02.01.10

Politically Scandalous Deficit Fixes

As Obama's new budget threatens record debt levels, Matthew Yglesias says the only real solution is to crack down on defense, deductions—and yes, Medicare.

The release of today’s budget by Barack Obama is a reminder that though everyone likes to complain about the budget deficit, few really want to do much of anything about it. In fact, though the administration is already being hit for proposing the biggest deficits ever in nominal dollar terms, the Obama budget actually represents more-or-less the very most that can be achieved within the terms of today’s political debate.

The sky-high deficits we’re facing today will decline on their own as a result of economic recovery; government forecasters anticipate a tumble from 10 percent of GDP to five percent of GDP as a result of nothing else. On top of that, the Obama administration is proposing a “freeze” of non-security domestic spending and tax increases for families earning over $250,000 a year. This will reduce the deficit to around four percent of GDP, which according to White House Budget Director Peter Orszag “is still not enough.”

Curbing deductibility raises revenue without creating any new loopholes or any new incentives to exploit existing loopholes. In other words, it’s a good idea.

And yet, despite the deficit reduction being insufficient, it’s arguably more than is politically possible. Consider the tax hikes, for example. There are two parts to this. One is the idea that the portion of the Bush tax cuts that exclusively benefited high-income taxpayers ought to be allowed to expire. This has been a longstanding Democratic policy proposal, and has always provoked howls of outrage from Republicans—outrage that’s ironic, in light of the fact that at the time the cuts were passed, the GOP’s case for their affordability depended on budget scores that anticipated the cuts expiring.

10 Key Budge Takeaways, from Tax Hikes to Unemployment But there’s a second part to Obama’s tax plans, a proposal to reduce the rate at which high-income households can write off itemized deductions. This is by far the most economically efficient way to increase taxes. What annoys taxpayers about taxes is that after you pay them you have less money. But economists say that the main way taxes hurt long-run economic growth is by distorting decisionmaking. Instead of engaging in behavior that’s efficient in market terms, people engage in behavior that’s efficient according to the terms laid out by the tax code. The very existence of taxes implies some inefficiency, but the proliferation of deductions and loopholes creates many new inefficiencies. Curbing deductibility raises revenue without creating any new loopholes or any new incentives to exploit existing loopholes.

In other words, it’s a good idea.

But it was in the last budget and it was rejected out of hand by Congress. On the one hand, Congress likes to hand out deductions; it’s part of members’ power. On the other hand, charities benefit from generous deductions and thus don’t like this idea, and Congress doesn’t like to fight with charities. On the mythical third hand, Congress likes to cater to the interests of rich people whenever it’s possible to come up with a decent rationalization for doing so, and the charities bit is a good talking point even though charitable giving would scarcely be affected. The point, however, is that this deduction-curbing represents the outer limits of what Democrats are prepared to do—broad-based tax increases, even as modest as a restoration of Clinton-era levels of taxation aren’t on the table.

Beyond that, the prospects for other deficit reduction look even bleaker. Conservatives like to talk about discretionary spending, but Obama’s freeze will reduce non-security discretionary spending to its lowest level since World War II. Indeed, you could completely eliminate such spending and it wouldn’t balance the budget.

The big driver of spending over the long-run is Medicare. Jackie Calmes and Jeff Zeleny  report in The New York Times that Representative Paul Ryan of Wisconsin, the top Republican on the House Budget Committee, has proposed a “blueprint for a balanced budget [that] relies heavily on changes in the system of Medicare benefits for future recipients, the kind of proposal that would surely provoke an outcry among Democrats.” But forget about Democrats. The Obama administration’s health-reform proposals involved some reductions in the scope of future Medicare spending, and that prompted a GOP-led outcry about “death panels” killing America’s grandparents. Under the direction of party chair Michael Steele, the GOP has put"Senior’s Health Care Bill of Rights” at the center of the party’s effort to retain the allegiance of old people.

So if even Democrats won’t raise taxes and even Republicans won’t cut Medicare, what’s left? Perhaps defense. The problem here is that while targeting defense waste always has some support, there are few politicians willing to question the real driver of Pentagon cost—the American military’s global mission. The presence of a huge number of American military assets in Japan isn’t waste. But it’s hardly vital to the security of the American people, either. In this regard, it’s typical of our military expenditures, which are neither about waste nor about “defending our freedoms,” but about projecting power. In particular, we choose to be key players in East Asian security rather than leaving it to the Chinese and Japanese and Koreans to sort out for themselves.

These are the real options we have to close the deficit—taxes that are higher than where they were in the 1990s, cuts in Medicare, or a redefinition of the mission of the American military. For now, there’s no political support for any of them. Which is why even though you’ll hear a lot of complaints about Obama’s proposed deficit being too high, Congress is much more likely to return a document with deficits that are even higher than one that trims them.

Matthew Yglesias is a Fellow at the Center for American Progress Action Fund. He is the author of Heads in the Sand: How the Republicans Screw Up Foreign Policy and Foreign Policy Screws Up the Democrats.