“We don’t have a problem with our budget because Americans don’t pay enough taxes. We have problems with our budget because we spend too much money.”
— Rep. Paul Ryan (R-Wis.), chairman of the House Budget Committee, April 13, 2011
“Most people understand that Washington doesn’t have a revenue problem, it has a spending problem. We can’t raise taxes.”
— House Majority Leader Eric Cantor (R-Va.), April 13, 2011
“They want to give people like me a $200,000 tax cut that’s paid for by asking 33 seniors to each pay $6,000 more in health costs? That’s not right, and it’s not going to happen as long as I’m president.”
— President Obama, April 13, 2011
The battle is now joined. After being AWOL from the long-term budget debate when he unveiled his 2012 budget, the president decided to match Ryan’s budget proposal introduced last week with his own vision of how to tackle the nation’s rising debt load.
The president spoke Wednesday in broad strokes, with few specifics, but the major philosophical difference with Republicans is this: higher taxes are on the table and major structural changes to key health programs such as Medicare and Medicaid are not. By contrast, Ryan would not accept higher taxes and in fact would lower them — and has proposed ideas that would fundamentally reshape Medicare and Medicaid.
Indeed, the details of how Obama gets to his claimed $4 trillion in deficit reduction over 12 years are less important than this coming philosophical battle. In his 2012 budget, he had already claimed $1 trillion in deficit reduction that we found dubious. This new plan essentially adds another $1 trillion in claimed spending cuts to that figure, with about 40 percent coming from cuts to defense that were not in the initial budget. He then gets $1 trillion in interest savings and $1 trillion from tax increases.
What do the data show about whether the nation has a revenue or a spending problem—and will it make a difference in the coming budget debate?
Simply going by the numbers, the United States has a revenue problem. It also has a spending problem.
Ryan, in his budget proposal, says, “Over the past 40 years, government revenue has averaged between 18 percent and 19 percent of GDP [gross domestic product]. Next to that statement there is a chart which shows a huge dip in revenue in the current period, though it’s tough to see the current problem because of the way the data is presented.”
Sure enough, the historical White House budget tables show that receipts (ie, taxes) in 2011 are estimated to be just 14.4 percent of GDP — the lowest level since 1950. But outlays (ie, spending) in 2011 are estimated to be 25.3 percent of GDP — the highest level since World War II. That yawning gap is the key reason why the deficit is so large—and why Republican claims that there is “no revenue problem” are worthy of a couple of Pinocchios.
The recession, of course, is a major reason why revenue has fallen so much — and why spending has soared. Obama came into office claiming he would roll back President George W. Bush’s taxes for the top 2 percent of wage-earners, which would have helped with some of the revenue gap, but then he cut a deal last year with Republicans that extended the cuts for two years.
In raising the concept of higher taxes, Obama harkened back to when “the first President Bush and a Democratic Congress came together to reduce the deficit” and “President Clinton and a Republican Congress battled each other ferociously and still found a way to balance the budget.” But that’s really more wishful thinking than realistic. The lessons Republicans learned from those deals makes it less likely that Obama can reach an agreement with the current Congress.
The first President Bush had sworn he would never raise taxes (“read my lips: no new taxes”) but then his hand was forced by the Democratic-controlled Congress. He then was largely abandoned by his party, with a majority of Republicans voting against the bill. He faced a primary challenge from the right and ultimately repudiated the budget agreement, even though experts often credit it with making a major contribution to deficit reduction. He also failed to win reelection.
Obama did not mention President Clinton’s budget-reduction reduction plan, which included higher taxes but was passed in 1993 without a single Republican vote. And the balanced budget deal between Clinton and the Republicans cited by Obama actually included tax cuts--not tax increases.
In other words, it has been more than two decades since even a handful of Republicans voted for higher taxes — and it has not happened when Republicans were in control of Congress. So the odds are extremely slim that any deal on taxes can be reached, unless it were somehow shrouded under a concept of broader “tax reform” (the euphemism Obama used in his speech when talking about higher taxes.)
Indeed, Obama signaled that he would highlight the gap between rich and poor in the budget battle when he compared the level of tax cuts he said would receive against the higher costs seniors would pay for Medicare in 2022 under Ryan’s plan. The $6,000 figure in higher Medicare payments seems legitimate; it is derived from the Congressional Budget Office evaluation of Ryan’s plan (see figure 1 on page 22).
The White House did not respond to queries about how Obama figured he got a $200,000 tax cut from the Bush era tax cuts, but he appears to be assuming he would have income of about $5 million, as he did in 2009. The cut in the top rates at that level of income would save him about $180,000. (He probably also saved money from Bush’s cuts in capital gains taxes.) It’s perhaps a stretch to compare a tax cut of today to a theoretical figure 11 years from now, but Obama is probably safe to assume a huge payday awaits him when he leaves the presidency.
The Bottom Line
The growing gap between rich and poor in the United States has become a major issue of concern on the left. Obama’s decision to frame his long-term budget vision with that debate in mind is a nod to the left wing of his party. It is also an acknowledgment that the chances of a deal may be slim, but a philosophical battle over tax fairness may prove useful in an election year.