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Cutting the deficit

9-30-09bud-f1.jpgPeter Orszag lays out the administration's line on the short-term deficit:

Of the $9 trillion in deficits projected over the coming decade, nearly $5 trillion comes as a result of failing to pay in the past for just two policies — the 2001 and 2003 tax cuts and the creation of a Medicare prescription drug benefit.

The cost of the tax cuts will total about $4 trillion over the next decade, including the additional interest on the debt the federal government will have to pay since the tax cuts were deficit financed. The Medicare prescription drug bill will add about another $700 billion to the deficit – bringing us to about $5 trillion total for the cost of just these two policies

In addition, roughly $3.5 trillion can be attributed to automatic economic stabilizers.

As the economy enters recession, certain spending programs, such as unemployment insurance and food stamps, automatically increase and revenues tend to decline. Although this helps to ameliorate the economic downturn by stimulating demand, it also leads to higher deficits.

Finally, there is the Recovery Act which accounts for just 10 percent of the entire deficit over the next decade.

All told, the entire $9 trillion deficit reflects the failure to pay for policies in the past and the cost of the worst economic downturn since the Great Depression and the steps we had to take to combat it.

Like Kevin Drum, I've got no problem with the White House making some real moves to cut the deficit. But the devil is in the details. It would be insane, for instance, to sharply cut spending in the midst of a recession. But it makes sense to build out policies to increase revenues in 2012 or after.

Similarly, there are good ways of decreasing the deficit and bad ways. Cutting Medicaid spending, for instance, would be a bad way. But I'd be glad to see the estate tax restored. Or relatively more of the Bush tax cuts left to expire. Obama should have the courage to say that the promise to avoid raising taxes on people making less than $250,000 was made before the economy collapsed, and that tax rates might have to rise in a couple of years.

Other big revenue raisers could include a tax reform that both transforms the tax code and raises rates and cap-and-trade that auctions off permits. This isn't about some tweaks to discretionary spending. But people shouldn't kid themselves about how hard this will be. Substantially reducing the long-term deficit will require making structural changes in the health-care system far beyond anything we're currently contemplating. We can't tax enough, and we can't cut enough spending, to afford the projected increase in health-care costs. As economist Jon Gruber argued yesterday, the Senate Finance bill is a good start. But it is only a start.

Graph credit: Center for Budget and Policy Priorities.

By Ezra Klein  |  November 13, 2009; 2:38 PM ET
Categories:  Budget  
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Comments

It would have been a better start if Obama had decide to use the political capital spent on the public option on cost control measures that are widely seen as more effective. The public option was a liberal indulgence that we couldn't afford. Few actual health policy experts believe that its a meaningful part of reform.

Posted by: wisewon | November 13, 2009 2:52 PM | Report abuse

This is a great post, but I want to say that we don't necessarily have to restore tax rates on earned income to the rates of the pre-Bush era (although they certainly weren't oppressive). Taxes on investment income, dividend income, inheritances, and other forms of income not associated with setting one's alarm and going to work every day should be modified to be closer to taxe rates on earned income.

The double-taxation argument made to defend current dividend and estates tax rates is bogus (all forms of income, including earned income, were previously taxed at some point in the economic cycle), and the argument that investment is more important to our economy than work (it's just as important, but not more) is also bogus.

In addition, the cap on payroll taxes should be eliminated, and the overall rate could be reduced to offset some of the gain.

With regard to corporate taxes, they've been whittled away over the years for the exclusive benefit of those at the top. The owners of corporations are getting something for nothing (limited liability) and it has to stop. Investors who don't like investing in companies that pay corporate taxes should invest in partnerships instead -- problem solved.

Posted by: cjo30080 | November 13, 2009 3:06 PM | Report abuse

"Effective tax rates" for both businesses and individuals are relatively low but that does not mean different people or entities pay relatively the same rates.

An astonishing number of people and companies escape federal taxation altogether (and no, it's not only poor people I'm talking about). But tweaking the tax code in your favor is relatively cheap - I think a million in lobbyist fees will get you about 10 million in tax breaks, for example. And a lot of politically connected people are dependent on the current situation for their next meal so it's not likely to change.

Posted by: luko | November 13, 2009 3:25 PM | Report abuse

They are so busy finding ways to blame the deficit on the previous administration. It just harms their credibility. Nobody cares. Every administration has to write its own budget, and balance it. Just like I do. You go to budget with the revenue and deficits you got.

Posted by: MikeR4 | November 13, 2009 3:51 PM | Report abuse

MikeR4 apparently has never heard that bills change existing law going forwsrd, as with the drug benefit. Perhaps he thinks that each year Congress should repeal everything that went before and start over? Has he never heard of people wanting some kind of certainty or predictability? And how can they project deficits into the future without assuming that most laws will just continue? If the CBO had to reckon with Congress rewriting everything every year how could it predict? And how could Congress function, given that they have trouble passing the budget bills even when most things don't change?

This is such an illo'informed comment it is hard to take the commenter seriously.

Posted by: Mimikatz | November 13, 2009 4:40 PM | Report abuse

But it makes sense to build out policies to increase revenues in 2012 or after.


Increase taxes AFTER a presidential election. Wow, talk about partisan.

Why not look to sensibly increase taxes marginally but also look to cut some of the more wasteful spending. YOu know, like the $60 BILLION in fraud and abuse in Medicare. Seems to me that could buy you a lot of Obama/Bayh 2012 buttons.

Posted by: visionbrkr | November 13, 2009 4:51 PM | Report abuse

"It would have been a better start if Obama had decide to use the political capital spent on the public option on cost control measures that are widely seen as more effective. The public option was a liberal indulgence that we couldn't afford. Few actual health policy experts believe that its a meaningful part of reform."

This myth still persists. The fact is that the public option costs virtually nothing to the public. It's only "public" in the sense that it's government run. It is not taxpayer-funded. It is instead funded by premiums paid by its customers, just like the private plans that will be offered in the health insurance exchange.

The cost of the bill is largely due to subsidies for low-income people to buy insurance, but these subsidies can be used on any plan in the health insurance exchange, whether public or private.

The public plan doesn't cost the government money. On the contrary, having a public plan able to compete with private plans will lower the cost of insurance and thus lower the total cost of reform by an estimated $150 billion over ten years.

Posted by: bluegrass1 | November 13, 2009 7:30 PM | Report abuse

"It would be insane, for instance, to sharply cut spending in the midst of a recession."

Unless it was the overspending and loose fiscal policy that had partially caused the recession.

Public plan save money? Unlikely. Get rid of third party payer and watch costs drop like a stone.

Posted by: staticvars | November 13, 2009 10:42 PM | Report abuse

A country that refuses to tax itself for the activities that it expects of its government has died as a meaningful polity, but may not have noticed yet.

Yes, I live in California.

Posted by: janinsanfran | November 13, 2009 11:04 PM | Report abuse

"This is such an illo'informed comment it is hard to take the commenter seriously." Sorry you don't approve.:) But, as I said, that's not how you make a budget. Continuity is nice and important, but not if it means your credit card bills mount. It is irresponsible to spend money you don't have just because you were spending it last year. Especially if you just got a big pay cut, as the US federal government just did.

Posted by: MikeR4 | November 14, 2009 9:12 PM | Report abuse

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