Why the Super Committee was a Super Failure

 

For Congress, the federal budget deficit is like the weather:  everyone talks about it, but no one does anything about it.

The Super Committee failed to reach a budget-cutting deal for the same reason as previous efforts--their concern is with ideology, not governing. 

For the forty years from 1969 to 2008, federal spending averaged a little over 20% of gross domestic product. [1]  During that period, the federal budget was in surplus for one year of the Johnson administration, and several years of the Clinton administration.

During the administration of George W. Bush, federal spending as a percentage of gross domestic product (GDP) rose while revenues as a percentage of GDP declined.  The result, of course, was record deficits.

By 2009 (the final Bush budget year), spending was 25% of GDP while revenues were just 15%.  (After President Bush left office, the 2009 budget was amended.  Taxes were cut and spending increased to counteract the recession, but even without these changes, the final Bush deficit would have been a record breaking $1.2 trillion.)  [2]

To get back to the balanced budgets we enjoyed in 1999-2001, we need to both cut spending and increase revenue so that they balance at about 20% of GDP.

Republicans have a different idea.  They voted this year to cap federal spending at 18% of GDP.  [3]  Federal spending has not been that low since 1966.  Rolling back federal spending to the level of the early sixties may sound appealing until you consider it would mean the elimination of Medicare (enacted in 1965) and a steep drop in Social Security benefits.

The Democrats on the ‘Super Committee’ proposed a ten-year plan to cut $3 trillion from future expected deficits, with about two-thirds of that amount coming from spending cuts and one-third coming from increased tax revenue. [4]

In their ten-year plan, the Republicans offered to increase taxes by $300 billion--$30 billion a year, or less than 3% of the deficit. [5]

It’s not that finding additional revenue is hard to do.  The major factor in the decline in federal revenues is the Bush tax cuts.  Allowing the Bush tax cuts to expire for those households with incomes over $250,000 would bring in $70 billion a year.  [6]  The Republicans offered $30 billion a year, but only on the condition that all the Bush tax cuts be made permanent.  [7]

The largest source of federal revenue is the income tax.  You might think that income is income, but you would be wrong.  Investment income—capital gains and dividends--are taxed at a lower rate than wages, which means that a middle income person who works overtime to make an additional $1000 will pay more in tax than a millionaire would pay on an additional $1000 in dividends.  Taxing investment income at the same rate as wages would strike a blow for equity, and raise $84 billion a year.  [8]

The oil and gas industry enjoys tax breaks given to no other industry.  Eliminating these would bring in $4 billion a year. [9].  Even in Washington, that is real money.  The Republicans said no.

Our corporate income tax is a mess.  Our corporate income tax rate is among the highest in the industrialized world, but our corporate income tax receipts as a percentage of GDP are nearly the lowest in the industrialized world. [10]  If we simplified our corporate income tax, decreased the rate, and increased corporate income tax receipts to the average in the industrialized world, it would bring in about $100 billion a year.

A financial transactions tax at a low rate—say, 0.5%--would bring in about $79 billion a year. [11]  Such a tax would have a negligible impact on long-term investors, but would discourage short-term trades on Wall Street, allowing the Street to get back to its function of allocating capital, rather than rewarding speculators.

Five changes to our federal tax code--allowing the Bush tax cuts for the wealthy to expire; eliminating preferential tax rates for dividends and capital gains; eliminating tax breaks for oil and gas; plugging the holes in the corporate income tax so that it brings in revenue similar to other countries; and a financial transactions tax—would bring in $337 billion a year

In the face of a $1.3 trillion deficit, the revenue proposal of the Democrats was too timid; the revenue proposal of the Republicans was pathetic.

Simple math dictates a balanced approach to the deficit problem, but Republicans cannot do math any more, they can only do pledges.  The Republicans—including Congressman Bass, Congressman Guinta, and Senator Ayotte--are committed to the Grover Norquist pledge not to raise any taxes, the deficit be damned.  [12]   If Republicans stick by the pledge—and if voters stick by the Republicans—we have no hope of taming the deficit.