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CARTER AND FICHTNER: To tax or cut?
In 21st century, spending growth has far outpaced revenues
Question of the Day
With the federal government poised to run its fourth consecutive $1 trillion-plus budget deficit this year, the question arises: Is the deficit the result of too much spending or too little taxing? To answer that question, consider the following:
c Since the federal government ran its last budget surplus in fiscal 2001, federal spending has nearly doubled - up 94.7 percent - while revenue has increased 23.4 percent.
c In the year prior to the latest economic downturn, federal spending equaled 19.7 percent of gross domestic product (GDP). Since fiscal 2009, federal spending has averaged 24.2 percent of GDP. In the decades since World War II prior to 2009, federal spending never rose so high - not even for a single year.
The federal government has a spending problem. But what is the solution?
President Obama’s pet solution is to have millionaires hand over a minimum of 30 percent of their income to the federal government. This is the so-called “Buffett rule.”
There are two problems with the president’s approach. First, a millionaires’ tax would not solve our fiscal problems - there just aren’t enough millionaires. According to the congressional Joint Committee on Taxation, the official authority for tax legislation, the Buffett rule would only raise $47 billion over a decade. That’s a far cry from even the $1.2 trillion deficit we face this year alone.
Second, raising taxes does nothing to solve the federal government’s spending problem.
Any viable solution must cut spending growth. Sen. Mike Enzi of Wyoming and Rep. Connie Mack of Florida have introduced legislation in their respective chambers to do just that. Their “Penny Plan” - recently updated to reflect the latest budget developments - calls for reducing federal spending (excluding interest payments) 1 percent a year for five years, balancing the budget in the fifth year.
To maintain balance once it’s reached, Mr. Enzi and Mr. Mack would cap federal spending at 18 percent of GDP. By no small coincidence, 18 percent of GDP roughly matches the U.S. long-run average level of taxation since World War II.
Is it realistic to think Congress could limit federal spending to 18 percent of GDP? Actually, there is precedent. Federal spending fell as a share of GDP for nine consecutive years before bottoming out at 18.2 percent of GDP in fiscal 2000 and 2001. The Penny Plan would return federal spending, expressed as a share of GDP, near the level achieved during the last two years of the Clinton administration.
The Penny Plan, however, won’t do away with the need for Congress to make tough choices. Obviously, the world is a very different place than it was at the end of the Clinton administration. Heightened global challenges make it necessary for the United States to spend more on national defense and homeland security. The aging of the baby-boom population, moreover, will increasingly weigh on the budget.
But either Congress will resize the federal government’s responsibilities and reform its programs or, by refusing to change course, it will lead this country into bankruptcy. As David Walker, U.S. comptroller general from 1998 to 2008, warned last summer: “We are heading for a fiscal abyss at break-neck speed. We must change course.”
The economy is recovering slowly from a severe recession, and millions of American families have been forced to tighten their own budgets. Americans have found ways to do more with less. Is it too much to ask that the federal government do the same?
To date, the Penny Plan has 71 supporters in the House and 12 in the Senate because it offers an inspired vision for putting the federal budget on the path to solvency. To quote James C. Miller III, President Reagan’s budget director: “Sign me up for the Mack Penny Plan. Simple. Elegant. Understandable.”
James Carter was a deputy assistant secretary of the Treasury under President George W. Bush. Jason Fichtner is fellow at George Mason University’s Mercatus Center and was acting deputy commissioner of Social Security.
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