Taxes

The Brutal Arithmetic of the Budget Deficit


The Brutal Arithmetic of the Budget Deficit

Photo illustration by 731; Obama photograph by Ron Sachs/Getty Images

Right now, U.S. citizens are paying $2.4 trillion for their government. That’s what federal revenue added up to this year, according to the Congressional Budget Office. Some 46 percent of that total comes from individual income taxes, 35 percent from payroll taxes meant for Social Security and Medicare, 10 percent from corporate income taxes, and the last 9 percent from estate and gift taxes, excise taxes, and others.

Now consider the $1.1 trillion which, also according to the CBO, the government will borrow by year’s end to make up the difference between revenue and expenditures. That’s the budget deficit, and if there was one thing the presidential candidates agreed on during the campaign, it was this: The deficit is unignorable. Mitt Romney said the gap needs to be closed entirely through spending cuts. Obama has maintained that increased revenue—i.e., increased taxes—must be part of the solution. Neither pronouncement sufficiently conveys how painful plugging the budget hole will be.

Obama’s right when he says higher taxes are inevitable. Both of the big deficit reduction reports issued during his first term, from his own Simpson-Bowles commission as well as the Rivlin-Domenici task force, recommended a mix of tax hikes and spending cuts to close the gap. The problem is that raising the taxes Obama talked about on the campaign trail doesn’t get anywhere near closing the deficit.

Take corporate taxes. Since those only make up a tenth of the federal government’s revenue, eliminating various corporate tax breaks, as Obama has promised to do, would have a minimal impact on the budget gap. Then there are the wealthy individuals whom the president says should “pay their fair share.” Obama’s 2013 budget calculates that allowing the Bush tax cuts to expire for earners over $250,000 would decrease the deficit by $968 billion over the next decade. That’s significant, but it’s still only a piece of what’s needed. Rivlin-Domenici recommended $2.3 trillion in new revenue from 2012 to 2020 (in addition to $2.7 trillion in spending cuts) to get the deficit to a manageable size, while Simpson-Bowles assumed that the upper-income tax cuts would expire, and still recommended $1 trillion in additional revenue (plus $2.2 trillion in spending cuts). The commission co-chairs, Erskine Bowles and Alan Simpson, laid out a scenario where that extra money came from eliminating or reducing all tax credits and deductions, including popular ones for mortgage interest and health insurance—credits and deductions aimed squarely at the middle class.

While Obama distanced himself from the Simpson-Bowles recommendations when they were published two years ago, his 2013 budget aims to reduce the deficit by $4 trillion, roughly as much as the commission. Strikingly, though, he proposes getting there by imposing $2.50 in spending cuts for every dollar in new revenue. That may be a concession to the mathematical impossibility of getting more tax revenue without hitting the middle class, but Obama’s ratio tilts more toward cutting than Simpson-Bowles. And since congressional Democrats already regard the commission’s report as the budgetary equivalent of clear-cutting, it’s hard to see the president getting much traction with his own party.

The tax math is unforgiving, and the president and his adversaries will have to confront it immediately. Barring action, almost every tax cut passed by Obama and George W. Bush will expire next year, starting on Jan. 1. At the same time, $1.2 trillion in across-the-board spending cuts will kick in—a “sequester” triggered by the failure of last year’s supercommittee to work out a debt deal. The infamous fiscal cliff will cut the federal deficit by $560 billion by the end of fiscal 2013, but with the likely side-effect of throwing the country back into recession. For those hoping for a deal, there are a few encouraging signs: The day after the election, Speaker John Boehner declared he was open to the idea of new revenue. Whatever the grand bargain, we’re all going to be paying for it. As the famed budget balancer Bill Clinton put it a couple months back, the answer is one word: arithmetic.

The bottom line: Obama and Congress must come to a deficit deal by Jan. 1, before every tax cut of the past decade begins to expire.

Bennett_190
Bennett is a staff writer for Bloomberg Businessweek in New York.

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