We Americans are having the wrong debate. Almost all the arguing over the Trump administration’s proposed tax cut centers on two issues: Will the tax reduction stimulate faster economic growth? And is the proposal too generous toward the wealthy and too stingy toward the middle class and poor?
Interesting questions, to be sure — but mostly irrelevant to the nation’s long-term well-being.
The truth is that we can’t afford any tax reduction. We need higher, not lower, taxes. What we should be debating is the nature of new taxes (my choice: a carbon tax), how quickly (or slowly) they should be introduced and how much prudent spending cuts could shrink the magnitude of tax increases.
To put this slightly differently: Americans are under-taxed. We are under-taxed not in some principled and philosophical sense that there is an ideal level of taxation that we haven’t yet reached. We are under-taxed in a pragmatic and expedient way. For half a century, we haven’t covered our spending with revenue from taxes.
Of course, there are times when borrowing (that is, budget deficits) is unavoidable and desirable. Wars. Economic downturns. National emergencies. But our addiction to debt extends well beyond these exceptions. We have run deficits with strong economies and weak, with low inflation and high, and with favorable and unfavorable productivity gains.
Since 1961 — and I admit to having reported this fact before — federal budgets have been in surplus in only five years. And these surpluses have invariably coincided with long economic booms that swelled government tax revenue: 1969, following the long boom of the 1960s; and 1998 through 2001, reflecting the "tech boom" of the 1990s.
Otherwise, deficits have dominated. From 1990 to 2016, borrowing represented nearly 14 percent of annual federal spending, according to calculations made by the nonpartisan Committee for a Responsible Federal Budget. That’s one dollar of every seven.
Based on present policies, it's doubtful that things will get much better. Aging baby boomers are inflating Social Security and Medicare spending. Pressures for more defense spending have probably been underestimated. The same may be true for many domestic discretionary programs. Even with these optimistic assumptions, the Congressional Budget Office projects that the budget deficit ($666 billion in 2017) will grow as a share of the economy.
We resist the discipline of balancing the budget, which is inherently unpopular. It’s what Eugene Steuerle of the Urban Institute calls “take-away politics.” Some programs would be cut; some taxes would be raised. Americans like big government. They just don’t like paying for it.
Borrowing is easier. It's largely invisible to most Americans, creating the illusion of "something for nothing." This liberates Republicans to peddle more tax cuts. Their tax cut would add $1.5 trillion to the debt over 10 years. A more realistic figure is $2.1 trillion, claims the Committee for a Responsible Federal Budget.
Democrats are little better. They advocate more entitlement spending, despite CBO's estimate of $10 trillion in deficits under existing policies over the next decade.
The unspoken assumption that justifies big and continuous deficits is that — rhetoric to the contrary — they pose no serious danger to the economy. We can run deficits forever without suffering ill effects.
Excessive federal borrowing poses three theoretical dangers. First, it could raise interest rates and “crowd out” the private investment essential for higher living standards. Second, it could trigger a financial panic, if private investors would no longer buy Treasury securities except at exceptionally high interest rates. And finally, a large national debt could make it harder for the government to borrow heavily during a true crisis.
But none of these imagined calamities has yet occurred. Perhaps they never will. There is a theory that suggests just that. Global investors want so-called safe financial assets, it’s said, and U.S. Treasury securities are deemed “safe.” This global demand for Treasurys could sustain budget deficits (which produce more Treasurys) for years.
But this is a very dangerous gamble to make, because if it’s lost, the consequences could be catastrophic. At some point, the demand for safe assets may weaken. Or too many large deficits may make safe assets seem less safe. A responsible society would not test the limits of what’s doable and what isn’t.
But that’s not us. By now, it must be obvious: We are no longer responsible. The urgent need is to plug the huge gap between government spending and tax revenue. Naturally, we aren’t doing that.
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