In a panel of large fiscal adjustments in OECD countries during the last 40 years, we find evidence that left-wing and right-wing cabinets are partisan: the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts. Our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies. In other words, the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues. Probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments.
Mitchell concludes that what the U.S. needs, accordingly, is a “Super Democrat” who’s willing to enact broad-sweeping spending cuts and believes President Obama has squandered the opportunity to do so. “So if it is spending cuts that we need, then these cuts are likely to be more sustainable (“persistent”) if they are executed by a left-leaning government,” he writes.
But the Obama administration has signed onto $1.2 trillion in spending cuts through the trigger and another $900 billion in the debt-ceiling deal. And the White House just issued a veto threat against Republican efforts to defuse the trigger’s defense cuts. So it’s hard to argue that the Democrats haven’t accepted any spending cuts. As of now, we have more than $2 trillion in spending cuts from a Democratic government, and not a dime in tax increases.
And to bring the long-term budget into balance, tax increases might have to be part of that equation as well. So according to Tavares’s findings, it’s also Republicans who have missed the opportunity to enact “credible, sustainable” deficit reduction by refusing to budge on tax increases, supporting additional tax revenue only on the margins.