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January 14, 2013
Deficits, Schmeficits
by David Cay Johnston

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by David Cay Johnston

Summary by Tax Analysts®

David Cay Johnston David Cay Johnston received the Pulitzer Prize for his coverage of tax policy while at The New York Times. He now teaches at Syracuse University College of Law and is the author of three books about taxes -- Free Lunch, Perfectly Legal, and The Fine Print.

Johnston argues that the fiscal cliff compromise will make it harder to solve the United States' long-term deficit and debt problems.

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Here are 10 things that the tax deal the 112th Congress enacted in its closing hours tells us:

    1. The Reaganite idea of broadening the tax base to allow lower rates is not just dead, but forgotten.

    2. So, too, is the idea President Reagan championed that all forms of income should be taxed at the same rate, with long-term capital gains to be levied in 2013 at half the top rate applied to paychecks.

    3. However, the Reaganite idea of raising taxes on the vast majority of workers, known in the day as "revenue enhancers," lives on.

    4. Congress treats the marginal utility of an extra dollar earned by a two-income couple working long hours all year to make $450,000 the same as one more buck for a baseball player making $45 million for 162 days of paid play.

    5. Many of the political donor class's irrational tax favors (NASCAR and Hollywood tax benefits among them) have been extended, undoing most of the revenue gains from slightly higher income taxes on the top 1 percent.

    6. Speculators who get rich off other people's money, known as hedge fund and private equity managers, can continue to defer unlimited amounts of money, and when they are taxed, can pay at half the rate of others who are compensated for their services.

    7. Federal deficits will continue at much larger levels than if Congress had done nothing and simply let the temporary George W. Bush income tax cuts end.

    8. Those deficits mean, in turn, that more and more federal tax dollars will be diverted from services that sustain or build the economy to risk-free returns for cautious investors as the federal debt grows.

    9. Social Security, the best-funded federal program because it is paid for with a dedicated tax, is about to be cut even though most Americans oppose any cuts and the program does not add one cent to the federal debt.

    10. Despite all the rhetoric about balanced budgets and increasing federal debt, our elected leaders are unwilling to raise taxes more or cut the programs that actually add to the debt and weaken the economy.

The scale of that last point is vividly illustrated in Congressional Budget Office projections in the accompanying chart. A quarter-century from now, all else being equal, the federal debt will be twice the amount of the economy's total annual output. Of course, as the CBO points out, all else will not be equal if the federal debt continues to grow at unsustainable levels.

But do not expect any serious solutions, just bandages.

Senate Minority Leader Mitch McConnell, R-Ky., put the situation into perspective on the first Sunday of the year. On ABC's This Week, he told us that any thought of further tax increases is over. Put another way, tax reform is dead, at least in the 113th Congress. That means we are in an Alice-in-Wonderland debate about taxes and federal debt -- reality be damned.

President Obama and congressional Republicans have announced that the first stop in this fiscal twilight zone will be an assault on Social Security.

Policymakers seem determined to ignore the fact that Social Security does not contribute to the deficit or federal debt. The vast majority of the public loves Social Security, according to polls. So if they can't kill it, Social Security's enemies plan to wound it, and Obama is happy to oblige them in his quest to go down in history as a post-partisan peacemaker.

Two areas that do increase the debt will get less attention.

One is national security spending, now larger than all the revenue from individual income taxes. Because of a World War II-era doctrine that America must be prepared to fight two full-scale wars simultaneously against traditional enemy states, we employ a vast standing army overseas and pay for 71 nuclear submarines and 10 aircraft carriers with their multiship support fleets.

Of all military spending worldwide, measured in purchasing power parity dollars, the Pentagon alone spends 44 percent. Much of that money is spent overseas, a greenback spigot that drains the domestic economy.

Federal Publicly Held Debt as Percentage of GDP --
Projected for the Next 25 Years

Source: CBO.

Republicans are not happy with the idea of cutting defense spending. They say the Pentagon needs more. So much for their rhetoric about government spending too much.

The second debt contributor is healthcare. Solving the healthcare cost problem would put the federal budget in balance. So why is this not the issue Congress puts the most time and effort into, especially since we are endlessly told that the growing federal debt is our biggest economic problem?

The answer is that Dick Cheney was right, at least as a political matter -- deficits don't matter. What we will see is an assault on Medicare. Polls show that the public does not want Medicare cut, but Congress is sure to do just that because Obama has said cuts are required. That is true, assuming you do not reform healthcare overall.

There will also be cuts to Medicaid, which serves the poor. Numerous Republican congressional leaders have said that America cannot afford to spend as much as it does on Medicaid.

How is it that Portugal, with less than half the per-capita income of America, can afford universal healthcare and America cannot?

The reason is that we spend too much on healthcare through tax expenditures like fringe benefits for health insurance premiums and through private spending. However, universal care on a public service model would reduce costs and burdens on business -- especially small business.

America cannot afford to continue denying all but emergency room care to 50 million people, some of whom move from working taxpayers to disabled tax-eaters because they lack proper medical care for injuries or chronic conditions. A healthy and productive worker is a terrible thing to waste.

As the debate over spending cuts and the debt ceiling advances, keep in mind your tax burdens. And remember the scale of the numbers. Here is one comparison to keep in the forefront of your mind:

The Obama administration says that the fiscal cliff deal it made will mean $737 billion less in federal debt over the next 10 years. CBO data show that interest on the growing national debt will cost more than $770 billion just in the 10th year, assuming interest rates remain at current low levels.

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