Can the U.S. Afford $70 Billion in Tax Relief in 2011?

What's popularly known as the "Bush tax cuts" expire at the end of this year. President Barack Obama wants to keep rates the same (or lower them even) for individuals making less than $200,000 and households pulling down $250,000. And he wants to end the reductions for the group that, using 2005 figures, accounts for the top 2.67 percent of American taxpayers. (Fun fact: the top 1 percent of households pay about 40 percent of income tax receipts.)

The big taxes that would go up include the death/estate tax (currently at 0 percent but slated to jump to 55 percent on inheritances beyond $1 million!) and the top two marginal tax rates, which would go up from 33 percent and 35 percent to 36 percent and 39.6 percent (which is what they were under Clinton).

The Congressional Budget Office says that extending the cuts for the tippy-top income earners will cost $700 billion in foregone revenue over the next decade. Let's call it $70 billion per year then. According to CBS News (I know, I know, not the greatest source), a majority of economists think that extending the cuts are a good idea because wealthy people, who have the most money to spend and invest, are particularly sensitve to tax increases. They are particularly good at finding shelters and new places to stash money in tax-advantaged ways. Incidentally, killing all the Bush tax cuts would, says the CBO, bring in $3.9 trillion over the next decade.

But even ignoring the idea that increases might stymie the crappy economy even more, can the feds afford to leave $70 billion on the table? For god's sake, the total 2010 budget is $3.6 trillion (and that's an estimate; if the past is prologue it will be higher than that.) As it stands, there's $164 billion of stimulus funds tagged for transportation projects that haven't been spent yet, so you could pay for two years plus of a tax-cut extension right there.

Which might explain why the Wash Post is reporting that

a growing cadre of Democrats - alarmed by evidence that the recovery is losing steam and fearful of wounding conservative Democrats in a tough election year - are advocating a plan that would permanently extend tax cuts benefiting the middle class while renewing breaks for the wealthy through 2011, senior Democratic aides said.

Indeed.

All the talk of tax cuts is nice, but it does tend to take people's attention off what really matters, which is spending. Lest we forget, federal revenue has been highly stable since World War II, coming in around 18 percent of GDP despite heroic attempts to increase or decrease that share.

Here's the bad news: Official estimates of spending relative to GDP for the years 2010-2015 average 23.7 percent.

The highest percentage of revenue as a percentage of GDP recorded since 1930? A mere (irony!) 20.9 percent, in 1944. And the same estimates of total federal revenue as a percentage of GDP during 2010-2015? A whopping 17.7 percent.

By all means, let's have a debate over whether the government can afford to let taxpayers keep either $700 billion or $3.9 trillion of their own money over the next decade. But let's NOT pretend that the economy can withstand the government spending 28 percent more than it's taking in over the next six years. Or that looking for change in the back seats of the car is what's going to bring to us fiscal salvation or ruin.