This chart from the White House, which purports to prove, with the scientific magic of math, that basically everything bad that has happened to the budget is the fault of one George W. Bush, has been making the rounds.  My colleague approvingly calls it “Another chart that should accompany all debt ceiling discussions”.
I’m a little less enamored, considering that this graph attributes decisions made by Obama and an all-Democratic Congress–like doubling down in Afghanistan–to Bush, while taking responsibility for basically nothing except the stimulus. Â When Obama extends the Bush tax cuts for the rich under pressure from Congressional Republicans, that disappears from his side of the ledger, because after all, he didn’t want to do it. Â When Bush enacts Medicare Part D under pressure from Congressional Democrats, the full cost is charged against his presidency. Â The list of such silliness goes on. Â Our president seems set to coin another presidential motto: “The duck starts here.”
If you must use this chart as some sort of an aid to debate, we should probably drag in a few others for contrast and depth. The first shows deficits, spending, and revenues since 2000 (as a percentage of GDP):
And the second shows what happened to the national debt, and interest payments on that debt, during the same period:
It’s not really very easy to look at these graphs and tell a story where the deficit is 1.6% under George Bush in 2007, and then suddenly balloons to 10% under Obama a few years later–and does so almost entirely as a result of policies initiated under George W. Bush, and only those initiated under George W. Bush.  (Not because of say, Medicare, Medicaid, and Social Security.)  What changed about Bush policies that made them so much more expensive once Barack Obama took office?
Nor is it exactly obvious to look at the $2.4 trillion in additional debt incurred during Bush’s eight-year presidency, and say that he is nonetheless actually responsible for $7 trillion of our current debt load–and then turn to the $3.1 trillion of debt incurred during Barack Obama’s three-year presidency, and declare that his policies are actually responsible for only $1.4 trillion.
As Jim Fallows notes, these blame games are really quite childish. Â In fact, most of what’s driving our current deficits is the economy, and the onrushing retirement of the Baby Boomers. Â Those are the things that are changing rapidly, not the size of the Bush tax cuts. Â If you want to blame it on anyone, blame Lyndon B. Johnson and Richard Nixon, but good luck getting any money out of their estates.
My colleague nonetheless thinks that this is a useful graph because it focuses us on the choices that have to be made: “I really am not interested in the Bush-v-Obama, red-v-blue allocation of the blame. The point is the fundamental irrationality of insisting on cutting the deficit, while also insisting on preserving every penny of the tax cuts. One or the other: OK. Both of them: You’re making it up.”
I’m afraid I disagree. I also am not interested in the Bush-v-Obama, red-v-blue allocation of blame, but the graph at top was made by someone who seems very interested indeed in allocating as much blame as possible to Republicans–indeed, more interested in that than anything else.
Focus on the $14 trillion in “old” debt is almost silly when you consider that our unfunded liabilities stand at about $114 trillion. This isn’t some number we’ll have to pay in the future, i.e. it is not similar to the “total of payments” you see on a mortgage document, the total of all future payments. Rather, this is the present value of future payments, i.e. similar to the starting mortgage balance that must be paid, with interest. Another way to look at it is, this is how much you’d have to have in the bank earning interest in order to make all the promised payments and slowly eat the principal until nothing remains 75 years later. Purely for entertainment purposes and to show, as best I can, how (literally!) bankrupt the progressives’ ideas are, I tried to see if I could square the circle with respect to this looming problem.
Total US household net worth, including non-profits, is about $58 trillion. So, even if we confiscated everything that every private individual has, and it had no negative effect on the productivity of the economy, we’re short by half the total. Clearly that’s not going to work.
But then, the $58 trillion doesn’t include our productive capacity, that is, our ability, through human and physical capital, to produce more wealth. So we can consider attempting to extract the needed money from national income.
The current size of our economy, the GDP, is about $15 trillion. So while it’s obvious we can’t gather up the required $114 trillion all at once, perhaps over time it might be possible – after all, we have 75 years to make those payments. Yield on 30-year treasury bond is 4.3%, so I’ll use that as the discount rate.
The current US federal+state+local tax burden is 26% of GDP. By comparison, Canada is 30%, Australia is 33%, and the UK is 39%. So, it seems plausible that if we could raise our tax burden, perhaps we could fund the liabilities. One problem: they all have national health plans, whereas in the US, we pay for part of our
health care in a private system. The same people who are paying our taxes are also paying for their private health care, either directly or indirectly, and if you add that to the US tax burden, our total cost is around 34% of GDP, putting us over Canada and Australia in total burden before any new tax is levied. So it’s clear that to meet the unfunded liabilities with higher taxes will involve taking the total burden, including private health care, considerably higher than these other countries. Replacing the private health care system in the US with a national single-payer plan, assuming it cost exactly the same, would change nothing, other than the % of GDP that the government was responsible for. The foregoing is not to argue either for or against a single-payer plan for the US, but simply to correctly account for the GDP burden in a way comparable to other countries.
Let us now consider extracting some additional fraction of GDP via higher taxes. How much would we need?
Assumption: we somehow extract an additional 5% of GDP in taxes, a tax burden similar to Canada. Present value of $750 billion / year for 75 years discounted at 4.3%: $17.4 trillion – not enough. But wait, we might still have 3% real GDP growth despite the tax, so the $750 billion will go up slowly over 75 years. Factoring this growth in, the tax brings in $36.2 trillion. It’s still not enough.
Assumption: we somehow extract an additional 10% of GDP in taxes, becoming similar to Australia. Present value of $1.5 trillion / year is $72.5 trillion, assuming the economy still grows at 3% despite the new tax. That’s an iffy assumption, as we’ll see. But anyway, it’s still not enough.
Assumption: we somehow extract an additional 15% of GDP in taxes, becoming similar to the UK. Present value of $2.25 trillion /year is $108 trillion, assuming the economy shrugs off the giant tax increase and still grows at 3%. This is finally close enough that we’re within the margin of error of this crude analysis. However, if GDP slips to 2% under the weight of the taxes, then we only rake in $81.9 trillion, so we’d still come up short. We’d have to keep increasing the tax take as GDP growth slips further in response to the tax. Perhaps this reaches equilibrium at a total tax burden of 45% of GDP, with growth down to a relatively stagnant 1.5%? This also still ignores the fact that our private health system adds to this burden. Is it possible that GDP growth would remain high, or even increase, in response to higher taxes? I’ll come to that as we consider the nature of the new taxes.
Now let’s suppose we try a compromise solution – we’ll attempt the 10% of GDP hike and close the rest of the gap with $40 trillion in benefit cuts. That’s a 35% reduction in benefits, and we still need to find 10% of GDP to pay the rest! This might work, but who’s going to pay $1.5 trillion extra per year? Let’s try on some income-tax-only solutions for size and see how they feel, shall we?
Assumption: we hit the top 10% of income earners for the entire $1.5 trillion. This is everyone earning over $110k/year. Their share of GDP is 47%, or 7 trillion. So, the fraction of their income that we collect needs to go up by 21%. Someone at the low end of this decile sees his tax rate rise from 28% to 49%, while someone at the high end sees his tax rate (in 2013) go from 40% to 61%. A Californian would be paying 9.3% on top of those numbers. This seems inconsistent with 2% GDP growth, but heck, I’m not a nobel-prize-winning economist.
Assumption: we hit just the top 1% of income earners for the entire $1.5 trillion. This is everyone with an incomes above $360k. Their share of GDP is 20%, or $3 trillion. So their tax rate needs to rise by 50% to raise $1.5 trillion. This group already pays 38% of income taxes (not counting payroll taxes to be sure, but still a substantial portion of the total bill). Since their tax rate will rise to 40% in 2013 under current law, this means we need to raise their tax rate to 90%. A Californian pays 9.3% on top of that, a combined 99.3% (though, since it’s deductible, perhaps as little as 92%). It seems likely that income in this group would drop rapidly as everyone lost any incentive to earn enough to be in this group, and therefore the tax would be unlikely to actually bring in the required revenue. But then again I could be wrong; this group could simply consist of automations that will robotically and moronically continue working just as hard for 8 cents on the dollar. Again, the nobel prize committee doesn’t have me on the short list. Of course, while the “working rich” (doctors and other high-earning professionals) retire and close their small businesses, and large companies move these highly-paid jobs offshore wherever possible, there are already plenty of billionaires who’ll be “stuck” paying the tax, which slowly consumes their wealth. Assuming they don’t start emigrating in droves and simply sit still while their assets are redistributed, we already saw that consuming all household wealth won’t pay even half the tab. Any way you slice it, this simply isn’t going to work.
Assumption: we hit the top 5% of income earners for the tab. This is everyone earning over $160k/year, and there are a lot of people in this group, most of whom do not have the means to avoid or flee the tax. This group earns about 35% of GDP, or $5 trillion, and is already paying 59% of all income taxes. Required increase in tax rate is 30%, so their marginal rate needs to go from about 33% to 63%. Those at the top see 40% go to 70%, similar to Robert Reich’s proposal. A Californian pays 9.3% on top of that. Once again, since this group includes the top 1% group, we can expect those experiencing 70-80% rates of taxation will be motivated to avoid the tax or simply retire, thus increasing the burden on those further down the list within this group who don’t have the option or means of avoiding it.
It seems clear that attempting to extract the needed revenue from a smaller and smaller set of people earning higher and higher income cut-offs requires an ever-higher rate of taxation, simply because there aren’t enough people as you go up the income scale, nor enough income; the rate reaches levels that clearly won’t work and can only be called punitive. That is, they put limits on income while not actually raising the required revenue.
What would? Another option would be a VAT, which the US does not have but which Canada, Australia, the UK, and most Western European countries have, and which seems to enable their tax burdens to reach higher fractions of national income. We haven’t heard much talk of it, because it’s an unpopular idea compared with the fantasy that someone else is going to get stuck with all the bills. The VAT has one advantage over income taxation: it doesn’t create a disincentive to work, save, and invest. It may create a disincentive to consume, but since our consumption exceeds our production (we borrow the rest from abroad), this may not be a bad thing. Consumption is 70% of the economy, but historically has been more like 65% (and that 5% is roughly the size of the trade deficit, so it’s not a good thing). If the US had a 5% VAT, that would raise about $500 billion / year. It’s short of the $1.5 trillion needed, but it would make the income tax rise look much less implausible. The rate might have to be higher than 5% to raise $500 billion since typically staples like food are exempted from VATs.
What else might work? Well, we could gut something else, like our national defense. Still, at about $850 billion / year, there’s only so much we might expect to “save” there. It still won’t be enough, though it could make the required income tax rise smaller still.
The numbers are what they are. We can’t expect to fund these liabilities with income taxes only on high earners, a broad-based tax is needed to even come close. And the numbers are so large that it seems clear we must control the costs of these programs because otherwise the required level of taxation becomes so large that it is hard to imagine implementing it without a major negative impact to GDP growth. So far few politicians and pundits are willing to tell the truth to the average person that he or she needs to make a choice, either to accept a higher broad-based tax that will affect him or her personally, or a reduced level of entitlements, or some combination of these. It’s easier to tell them they can have it all at someone else’s expense, which is either a cynical political strategy employed by people who know better, or the position of clueless politicians who make decisions based on ideology rather than analysis.
I have a few problems with those charts. First off, when did Obama become commander in chief? Just because he is continuing the Bush policies in Iraq and Afghanistan doesn’t mean he can pin the cost on Bush. Once he became president he had the option of withdrawing all the troops and choose not to do so. That makes the Iraq and Afghanistan war policies Obama policies as of January 20, 2009.
And there are two problems with the tax cuts in the chart. First is the idea that allowing you to keep your money is a government expense. Tax cuts should NEVER be on an expense chart. Second is similar to the first. Obama had a chance to let the Bush tax cuts expire, but he and a democrat senate and house extended those cuts. That makes the Bush tax cuts Obama policy. Like with the military, it is his actions not his words that count.
YES OBAMA IS DECEIVING ALL THE AMERICANS WITH HIS TWISTED TONGUE,
AND TWISTED SECRETS ACTIONS AND EXECUTIVE ORDERS,
NOW HE AND THE DEMOCRATS ARE TRYING TO SHIFT
THE BLAME OF THE DEBT CEILING DELAY THO THE TEA PARTY ELECTED PEOPLE, ANY ONE BUT HIM IS GUILTY.
IS IN HE THE ONE WHO SPENT AMERICA TO THE CEILING OF THE WHITE HOUSE