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Fareed Zakaria on Why We’re Better Off Than Greece

July 4th, 2011 . by economistmom

us-vs-greece-oliver-munday-for-time-070311(illustration by Oliver Munday for Time)

On his CNN blog (as well as in his Time column), Fareed Zakaria contemplates whether the U.S. could become the next Greece in terms of the bleakness of our fiscal outlook.  He concludes “no,” because among other things:

The most important difference between Greece and America is this: America has many paths to solve its deficit problem. Were it to implement the Simpson-Bowles Deficit Reduction Plan, for example, it would instantly give America among the strongest public finances of any rich country.

Would Congress simply allow the Bush tax cuts to expire - returning rates to where they were under Bill Clinton’s presidency when America created almost 25 million jobs - that one action would provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem. We would still face the long-term problem of entitlements, especially health care costs, like every other rich country, but the short and medium-term crisis would be over.

And Fareed, we wouldn’t even have to let the Bush(/Obama) tax cuts expire.  We could, for example, preserve the current rate structure of the Bush(/Obama) tax cuts, and pay for it by broadening the tax base.  Then we would still be sticking to current-law revenue levels–i.e., levels adequate to achieve economically-sustainable deficits for the short-to-medium term (as you point out)–without having to stick to (mediocre) current tax policy as specifically written in current law.  (I suggested this approach recently, here.)  Then we’d have the perfect blend of the two approaches you praise here:  (i) the recommendations of Bowles-Simpson (or “Simpson-Bowles”) in terms of base-broadening, tax-expenditure-reducing tax reform, and (ii) the revenue levels consistent with letting the Bush tax cuts just (finally) expire.

So on the 4th of July, let’s count our fiscal blessings.  At least we have options far beyond those of Greece.  And pretty good policy options at that.

6 Responses to “Fareed Zakaria on Why We’re Better Off Than Greece”

  1. comment number 1 by: Joe Cordes

    Diane: Great post. Also have you seen Len Burman’s latest:

    http://blogs.forbes.com/leonardburman/2011/07/04/a-solution-to-the-debt-limit-impasse-let-the-voters-decide/

    One of the more interesting and I think potentially sensible ideas out there.

  2. comment number 2 by: Vivian Darkbloom

    Care to show us your arithmetic? Per Simpson Bowles, eliminating *all* tax expenditures would raise about $1.1 trillion over the 10-year window. Their plan also reduces tax rates across the board and thus raises a net of $785 billion (they also keep reduced expenditures for mortgage interest, charitable deductions and employer-provided health insurance). The reduced rates, per SB, should raise economic growth (a key factor in reducing the deficit). That’s a start, and a necessary component in any deficit reduction strategy, but frankly it doesn’t come anywhere close to solving the problem. That’s why Simpson Bowles would cut deeply into spending.

    I don’t know what the total impact would be of keeping the current rate structure, but since you are the one proposing it, you must have a number in mind—so, what is it? I strongly suspect that merely reducing tax expenditures by $785 billion (or even $1.1 trillion) and adding to that whatever effect keeping the current rate structure would have would hardly pay for the increased costs of servicing the debt. The interest rate historically on the Treasury debt has averaged about 6 percent and we are now at about 2. As our debt goes up and our interest rate goes up with it, you can see that your plan just doesn’t begin to solve the problem. According to the administration’s 2011 budget, annual interest expense is set to rise to $554 billion annually in 2015 from $185 billion now. By 2020 it will approach 4 percent of GDP. Read the following and weep.

    http://www.treasury.gov/press-center/press-releases/Documents/TBAC%20Discussion%20Charts%20Merged%202.2011.pdf

    The biggest problem is the spending , not the revenue side. After all the columns I’ve read here, I can’t recall a single one in which you’ve addressed that problem or suggested a few trillion of cuts that are gong to be needed to keep us out of the league table with Greece.

    Having taken another look at the Simpson Bowles Plan, I can’t help to be reminded as to just how responsible and sensible it was and completely honest in detail. In contrast, it strikes me that most bloggers are just throwing stuff over the fence. That doesn’t seem to be getting us anywhere. So, show me the numbers (please).

  3. comment number 3 by: AMTbuff

    that one action would provide the federal government with $3.9 trillion in revenues over the next decade and basically solve the deficit problem
    Does that include an AMT at unindexed levels set 20 years earlier? That’s an increase of $4000 per family all by itself, hardly what anyone thinks of as simply letting a tax cut expire.

  4. comment number 4 by: Steveinch

    And here I thought projected deficits were on the order of 10 trillion over the next decade. Funny that nobody mentionsnthe $500 billion of new taxes in the ACA over 7 years in this discussion.

    But hey, let’s keep spending. It will be fun while it lasts.

  5. comment number 5 by: economistmom

    Vivian: the figure you cite as the value of *all* tax expenditures (of around $1 trillion) is just for ONE year, not ten. We can accomplish a lot if we we’re really willing to broaden the tax base. We could very easily pay for not just the extension of the “middle class” Bush/Obama tax cuts, but also the high end rates. I’m working on some numbers, but we’d just need a more ambitious version of the President’s proposal to cap itemized deductions at the lower-bracket rates (I would go down to 15 percent and not just 28 percent–which would pay for all BUT the highest brackets of the Bush tax cuts) to which I’d add a “haircut” to the exclusion of employer-provided health benefits (which we should have done anyway as part of health reform instead of the indirect and clumsy excise tax on high-end insurance plans), which I think we wouldn’t have to even cut in half. (Will be writing about this idea of mine next week.)

  6. comment number 6 by: Vivian Darkbloom

    Yes, and this demonstrates the big hypocrisy over tax expenditures. When it comes right down to it you are just talking the old distributional game which is hidden behind the ostensibly lofty goal of “eliminating tax expenditures’. What you really mean then about eliminating tax expenditures is that we eliminate them for some by tacking on to the already overly complex tax system another set of limitation rules. How does this foster the goal of tax simplification or the goal of eliminating wasteful and inefficient government subsidization of certain industries or interest groups?

    Secondly, and consistent with the distributional issue, is the fact that most often progressives focus on eliminating tax rules that have very little or anything to do with “tax expenditures”. I’ll take the tax rate on dividend distributions as an example. There is a clear rationale for not taxing business income twice, which the current rate of tax on dividends only partially addresses, and this has nothing to do with “spending through the tax code”.

    If you were really interested in eliminating tax expenditures you would advocate eliminating them of all, not just for some. Let’s start with the deduction for employer or self-employed health care insurance and the mortgage interest deduction—two of the biggest. We don’t need to do it overnight, but phase them out over a 5-10 year period not just for some, but for everyone. We can then address your distributional preferences more directly by having a discussion about tax rates, not on the selective elimination of tax expenditures.

    That said, I am looking forward to your numbers.