No Plan at All

Economist Tino Sandanjani at Super Economy gives us some helpful perspective on the question of whether allowing the Bush tax cuts to expire would do anything to alleviate our deficit problem. He begins by making an important distinction, one that doesn't often get made in media discussions of the looming fight over whether or not to extend the Bush tax cuts:

Don’t confuse the “Bush Tax Cuts” with “Bush Tax Cuts For The Rich”. Obama’s plan to repeal the Bush Tax Cuts only for those making $250,000 per year will raise one quarter as much revenue as the entire tax cut.

Over the next decade, the total Bush tax cuts reduce revenue by about 1.7% of GDP per year (0.4% of which represents tax cuts for those making more than $250,000). During this period the deficit is expected to average about 6.7% of GDP.

Over ten years, the deficit is expected by the Congressional Budget Office to be about $13 trillion dollars. Repealing the Bush tax cuts on the rich as President Obama proposes will raise $0.7 trillion. Repealing all Bush tax cuts would raise $3.3 trillion. In addition, if all tax cuts are repealed, the U.S will save $0.7 trillion in interest on debt.

The Bush tax cuts on the rich (the part Obama wants to repeal) barely makes a dent in the deficit. If you include the cuts for the middle class, the Bush tax cuts are a non-negligible cause of the deficit, but even then not the main cause.

[The] claim - common among the left - that the Bush tax cuts would “basically solve the deficit problem” is an exaggeration, seventy percent of the ten year deficit and an even larger part of the long term deficit would remain even if all Bush tax cuts are repealed, since the main cause of the fiscal imbalance is expanding expenditure as a share of GDP.

For the long term deficit the Bush tax cuts are even less important. The tax cuts represent about 1.7% of GDP in increased revenue per year, while the federal deficit on its current path is projected to explode to above 10% of GDP by 2026.

Let me finish by citing the Congressional Research Service:

“The Obama Administration has proposed allowing the Bush tax cuts to expire for high income taxpayers and permanently extending the tax cuts for middle class taxpayers.... This proposal is projected to increase tax revenues by ... $678 billion over 10 years, but still leaves federal debt on an unsustainable path.”

All of which is to say that higher taxes are not the answer to our deficit problem. The problem is caused by too much spending. Raising taxes will do little to solve fix it and may even exacerbate it, if, as is usually the case, raising taxes motivates people to shelter their money. The only way we can avoid the day of fiscal reckoning is to reduce entitlement spending, which means reforming social security, medicare, and welfare, none of which the Obama administration has shown any appetite for.

It may be that a new administration in Washington will fail to avert calamity, and that in a year or two we'll wind up like Greece, but it's almost certain that the current administration will fail to take the steps necessary to avert it. Mr. Obama has given us no insight at all into what he would do in a second term to restore us to fiscal health. He seems to have no plan other than to "tax the rich" which, as Sandanjani shows above, is no plan at all.