment number 23 by: AMTbuff

    we are getting more services because people are living longer.

    Unless childhood is increasing in duration, we should be paying more taxes because we are living longer. Or do you contend that the retirement age should remain the same regardless of how long our lives are extended?

  24. comment number 24 by: SteveinCH

    Arne,

    That’s marginally right but doesn’t come near accounting for the changes. Lifespan effects population so if we adjust spending for population, we’re capturing much of (though not all of) the increases in serviced population. And to your last point, we aren’t getting more services, more people are getting the same services.

    In any event, take a look at the data and let me know whether you think your explanation applies.

    http://www.usgovernmentspending.com/downchart_gs.php?year=1980_2015&view=1&expand=&units=d&fy=fy11&chart=F0-fed&bar=1&stack=1&size=m&title=&state=US&color=c&local=s

  25. comment number 25 by: Arne

    “we should be paying more taxes because we are living longer”

    Isn’t that what I said?

    “we aren’t getting more services, more people are getting the same services”

    The older a person gets the more medical services cost. In capitalism that is more services. On a per capita annual basis, the only way to keep taxes constant is by increasing the retirement age faster than the lifespan increases.

    Regardless of what I think, that is what is happening. As long as productivity increases lead to increasing standards of living at all ages, that is what I think should happen.

    The idea that a percentage of GDP that worked 40 years ago should work 40 years from now seems absurd to me.

  26. comment number 26 by: SteveinCH

    Great, then the logical conclusion is you won’t mind when government spending is 100 percent of GDP

  27. comment number 27 by: AMTbuff

    Isn’t that what I said?
    we aren’t getting more services, more people are getting the same services”
    The older a person gets the more medical services cost.

    If the ratio of years working to years retired remains the same, government transfers should remain the same as a % of GDP. Medical costs might go up, or they might not, especially if third-party payment is curtailed.

    However if you posit government-paid health care, e.g., Medicare on autopilot, the % of GDP spent by government would increase. I claim that such a premise is faulty because it is known to be unsustainable.

  28. comment number 28 by: juandos

    “Bruce says it’s ridiculous–or even worse–to claim the deficit must be reduced entirely on the spending side of the budget”…

    Well then Bartlett is a lying bastard…

    The fact is that it quite easy to defund any and all nanny state programs…

    There’s NO constituional basis for the federal government to EXTORT from the productive in order to pander to the PARASITIC…

    It just takes a few politcos to start growing a pain…