Washington’s spendthrift ways have taken much of the blame for sending the budget deficit more than $1.5 trillion during the recession, but equal blame should go to a collapse in federal revenues to 60-year lows, budget analysts say.
To be sure, President George W. Bush, President Obama and Congress went on spending binges in 2008 and 2009 in an effort to quell the financial crisis and counteract the downturn. But at the same time, revenues plummeted by a historic 18 percent because of high unemployment, widespread bankruptcies and a series of tax cuts.
Revenues plunged from their peak of $2.57 trillion in 2007 to reach $2.1 trillion, or 14.8 percent of economic output in 2009 — the lowest level since the 1950s — and taxes remain that low today, according to the Congressional Budget Office (CBO).
While that may seem like good news to millions of people filing their federal taxes, that level of revenues is far below the 18 percent historical average and is not sufficient to support a federal government that is waging two wars and has become the primary source of income for a growing population of retirees, economists say.
The collapse in federal revenues has driven the total weight of taxes on the economy to the lowest levels since the 1960s, even when myriad state and local taxes are added in, according to the Organization for Economic Cooperation and Development (OECD).
With federal, state and local tax revenues totaling 24 percent of economic output, the OECD said, the United States is in the same category as countries like Turkey and South Korea, which have neither a globe-spanning military to support nor fully developed economic safety-net programs such as unemployment benefits, Social Security and food stamps.
Moreover, the U.S. is the only major developed nation that has allowed tax levels to fall so low despite creating dangerous and potentially destabilizing deficits and debt burdens, the OECD said.
“The upcoming fiscal challenges simply cannot be solved by spending cuts alone,” said Harm Bandholz, an economist with Unicredit Markets who is mystified by the stubborn resistance to raising taxes in Congress given historically low revenue levels and the inexorable growth in retirement spending in coming years.
The “categorical rejection of higher federal revenues” by many lawmakers could doom chances for a breakthrough agreement on reducing today’s oppressively high deficits, he said.
Despite the mounting debt, many legislators continue to resist even allowing tax cuts enacted during the recession to expire so that revenues rise back to their average level between 18 percent and 20 percent of economic output, analysts note.
Revenues would pick up to more normal levels without the tax cuts, according to the CBO. But it estimates that extending all the cuts set to expire at the end of 2012 — primarily the Bush-era tax cuts — will add another $4.6 trillion to the national debt in the next decade.
In an interview last week with the Daily Beast, David Stockman, who was director of the White House Office of Management and Budget under President Reagan, said Republicans are foolish to ignore and to add to the gaping hole in revenues.
“You are totally out to lunch, thinking you can address a $1.6 trillion deficit, and spending 43 cents on every dollar for borrowing, without tax increases,” he said, even as he applauded the budget-cutting zeal of the tea-party-inspired freshman Republicans.
The House Republican budget would add to the problem by cutting taxes another $4.2 trillion over the next 10 years, “burying us that much deeper because of this Republican catechism about tax cuts, anytime, anywhere, for any reason,” he said.
Rather than continue to resist calls by President Obama and Democratic leaders for an end to the Bush tax cuts for upper-income taxpayers, Mr. Stockman said, “the Republicans should just sit on their hands and let it happen.”
Mr. Stockman told Slate magazine that “I think the biggest problem is revenues. It is simply unrealistic to say that raising revenue isn’t part of the solution. It’s a measure of how far off the deep end Republicans have gone with this religious catechism about taxes.”
While revenues always drop during a recession, the OECD said, the U.S. government is particularly vulnerable to a revenue collapse in a deep recession because it is disproportionately dependent on taxes on income and payroll employment, which take a particularly big hit when unemployment is high.
Also, other forms of income such as capital gains and corporate profits, which the U.S. taxes as corporate income, fall or disappear during a recession.
Most other developed countries and even most U.S. states rely on a broader revenues base than income taxes, also raising money from sources that are not hit as hard during a recession, such as sales taxes and special levies on goods such as gasoline or alcohol.
The heavy reliance on income taxes is the reason that revenues plummeted in 2009 when unemployment surged to 10 percent, slashing the stream of revenues from income and payroll taxes while feeding rapid growth in safety net programs such as unemployment benefits, Medicaid and food stamps.
The combination is what resulted in today’s huge and unprecedented deficits of more than $1 trillion.
Economists note that both the plunge in taxes and the surge in benefits spending occur automatically during a recession — without an act of Congress — and help the economy by acting as “automatic stabilizers” that limit the severity of the recession’s toll on workers while braking the economy’s downward momentum.
Despite the cratering of revenues and its potential to destabilize the government debt in coming years, debate about the role of taxes in the current budget crisis has been stifled amid Republican efforts to rule out any increase in taxes and Democratic reluctance to be labeled as the party of “tax and spend.”
“Washington has a spending problem, not a revenue problem,” said House Speaker John A. Boehner of Ohio, repeating the Republicans’ mantra even before Mr. Obama on Wednesday renewed his proposal to let some of the Bush-era tax cuts expire in 2012.
“Both political parties will need to make compromises” if the nation is to gain control over the debt, said Pete Peterson, an industrialist whose eponymous foundation has spent millions of dollars trying to educate the public about the burgeoning deficit problem.
“Any viable plan must include both spending cuts and revenue increases,” he said.