By Emil Pulsifer, Guest Rogue
I recently shared a table with a stranger. He was mature, educated, and gets his news from a variety of sources including MSNBC, CNN, C-SPAN, and others. We discussed a variety of topics ranging from the need to address climate change, to the development of alternative energy sources and campaign finance reform. Yet, when it came to budget policy he could do no better than to repeat the common wisdom that in order to address the "$16 trillion debt" a mix of spending cuts and tax increases are necessary, and that tax increases could not target the wealthy exclusively because "even if you confiscated all of the income of the rich it wouldn't be enough to fix the problem." Medicare would have to bear the brunt of the spending cuts, he said. These claims are all elements of the meme promoted by "responsible" media organizations, but in many respects they happen to be wrong.
There is certainly room for spending cuts in the current budget, in particular the bloated Defense Department. In 2011, "national defense" spending totaled 4.7 percent of the U.S. economy. In the late 1990s and early 2000s, when Clinton era "peace dividends" reached their peak, national defense spending was just 3.0 percent of GDP. See Table 8.4 of this report.
The Cold War is over: The Soviet Union no longer exists, and China has irrevocably converted to gung-ho capitalism. There is simply no excuse for this level of "defense" spending. In 2011, U.S. GDP was $15 trillion dollars. If national defense spending had been at Clinton era levels as a percentage of GDP, the savings in that year alone would have been 1.7 percent of GDP or roughly $250 billion dollars. Extend this over 10 years and the savings would total $2.5 trillion, or slightly more than the $2.4 trillion total savings touted by Republican Alan Simpson and Democrat Erskine Bowles in their new debt reduction plan. And because we're talking about defense spending as a percentage of GDP, and GDP is expected to grow, this actually underestimates the dollar savings by about a third. Sure, there is already supposed to be some savings in coming years from the military drawdown in Afghanistan, but Congress may not allow this: Already there is a bipartisan movement afoot to restore the much smaller $43 billion in military sequestration cuts due to take effect this year.
But ignore all of this, if you like, and concentrate only on the tax side. The federal government ran a $1.1 trillion budget deficit in 2012. However, this is falling fast, as the tepid recovery takes hold and federal tax collections increase, according to the Congressional Budget Office, which projects the deficit to shrink to 2.4 percent of GDP by 2015 even if federal laws governing taxes and spending remain the same as they are now. In dollars, CBO's tables show a $430 billion deficit by 2015. See the Budget Projections data.
But ignore this too, and pretend that the deficit will continue to run at $1.1 trillion without a break, and as far as the eye can see. After all, the CBO also projects deficits to increase after 2015 because of demographic changes influencing entitlement spending, reaching $978 billion by 2023. Is it really true that a tax increase on the wealthy couldn't balance the budget with a deficit of this size, without spending cuts?
Well, no. There's that $15.8 trillion U.S. GDP in 2012. Gross domestic product is a measure of national output, but by definition it is also a measure of national income: The money from those sales of goods and services went into somebody's pocket, either corporations or individuals; and the "domestic" part insures that the figure excludes net imports and therefore doesn't include money sent out of the country to foreign manufacturers.
True, corporations have costs, such as labor, which have to come out of income before profits are calculated: an important caveat because it is profits, not income, which are subject to corporate taxes. However, those labor costs are income for the labor receiving those wages and salaries, and individual income is taxable. In general, any business costs are someone else's income (corporate or individual). Corporations also distribute a large amount of their net profits to owners, shareholders, and executives in the form of dividends, bonuses, and other profit sharing arrangements. That $1.1 trillion deficit was just 7 percent of national income, then. To completely balance the budget in 2012, the federal government would have had to collect this much, and no more. Since this is larger than the projected deficit in every coming year through 2023 (the limit of CBO's current projections), such revenue would result in large annual budget surpluses and a total surplus over the 10 year budget window.
Because the share of national income received by major corporations and the wealthy is far higher than 7 percent, this would scarcely necessitate confiscatory tax policy. In fact, it would scarcely be onerous.
And this actually grossly overestimates the additional tax burden necessary. The reason is that GDP isn't frozen at 2012 levels. The CBO projects that by 2023 it will grow to $25.9 trillion from last year's $15.5 trillion, or about 67 percent over this period. So, the additional taxes necessary would come from a national income base that is actually much larger than at present, meaning that they take less income as a percentage of income.
Of course, there is an important distinction to be made between national income, which is identical with GDP, and taxable income, which excludes huge amounts of national income through various loopholes, deductions, and credits in tax law and other federal laws. For example, the wealthy pay no Social Security payroll tax on wage and salary income above $113,700 because of a cap (which is also adjusted upward annually for inflation). The list of loopholes is endless. That doesn't change the size of the actual income base, however; and loopholes can be eliminated through tax simplification, whether or not on a means tested basis.
Most of the argument against using taxes alone to deal with the debt problem is based on an absurd misconception: That debt management means paying off the national debt. First of all, nearly one-third of the $16.7 trillion "national debt" isn't real debt: It's "intragovernmental holdings" or debt from the federal government to itself, in the form of the fictitious and fraudulent "trust fund" balances. What counts is marketable Treasury debt held by other parties (everyone from domestic investors to foreign governments), which has to be serviced with real interest payments.
Second, of the $11.9 trillion in actual debt held by the public, absolutely NONE needs to be paid off. It's amazing how many business savvy individuals don't understand this. Treasury debt outstanding is no different than a revolving credit account at a large corporation: This is NEVER paid off, and the size of outstanding debt will rise as the corporation grows because its operations and liquidity needs grow. Similarly, Treasury debt outstanding need never be paid off and can safely grow as the economy grows.
The important thing in both cases is that the debt doesn't grow faster than the corporation or the economy does, except in times of economic downturns. The reason why this is important is that debt has to be serviced by paying interest to the holders of the debt, and if debt grows faster than corporate or economic income, those interest payments start to weigh more and more heavily on the budget of the corporation (or the government), eating away more and more available funds.
This is a very serious problem, but one which needs to be addressed by preventing debt from growing as a percentage of GDP, not by paying off the debt. If the budget is balanced, no more dollars are added to the debt each year. The size of the debt then freezes, while the size of the economy (and thus the government's revenue collections) continues to grow. Servicing the debt thus takes less and less, not more and more, of the budget funds available. Even if the budget isn't balanced, but is simply brought sufficiently close to balance, this occurs.
Fixing the deficit with a targeted tax increase will also decrease U.S. debt levels to a safe amount in coming decades, by reducing the amount of net interest the government must pay to service its debt. Interest on the debt is predicted to grow faster than any single entitlement in the coming decades, but you won't hear much about this. See Table 5-1, Long-Run Budget Projections, to see how fast net interest increases as a percentage of GDP, versus Social Security, Medicare, and Medicaid.
Both political parties depend on contributions from the wealthy and corporations, because that's where the money is. The party leaders know this. Once upon a time, when labor unions were strong, the Democrats could depend on the financial support of the organized working class. From the end of World War II through the 1960s, about a third of the nation's non-agricultural workers belonged to a union. They paid dues and supported lobbying and activism. In 2012, that had dropped to 11.3 percent. In the private sector, the rate was only 6.6 percent, according to the Bureau of Labor Statistics. It didn't have to be this way, as high income countries like Germany and Canada show. But it is, and increasingly, for party fundraising purposes, corporations and the wealthy are the only game in town. They must be placated. So, the debt chimera lives on, and someone else must take the heat. You.