Facing the fiscal cliff: American taxpayers have had it easy for decades
John W. Schoen , NBC News
Americans hate paying taxes. They also want Congress and the White House to balance the budget.
They can't have it both ways.
On one side of the escalating budget debate is the premise, offered up by a generation of politicians and tax policy wonks since Ronald Reagan, that government spending is dangerously "out of control" and needs to be restrained. Even if the cure means starving the Treasury Department of cash.
One the other side is a promise, dating back to the Great Depression and expanded through Lyndon Johnson's Great Society, to divert a greater share of the nation's hard-earned resources to care for the oldest and most economically vulnerable Americans.
That decades-long conflict seems to be approaching something of a Moment of Truth.
“If we want to maintain ourselves as a very low-tax country, then we have to break some of those promises,” said Michael Linden, a tax policy analyst at the Center for American Progress, a left-leaning think tank.
“That’s the big dilemma that facing the country right now. That’s the basic contour on the debate.”
The debate intensified over the weekend, as Treasury Secretary Tim Geithner made the Sunday talk show circuit to lay out the case for the Obama administration’s latest budget proposal. The plan calls for nearly $1.6 trillion in new tax revenue over the next decade, along with some $600 billion in spending cuts, including $350 billion from Medicare and other health programs.
The plan also calls for raising tax rates and limiting deductions on households making more than $250,000, a proposal Geithner told NBC’s "Meet the Press" Sunday that he thinks congressional Republicans will accept.
“I think we’re going to get there,” Geithner told NBC.
House Speaker John Boehner, R-Ohio, isn't so sure.
His first response to the White House proposal: “You can’t be serious,” he told "Fox News Sunday."
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Still, with the deadline for a deal to head off the so-called “fiscal cliff” now less than a month away, the debate has shifted from whether taxes should go up to just who should pay more. Both sides seem to acknowledge what some economists have been saying for some time.
The problem with the budget is that Americans don't pay enough taxes.
The case isn't hard to make. The U.S. federal tax burden, relative to gross domestic product, is lower than it’s been in half a century. Americans pay lower taxes in relation to the size of their economy than all but a handful of developed countries, including Chile and Mexico.
The relatively low tax burden on Americans is, in part, an illusion that results from heavy reliance on hundreds of billions of dollars of so-called “tax expenditures.” To make government spending appear lower than it really is, the U.S. tax code is larded with givebacks, deductions and exemptions.
For example, the government lets you off the hook for paying taxes on the cash your employer pays to cover your health insurance coverage - income by another name. The cost of those uncollected taxes would show up as spending if the Treasury paid you a direct subsidy for health care. (That tax break, by the way, is the biggest single giveaway the government provides.)
Or take the earned income tax credit, which issues payments to low-income households. This giveback costs the Treasury just as much as if it collected the money from all taxpayers and then turned around and used it to write checks for those with the lowest wages.
“It doesn’t really make much difference whether the government taxes people - and spends the money in order to redirect it - or whether it gives a tax incentive that encourages people to spend their own money in the same way,” said Bruce Bartlett, who served as a Reagan administration policy adviser and as a Treasury official under President George H. W. Bush. “Economically, it's exactly the same thing.”
The biggest sticking point in the current debate centers on whether tax rates should rise. Thanks to the thicket of loopholes available at all income levels, those "marginal" rates have little to do with how much of your hard-earned money you must fork over to the government.
As a percentage of their total income, though, Americans are paying less than they have in more than 50 years. Since 1960, the government’s total take has been remarkably steady at about 18.3 percent of gross domestic product, give or take a percentage point.
In the second half of the 1990s, that changed. Thanks to a booming economy , the Treasury began collecting money faster than the government could spend it – without raising tax rates. The dot-com stock market boom, for example, produced a surge in capital gains taxes, even after the government cut the tax rate on those gains in 1997.
By the end of the decade, the Treasury was using the excess cash to pay down the national debt. But that raised the politically difficult question: if the government collects more than it needs, doesn't that mean tax rates are too high?
The result was 2000 campaign pledge from both President George W. Bush and his Democratic opponent, Al Gore, to cut taxes, a promise that the government apparently could afford to make at that time. Just a few years later, when the dot-com boom turned to bust, the new, lower tax rates starved the government of cash following the 2001 recession and the weak recovery that stalled wage growth.
That shortfall widened sharply following the deep recession of 2007, when tax receipts cratered. Last year, the Treasury's total take came to just 14.4 percent of GDP, the lowest level since World War II.
When income dries up for the average American household, most people start looking for ways to cut back. But during the 2000s, no one in Washington was in the mood to cut government spending, which continued to rise throughout the decade, paid for with borrowed money. Ironically, that decade of government spending beyond its means without harm may now make it harder for Congress and the White House to convince voters to accept spending cuts.
“If you cut their taxes without showing people what that means in terms of cutting services, they don’t understand that those two things are connected over time,” said Linden. “All of a sudden, government services just seem cheaper to people.”
For now, government spending doesn't appear to be the problem. After peaking in the first quarter of 2011, even before the mindless "fiscal cliff" cuts imposed by "sequestration," federal spending has begun falling gradually. That contraction is one of the reasons the economic recovery remains weak.
This may not be a good time to cut spending. As Europe’s weaker countries are demonstrating painfully, trying to balance a national budget too quickly with tax increases and spending cuts can just as quickly send an economy in reverse. In the U.S., most private economists, along with the Congressional Budget Office, have warned that the “fiscal cliff” package of a half trillion dollars in tax hikes and spending cuts will almost certainly send the American economy back into recession next year.
That would take an even bigger bite out of tax receipts. Which is why there’s widespread agreement that the best way to raise more money for the U.S. Treasury is to spur the economy to produce a bigger pie of wages, capital gains and investment income that can be taxed. After all, every new job creates new tax dollars without increasing the tax burden on those already employed.
The Obama administration argues that the government needs to invest more tax dollars to spur economic growth. The latest White House budget proposal includes $200 billion in new spending on jobless benefits, public works and help for struggling homeowners.
Until the day comes when the government collects enough taxes to pay its bills, it will have to borrow more money. And no one on either side of the aisle believes the government can balance the budget again for at least another decade, if not longer.
For now, the best hope is to shrink the deficit gradually and slow the expansion of some $16.3 trillion in government debt that has piled up after taxpayers shortchanged their government for more than a decade.
Despite widespread agreement on the long-term goal of eliminating budget deficits, though, the impact of a swollen national debt remains a largely intangible threat to most voters.
Unlike the Great Inflation of the 1970s, when double-digit interest rates all but killed the housing industry and prices of everything from groceries to gasoline soared, most consumers today aren’t feeling the impact of the current federal budget debate on their own budgets.
That’s eased much of the pressure on Congress and the White House to make a deal, according to Bartlett.
“What is the potential benefit of reducing the deficit?” he said. “Are you going to get lower prices? No. Are you going to get lower interest rates? No. Are you going to get more economic growth? No. So there’s no tangible payoff. It’s all theoretical or even hypothetical. I think that’s the main constraint today in terms of putting together a budget deal.”http://www.nbcnews.com/business/economy ... -1C7378082