The Budget Deficit isn't a Math Problem

I'm as encouraged as the next Serious Person to talk about the intricacies of budgetary math.  What do you non-economists think we do on Friday nights, anyway.  So the report of President Obama's budget commission is the perfect Thanksgiving feast.  For an abbreviated summary, I recommend Kevin Hassett, Felix Salmon, and the pointers provided by the ever reliable Mark Thoma.  For fun, I'll provide snippets from each of the three, and challenge you to guess whose is whose:

A ... On the other hand, bold ideas in terms of new taxes — carbon taxes, wealth taxes, Tobin taxes, consumption taxes, you name it — are nowhere to be seen: as Jonathan Chait says, this is “a plan that’s tilted, overwhelmingly, toward Republican priorities”. Which means a large dash of wishful thinking, a bunch of tax cuts (!), and even a cap on the amount of tax revenues that the government can bring in. How that’s meant to help reduce the deficit I have no idea.

B ... Beginning a tax overhaul by closing loopholes is a strategy that should appeal to those on the political left, the ones that so far are voicing the loudest criticism of the Bowles-Simpson plan. A chart released with the plan shows that eliminating all tax breaks, other than the refundable credits targeted toward the poor, would reduce the after-tax income of those in the top 1 percent of the income distribution by almost 14 percent, those in the middle quintile by about 4 percent, and those at the bottom by only about 1 percent.

C ... One third of of the deficit reduction under Bowles-Simpson is from revenue increases, and two thirds is from spending cuts. The above is about tax cuts, but the spending cuts will, in the end, likely hit lower income households harder and end up being regressive as well.

My take is that the deficit commission is fine economics. I do think capping the amount of federal tax revenue is key, so I like that aspect greatly.  Such a guarantee is a minimum to get a serious political conversation.  Capping federal spending, which the report also endorses, is also essential.  But I think the whole of the entrepreneurial community won't like treating capital gains as income.  The public might understand this better if we just described cap gains as startup gains.  Or maybe growth gains.  As Uncle Miltie says, you tax more of something, you get less of it.  Do we really want fewer startups?

That said, I tend to view the process skeptically.  A good friend on Capitol Hill laughs every time a commission is announced.  There's simply no better way to play political dodgeball than to assemble a blue ribbon commission, which kicks the issue down the road a year or more.  My own skepticism is rooted in one of the Kane mantras:

The Budge Deficit isn't a Math Problem.

I once had a dream that I would come to Washington, DC and share my great ideas with the wise men and women in Congress.  "Eureka!" they would reply.  "Here is a Good Idea!"  Time has solved that idealistic illusion.  Congress knows the math.  They can appreciate the many ways that 1 + 1 =/= 14,750,200,000,000 (the current U.S. GDP).  If it were just a math problem, legislators would have solved it years ago.  No, the addiction to a budget deficits is a Rules Problem.  To solve it, the nation has to change the rules.

Loyal readers know that I believe the optimal rule change will be the national adoption of Constitutional amendments. Balanced budget. Max Tax. Spending Limits.  Any one will do, but all three would be even better. But maybe other rule changes would work better, even faster. Some believe that statutory rules like Pay-Go (I recall Nancy Pelosi committing the House to that one) or Gramm-Rudman or shaking up the Committee assignments (HT Chris Edwards). Edwards also argues that a spending cap could be instituted legislatively. Maybe.  But I don't trust the long-term viability of anything not carved in Constitutional stone, not with stakes this high.

Remember, the Constitution is not a living document.  The Constituion is a written document, and those words have eternal meaning.  I haven't lost that idealistic faith just yet.

Comments

[Bob]

To claim that the Constitution isn’t a living document simply ignores the 27 Amendments, the first 10 being the Bill of Rights, and the various Court decisions over the years. The immutable claim may “sound right” to folks who like their world simple, but it just isn’t true.

[Devin]

"The public might understand this better if we just described cap gains as startup gains. Or maybe growth gains. As Uncle Miltie says, you tax more of something, you get less of it."

No, startup gains are a special type of capital gain covered by, for example, sections 1202 and 1244 of the IRC. They get extraordinarily friendly tax treatment already. Long term cap gains are, overwhelmingly, people who buy stock, real estate, etc., and then just sit on it for years and wait for the value to appreciate. This behavior...buying an existing asset and sitting on it...doesn't do anything wonderful for the economy as a whole--in contrast to investments in startups which are the true engine of economic growth.

Regarding Miltie's sage advice, that is the reason I believe in a 100% death tax. Such a tax would allow us to tax labor less, so we would wind up with more labor and less death. Who knows, maybe our life expectancies might finally stop lagging the developed world?

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[Tim]

Thanks Devin for the distinction between gains types.

Let me push back a bit on your two arguments. First, when you suggest that "sitting on an asset" doesn't do anything for the economy, are you only considering the asset's owner? Granted, if Grandma Helen owns $1m in stock, she is personally adding no value. But isn't her money being put to use by the firm?

Second, if there were a 100% death tax, why would anyone save money when they were old? It seems to me this approach would nuke savings rates. Still, I like the "more labor, less death" angle. Thanks.

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