Regardless of who wins the presidential election, if you’re middle class, one outcome is certain: Your taxes are going up.
This fact goes unmentioned by President Barack Obama, who speaks only of tax increases on the wealthy, and is anathema to Republican presidential candidate Mitt Romney and his running mate, Paul Ryan, who insist they can beat the deficit into submission by slashing government spending, cutting taxes and eliminating unspecified loopholes. A look at the arithmetic shows neither campaign is on the level.
The scope of the deficit problem is enormous: Federal spending accounts for 24 percent of the economy, while tax revenue stands at 15 percent. Tax cuts, along with the economic downturn, have sapped tax receipts at the same time as more people have resorted to safety-net programs such as food stamps and unemployment insurance.
This imbalance produces budget-busting deficits that the Congressional Budget Office projects will total $1.2 trillion in 2012. Between 2013 and 2022, the CBO expects $10.7 trillion will be added to the national deficit if policy makers extend current policies, including the 2001 and 2003 tax cuts. U.S. debt is expected to total 73 percent of gross domestic product this year, rising to 93 percent in 2022.
The consensus among economists is that the national debt must be stabilized so that the U.S. runs a “primary balance” -- meaning the budget is balanced except for interest payments -- within a decade. To achieve that goal, annual deficits must be reduced from more than 7 percent to about 3 percent of GDP. That, in turn, requires that the U.S. cut its deficit by more than $4 trillion over the next 10 years.
One way to do that (there are only two) is to reduce federal spending, which will total about $3.7 trillion in 2012. Yet the pie isn’t as big as it appears. Spending on mandatory programs, including Medicare and Social Security, amounts to about $2.2 trillion.
Judging from last week’s campaign rhetoric, entitlements will not be curbed anytime soon. Romney promised to “preserve and protect” Social Security and Medicare, which are the biggest contributors to the government’s bloated budget tab, while Obama countered that his new health-care law won’t hurt seniors who currently depend on Medicare. Both comments suggest that significant cuts would not occur for at least a decade.
That leaves discretionary spending. But after the roughly $700 billion share for defense -- spending that is traditionally hard to cut by any significant amount -- the amount left for programs such as education, veterans benefits and transportation is about $610 billion. To reach $4 trillion in cuts over 10 years would require essentially dismantling basic government services such as border security and food and drug inspection. As the bipartisan Simpson-Bowles fiscal commission said in its 2010 report, that’s not going to happen.
Then there is the 2012 Budget Control Act, which is equally fantastical. The law requires about $1 trillion in across-the-board cuts over the next 10 years and puts $1.2 trillion more on the chopping block as part an automatic “sequester” that takes effect if lawmakers can’t agree by January on budget cuts. The Republican-led House has already moved to protect some defense spending. So much for reducing spending.
What about increasing revenue? First, let’s put to rest the canard that the U.S. can eliminate the deficit through tax cuts that stimulate economic growth. Lower tax rates do provide incentives for employment and investment, but the debt hole is so deep that it would take improbably robust growth for the U.S. to climb out of it.
What’s more, the bipartisan Tax Policy Center noted recently that Romney’s plan for “revenue neutral” tax cuts would undercut the potential for economic growth because it would “increase the portion of Americans’ income that is subject to tax, and this would create incentives that would work in the other direction.” In other words: Romney’s plan will require a tax increase because it would open up a $360 billion hole beginning in 2015. The Tax Policy Center suggests he would have to make up the difference by reducing tax expenditures and increasing the tax burden on middle- and lower-income households by at least $41 billion.
Romney is correct to tackle tax expenditures, which cost the U.S. $1 trillion each year. But that should be part of a bigger conversation about whose taxes should go up and when. Some tax changes hurt less than others. For example, the U.S. should tax income from capital gains and dividends, which disproportionately benefit wealthy earners, at the same rate as earned income. That could raise about $1 trillion over 10 years. More creative and efficient taxes should also be on the table. A carbon tax, for example, could bring in $310 billion by 2050.
The deficit is not irreducible. The Simpson-Bowles report, for example, lays out a mix of tough spending cuts and significant tax changes that increase revenue while keeping progressivity in the U.S. tax code. Every serious deficit reduction plan calls for increased revenue along with spending cuts.
If they were being honest, both presidential candidates would likewise acknowledge that taxes must be raised. And there’s no way to make the arithmetic work without some revenue from the middle class. So vote for whomever you like this November. Either way, your taxes are going up.
Today’s highlights: the editors on Putin’s failed show trial; William D. Cohan on the SEC’s treatment of whistle-blowers; Albert R. Hunt on why voter turnout will be critical in November; Simon Johnson on the real opportunity for conservatives this fall; Elena Marks on why even governors in opposition should set up state insurance exchanges.
To contact the Bloomberg View editorial board: email@example.com.