Ezra Klein: How Obama and Romney would pay for the budget

February 14, 2012

I love budgets. And not just because I love tables, charts and appendices — though, to be clear, I do. I love budgets because they force us to run the numbers, to make trade-offs, to set priorities. The annual budget is, frankly, about as honest as the government ever gets with itself, and with the American people.

As I wrote a year ago, President Obama’s 2012 budget showed that the federal government had become an insurance conglomerate protected by a large, standing army. About 40 percent of its spending went to the three major social insurance programs — Medicare, Medicaid and Social Security — and an additional 23.8 percent of federal dollars went to the military.

His 2013 budget shows much the same thing. So this year, I want to focus on the other side of the ledger: how we’re paying for our insurance conglomerate/ army, and how the two parties propose we do so in the future.

Right now, we’re not paying for it. In 2011, federal spending was 24.1 percent of gross domestic product. Tax revenue was 15.4 percent of GDP. That’s a slight rise from 2009 and 2010, when revenue was 14.9 percent of GDP, but all three are near-record lows. Before this financial crisis, the last time federal revenue was below 16 percent was 1950 — before Medicare and Medicaid were law, and before Hawaii was even a state. For comparison, federal revenue averaged 18.2 percent of GDP during the Reagan years, and 19 percent of GDP during the Clinton years.

There are two reasons revenue is so low. One is that the Bush tax cuts — which Obama extended in 2010 — pushed them far below where they would have been if we had stuck to Clinton’s rates. The other is that recessions bring revenue down and spending up, and we’re just coming out of a deep, long recession.

And that’s fine. This isn’t a popular thing to say, but there are times when it’s good to have a deficit. Now, for instance. When businesses and consumers stop borrowing and stop spending, government needs to borrow to pick up the slack and protect the vulnerable. But the flip side of that is we shouldn’t have been running deficits during the growth years that preceded the financial crisis, and we need to get them under control once the economy has recovered. And the two parties are proposing very different ways of doing that.

Comparing the fiscal promises made by Obama and Mitt Romney isn’t quite comparing apples to apples. Obama is burdened with the responsibilities of governance. His numbers need to add up. They need to unite the congressional wing of his party. They need to fit inside a detailed budget that lays out funding levels for every agency in the federal government.

Romney, meanwhile, is running a primary campaign. He’s trying to keep Newt Gingrich and Rick Santorum from getting too far to his right. He’s trying to mollify conservatives. He’s trying to inspire the party faithful. So his promises — like those of all candidates, including Obama in 2008 — are going to be a bit more fantastic than those of the sitting president.

Nevertheless, the difference between the tax proposals of the two candidates is instructive. First, it’s important to establish our baseline: If we just extend current policies — which would extend the Bush tax cuts — revenue would be 17.9 percent of GDP over the next decade.

Obama’s plan would raise revenue to 19.2 percent of GDP. Most of that would come from people making more than $250,000 a year. In September, the nonpartisan Tax Policy Center ran the numbers on his proposal — unchanged in the budget — and estimated that taxpayers in the bottom 20 percent would pay an average federal tax rate of 1.8 percent, those in the middle 20 percent would pay 15.2 percent, and the top 1 percent would pay 36.3 percent.

Romney’s plan cuts taxes to about 17 percent of GDP. Most of those cuts would accrue to upper-income Americans. According to the Tax Policy Center, under Romney’s plan, taxpayers in the bottom 20 percent would pay a rate of 3.4 percent, those in the middle 20 percent would pay a rate of 15.6 percent, and the top 1 percent would pay 25.9 percent.

So low- and middle-income families would pay a bit more under Romney’s tax plan, and high-income families would pay a lot less. Taxes would also fall far short of spending. A realistic estimate of federal spending over the next decade is in the 22 to 23 percent of GDP range. Romney’s revenue is 5 to 6 percentage points below that, and since Romney has promised to balance the budget without cutting defense spending, he would have to cut every domestic spending program, including Social Security and Medicare, by more than 35 percent to make his numbers work.

But there is agreement here, too. Taxes are lower under both plans than they would be if we simply let the Bush tax cuts expire and returned to Clinton-era rates. Then taxes would be closer to 20.4 percent of GDP. You wouldn’t know that from the admiration with which Democrats talk about Clinton’s economic policies, or the horror with which Republicans talk about Obama’s tax ideas. They’re also lower in both plans than they were under the Simpson-Bowles proposal, which called for revenue at 20.3 percent of GDP, and the Gang of Six proposal, which envisioned revenue at 19.9 percent of GDP.

But then, that’s why budgets are useful. They help us keep the two parties honest.

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