Note: This article originally appeared at Bloomberg View on December 18, 2012. Read it there by clicking here.
Such a large difference obscures a more fundamental agreement: Neither side is interested in addressing the central role federal spending plays in creating persistent deficits and, more important, damping economic growth.
The deficit for fiscal 2012, which ended on Sept. 30, came in at about $1.1 trillion, marking the fourth consecutive year that the nation has posted a trillion-dollar-plus spending gap. Contrary to what Dick Cheney said when he was vice president, deficits do matter.
Under the most recent budget plans of House Republicans and Obama, the federal government will spend from $40 trillion to $47 trillion over the next decade. Yet in the current negotiations, Boehner has called for only $800 billion in spending cuts and Obama $400 billion, most of which would be pushed off until 2022 or later - tantamount to saying they won’t happen at all. Neither side’s long-term spending plans envision a balanced budget in the next 10 years.
In a paper released this year, economists Carmen M. Reinhart, Vincent R. Reinhart, and Kenneth Rogoff said that periods of "debt overhang" - when accumulated gross debt exceeds 90 percent of a country’s total economic activity for five or more consecutive years - reduce annual economic growth by more than one percentage point for decades.
Over 20 years, the authors write, there can be a “massive cumulative output loss” that reduces gains by 25 percent or more. The U.S. went over the 90 percent threshold after the 2008 financial crisis. At $16.3 trillion, our current gross federal debt represents more than 100 percent of 2012’s total economic activity or gross domestic product.
Obama hasn’t explained precisely how higher tax rates on a small fraction of the population will do much to improve the country’s balance sheet. According to the Congressional Budget Office, increasing taxes on the wealthiest Americans to Clinton-era levels will raise $220 billion over four years - $55 billion a year on average through 2016, the last year of Obama’s presidency.
Over that same period, the White House Office of Management and Budget estimates federal spending at $15.8 trillion, or almost $4 trillion a year on average, and annual deficits of $700 billion.
A little history: 2000 was about the best year ever for federal revenue since 1950. The government raked in slightly more than $2 trillion in nominal dollars and $2.3 trillion in inflation-adjusted (fiscal year 2005) dollars. When measured as a percentage of GDP, revenue reached 20.6 percent, the highest fraction ever recorded in peacetime. Although it’s true that receipts in 2006 and 2007 topped the $2.3 trillion mark in constant 2005 dollars, those totals represent smaller fractions of GDP, 18.2 percent and 18.5 percent, respectively. So it’s fair to call the $2.3 trillion in constant dollars a high-water mark. (All these figures are drawn from the 2013 Historical Tables generated by the OMB; see table 1.3.)
The high level of revenue - both in constant dollars and as a percentage of GDP - was reached in a roaring economy. And all Americans were taxed at significantly higher levels than they are now.
Whatever you think about the decline of rates under President George W. Bush, it made the U.S. tax system more progressive by reducing the burden on middle- and lower-income people. That’s one reason that singling out high-income earners for increases this time will yield such little revenue: All of us paid higher taxes then. It wasn’t just the swells at the top of the income pyramid.