The tax deal President Obama and congressional Republicans struck last week will send government revenue soaring above its historic average, but did nothing to control spending, which remains stubbornly high.
With the increases in payroll, estate and income taxes, the Tax Policy Center says, revenue will rise to 19.4 percent of gross domestic product over the next 10 years — putting it well ahead of the 18 percent average over the past five decades.
The deal, though, didn’t touch long-term spending. That has averaged about 20 percent over the past five decades, but, according to the analysis, still will be at least 22.3 percent in 2022 — and could be as high as 24.1 percent, depending on the decisions Congress makes on the automatic spending cuts built into the law.
“It should absolutely end that debate [over new tax revenue], both politically and because you can now see that getting what the president wanted didn’t put a dent in the long-term problem,” said Douglas Holtz-Eakin, former director of the Congressional Budget Office and now president of the right-leaning American Action Forum. “This isn’t a tax problem. It is a spending problem.”
Without more spending cuts, the gap between revenue and spending will be a minimum of about 3 percentage points of GDP, and could be more than 4.5 points. At that top end, it would mean the government still could be borrowing nearly 20 cents of every dollar it spends.
“It is not sustainable to have such a gap deficit going forward,” said William McBride, chief economist at the Tax Foundation, which advocates for a flatter and simpler federal tax code. “The main debate has been about taking income from a small set of the population — the rich — without any real discussion about how that impacts the economy.”
The deal that Mr. Obama and Republican leaders ushered through Congress last week combined $330 billion in additional spending with an extension of the George W. Bush-era income-tax rates for individuals making $400,000 or less, as well as for households with incomes of $450,000 or less. Several other tax breaks, such as the payroll-tax holiday, expired.
Republicans now say they have checked all the boxes on taxes and that it is time to turn to spending — in particular entitlement programs, which they warn will continue to be the fastest-growing parts of the budget.
“Where we are now is, we have resolved the revenue issue, and the question is: What are we going to do about spending?” Senate Minority Leader Mitch McConnell, Kentucky Republican, said Sunday on NBC’s “Meet the Press.”
With the nation now sitting atop a $16.4 trillion pile of debt, the government’s long-term deficits have garnered increasing attention and sparked bitter partisan fights over spending and taxes on Capitol Hill.
In 2010, Mr. Obama’s bipartisan National Commission on Fiscal Responsibility and Reform released a high-profile report that recommended Congress cap federal revenues at 21 percent of GDP and cap spending below 22 percent — in part by means-testing and raising the retirement age for Social Security. The recommendations have since collected dust.
House Republicans also passed the Cut, Cap and Balance Act of 2011, which called for federal spending to be capped at 18 percent of GDP and a balanced-budget amendment to the U.S. Constitution, and said that the nation’s borrowing limit could not be increased unless the federal government balances its books. That effort also failed.
The problem is that Republicans want to keep taxes near their historic average of 18.1 percent, while Democrats say an aging population and higher demand for services means spending will have to rise from its historic average of 20.2 percent.
Last week’s deal boosts taxes beyond that average, but leaves spending somewhere in the ballpark of 24 percent. The automatic sequesters could cut that to 22 percent, but that would still be above the average.
“Under the agreement, revenues in 10 years will reach about 19.4 percent of gross domestic product, and that is at the very high end of what most Republicans say is tolerable,” Howard Gleckman, of the Tax Policy Center, said in a post on the group’s website. “Spending will exceed 22 percent, at the low end of what many Democrats think is acceptable, given the aging of the population. Looking at taxes and spending as a share of GDP shows just how tough it will be for the parties to reach a fiscal compromise.”
Other budget wonks reached similar conclusions. Richard Kogan, of the liberal Center on Budget and Policy Priorities, assumes that revenues will average 18.8 percent and spending 22.4 percent over the next 10 years, and Andrew Fieldhouse, of the liberal Economic Policy Institute, projects federal revenue will average 18.4 percent and federal spending will average 22 percent of GDP.
Both men, though, warned not to read too much into the postwar spending and revenue levels as a share of GDP.
“Looking to past revenue and spending levels for guidance going forward makes no sense because the recent beginning of the baby-boomers’ retirement and excess health care cost inflation have us in a thoroughly different world than the postwar era,” Mr. Fieldhouse said. “Realistically, the federal government needs a substantial level shift in revenue as a share of GDP if the U.S. isn’t going to renege on commitments to provide health care and a semblance of retirement security to the poor, disabled and elderly.”
• Seth McLaughlin can be reached at smclaughlin@washingtontimes.com.
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