Does Preserving the Bush Tax Rates Doom Us to Massive Deficits? Nope!

As Radley Balko notes below, President Obama and Congress have reached an agreement to preserve the Bush-era tax rates that were set to expire on December 31 of this year. The deal extends the Bush rates for two years, lessens what would have been a gigantic increase in estate taxes, and puts more money into long-term unemployment benefits.

One of the main reasons that advocates for a return to Bill Clinton's tax rates put forward was that we needed the extra money higher rates would bring in to pay down the deficit, etc. For individuals making more than $200,000 and households making more than $250,000, the standard figure was that a return to Clinton's rates would bring in $700 billion over the next decade. If all the Bush rates expired, another $3.2 trillion would have come into the government's hands over the next decade. One reason why the argument against just hitting top income earners fell flat, I think, was that it ignored that huge pile of cash the rest of us pay. And one reason why hiking rates on everyone was unpopular was, well, because people don't want to see huge tax increases, especially in a crap economy.

So, does keeping the Bush tax rates mean that the government, which has hiked federal outlays 60 percent in constant 2010 dollars since Bill Clinton left office, will be starved for money? Not hardly.

In fact, as Veronique de Rugy and I laid out yesterday, it would be quite easy to balance the budget in 2020 if the government would start early with small, systematic cuts designed to get government outlays about equal to the historic average of government revenue. Since 1950, the feds have brought in average revenue equal to about 18 percent of GDP. In its more-realistic "alternative scenario" budget projections, the Congressional Budget Office estimates that by 2020, revenues will equal about 19 percent of GDP, near the historic average. The CBO's alternative scenario is based on keeping the Bush tax rates through 2020 and doing various types of AMT patches that reduce the number of people paying the AMT. In other words, CBO's revenue scenario keeps things the way they've been for the past decade or so.

In order to balance the budget by 2020, all the feds need to do is cut 3.6 percent of projected budgets in each of the next 10 years. The table below lays out what this means. The short version is trimming about $129 billion from budgets that average $4.1 trillion. Here, we've broken it down by major expenditure categories. CBO estimates the budget in 2016 will be $4.3 trillion; to put us on a path toward balance in 2020, that would call for $128.7 trillion billion in cuts. Spreading those evenly would mean $20.7 billion in defense, $12.9 billion in Medicaid, etc.

Click on the chart or go here for the full argument.

Note that this exercise isn't utopian from a small-government POV. That is, it gives oodles of money to the government to maintain a status quo that doesn't work particularly well. But what it does do is show the relative ease of balancing the budget over time without raising government revenue. When you hear folks talking about how the "Bush tax cuts" are starving government coffers, remind them of that 60 percent increase in real spending over the past decade and point them to this chart.