Cutting Deficit Will Require Tax Increases
The debate on the budget is phony, the howling on deficits a charade. Few politicians want to acknowledge that if you really are concerned about long-term deficits, you have to support tax increases.
That's why the most significant moment of President Obama's news conference on Tuesday was not his dodge of a question on AIG but his defense of the least popular tax increase in his budget: limits on the benefits wealthier taxpayers get for their charitable contributions and mortgage payments.
It has been a long time since a president was willing to defend raising taxes. You have to go back to Bill Clinton and his 1993 budget. The consequences for Democrats who voted for that budget -- no Republicans did -- were grave. Republicans swept the 1994 elections and held on to the House for 12 years. No wonder politicians are so phobic about taxes.
Obama himself is going only part of the way on tax increases. He is still arguing that he can fix things with hikes on just the top 5 percent of taxpayers.
He's right that a large share of any increase should hit those who enjoyed the biggest income gains over the past decade. But in the end, no politician (with the possible exception of libertarian Ron Paul) is willing to cut the budget enough to contain the deficit without a general tax increase down the road.
Every budget analyst knows this, and every politician knows that it's far easier to bemoan deficits in the abstract than to risk spending cuts or tax increases that hurt sizable groups of voters. "There are no more low-hanging fruit," says Tom Kahn, the staff director for the House Budget Committee. "The low-hanging fruit have already been picked. Any tax increase or spending cut is going to trigger opposition from somewhere."
In an ideal world, Obama would come right out and say we'll need broad-based tax increases. But that would be suicidal right now. Witness the reaction to his effort to put a 28 percent ceiling on deductions. His proposal would affect only 1.2 percent of taxpayers, yet even that idea seems to be dying in Congress.
Obama's proposal is based on a sound intuition: Do we really believe it's fair that when a married couple with a taxable income of $50,000 gives $1,000 to charity, they get a tax benefit of $150, while a couple earning $1 million making exactly the same contribution gets back $350? Is it fair that the higher-income couple also gets a bigger tax advantage on their mortgage payments?
The value of the deductions is currently worth more to the higher-income couple because they pay taxes at a higher rate. Obama wouldn't even close the whole gap. Applied to this example, his 28 percent cap would still let the wealthier couple deduct $280.
Yet even this modest effort to raise money to pay for health-care reform is falling under a hail of fire from those who say the president wants to hurt private charities. Obama was quite right when he said at his news conference that the effect of this change on charitable giving would be small: Using 2007 figures, the liberal Center on Budget and Policy Priorities found that Obama's change would reduce charitable contributions only marginally -- from $306 billion to $302 billion.
Is that too much for nonprofits to give up so the country can cover the costs of health care for the needy? The truth is that the opponents of making any changes in the amount the wealthy can deduct are using solicitude for the private charities to kill the whole plan.
Fine, kill it. But then, how else will we pay for health-care reform? Obama's across-the-board limits on itemized deductions would raise $318 billion over 10 years. Does anyone have a less painful way to raise that much money?
The larger problem is the emptiness of all the howling over the long-term deficits. Nibbling away at bits of Obama's proposed budget will do very little about them. Talk of "entitlement reform" is empty unless we have health-care reform -- and unless we acknowledge that we will never cut Medicare and Social Security enough to close the budget gap. In fact, Social Security is more important than ever, now that the value of so many 401(k)s has plummeted.
The task of those who genuinely care about deficits is to make the world safe for tax increases. Under current conditions, it's a whole lot easier for politicians to talk a lot about deficits, and then just let them grow.