How to fix the deficit: Tax and cut

Americans aren't paying nearly enough federal taxes to afford the government they have. To bring the budget closer to balance, Congress will have to raise taxes, cut spending, or both.

In recent decades, federal tax revenues usually have totaled about 18 percent of gross domestic product, the nation's total output of goods and services. They got up to 21 percent when President Clinton balanced the budget. This year, after the Bush tax cuts and a deep recession, they are only about 14 percent of GDP.

"No wonder we are broke," says Robert McIntyre, director of the liberal think tank Citizens for Tax Justice. "We need a tax increase. Revenues are ridiculously low."

That kind of talk probably wouldn't get Mr. McIntyre elected to Congress. Cutting programs can also be politically risky, especially with an economy that's fragile and vulnerable to a pullback in government spending. But something clearly must be done.

The White House has just projected a deficit for fiscal 2010 of $1.47 trillion, 10 percent of GDP. That's a bit more than the fiscal 2009 deficit, which already was the largest relative to the size of the economy since the end of World War II.

Before the November midterm elections, Democrats and Republicans will be too focused on politics to do anything. What happens after November is anybody's guess.

The Republicans' stated remedy would be budget cuts.

That's a bit ironic, because under President Bush, total federal outlays rose more than 6 percent a year in fiscal years 2002 through 2004, making him one of the biggest spending presidents ever. That compares with an annual average increase of 1.7 percent over the past 40 years, notes Veronique de Rugy of the Mercatus Center at George Mason University in testimony for President Obama's National Commission on Fiscal Responsibility and Reform. Trying to raise taxes sufficiently "to even begin to address" the future budget gaps "would hinder economic growth and thereby make the crisis even worse," she holds. "Our fiscal problem is a spending problem, not a revenue one."

McIntyre agrees that most taxes shouldn't be raised until the economy has recovered.

Where to cut? One place to look is defense.

Mr. Obama proposes spending $708 billion on the military (including the wars) in fiscal 2011, making it the biggest military budget since World War II. That sum, notes Ms. de Rugy, is 33 percent higher than the budget at the peak of the Vietnam War and 23 percent higher than that at the peak of the cold war under President Reagan, even after adjusting for inflation.

Another potential source for slashing the budget is what Washington calls "tax expenditures." These are special tax breaks that cost the United States Treasury an estimated $1 trillion a year. Some of the biggest breaks are also the most popular, such as income tax deductions for property taxes and for interest on home mortgages.

Finding politically vulnerable tax breaks could be hard. That's why, eventually, Congress will have to raise taxes, McIntyre figures.

Obama wants to let the Bush tax cuts expire for those making more than $250,000 a year, thereby protecting 80 percent of the cuts. McIntyre suggests setting the expiry level at $150,000, raising an extra $3.5 trillion over 10 years.

If Congress doesn't act, and soon, the deficit promises to be more than $1 trillion a year for the next decade.