Rosanne Altshuler and I have argued in recent posts that Washington will be hard pressed to close our ongoing budget gap with politically palatable tax increases. (Is that an oxymoron?) Neither raising the individual income tax nor boosting corporate levies will erase the deficit.
But what about the spending side of the budget? We at the Tax Policy Center naturally focus on taxes but we do understand that cutting a dollar of spending has pretty much the same effect on the deficit as raising another dollar in taxes.
Let’s look first at the big picture and concentrate once again on 2012, the budget-window year with the smallest deficit—a mere $633 billion. The Congressional Budget Office’s baseline projects total 2012 spending of $3.4 trillion: $1.9 trillion mandatory, $1.2 trillion discretionary, and $300 billion in interest paid to the public. Washington can’t stop paying interest (well, it could, but it would become Argentina) so balancing the 2012 budget would require cutting a third of all mandatory spending or more than half of discretionary outlays. That’s a tall order in the best of times.
Most mandatory spending involves two politically popular programs: 40 percent pays Social Security benefits and another 30 percent covers Medicare. If you protect them, you could zero out the rest—Medicaid, military and federal retirement, and income support programs like unemployment compensation and Supplemental Security Income—and just about balance the budget in 2012. You might squeeze some cost savings out of Medicare, but just stop by your congressman’s town meeting to see how easy that would be. Big cuts in Social Security benefits won’t happen either.
Cutting on the discretionary side may seem a better bet but that’s unlikely to be any easier. CBO’s latest Budget Options volume suggests lots of cuts but they’re all small potatoes. The biggest one I could find—reducing highway funding to maintain positive balances in the highway trust fund—would save not quite $11 billion in 2012. (Don’t get me started on that one; we haven’t raised the federal gas tax that feeds the trust fund since 1997 so Congress tosses in extra money each year.) Most of CBO’s options would reduce spending by less than $1 billion. All of them probably don’t total enough savings to wipe out the deficit.
So let’s review the bidding. Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.
