Tackling the budget deficit: What's it really going to take?

Washington Post columnist E.J. Dionne, looking down the field a tad, tackles an issue that no one wants to discuss now or perhaps ever, but hey, it's a dirty job and somebody has to do it.

The issue: raising taxes. Taxes won't be raised during the nation's pronounced recession, but after the recovery starts, the nation will have to turn its discussion to income taxes and the budget deficit.

Can a tax increase be avoided?

No matter what economic conservatives, including most Republicans say, no amount of spending cuts will balance the federal budget. Even after subtracting a one-time spending increase for fiscal stimulus in 2009, the cost of increased defense spending for the wars in Iraq and Afghanistan alone will require at least a modest tax increase.

And that doesn't count entitlement spending, for which President Obama and congressional Republicans have formed a bipartisan commission to address. Without a tax increase, the entitlement-driven budget creates deficits for as far as the eye can see. Expect some negotiated, downward revision of entitlement spending, but that reality, too, will not eliminate the budget deficit. Taxes have to be raised, Dionne said.

Clinton era: Balanced budgets

The last time a serious discussion of a tax increase occurred was in 1993, when, after a bitter debate, President Clinton and Congress narrowly passed a tax increase on upper income individuals, which increased the top tax rate to 39.6 percent from 35 percent, among other changes. In the view of Keynesians, it was a modest tax increase, essential for balancing the federal budget.

Economic conservatives, of course, viewed it has a calamity, and claimed nothing but economic ruin would follow.

For example, after the tax increase, conservative commentator Rush Limbaugh predicted President Bill Clinton's economic policies would fail, just before the nation started its longest, peacetime economic expansion since World War II -- the Roaring '90s.

And the federal budget deficit? It disappeared by the end of President Clinton's second term. Yup, that's correct, and it's hard to believe today, but the U.S. government was actually running a budget surplus at the end of the Clinton presidency in December 2000. So much for theories about taxes on upper income groups hurting the economy and failing to close deficits.

Bush era: Large deficits

Now, one would have thought that the nation would have learned from this and not lowered the top tax rate below 39.6 percent, but shortly after taking office in 2001, President George W. Bush and his Republican supporters passed a $1.35 trillion tax cut to undue the 1993 tax increase on upper income groups. Bush did this at same time that defense spending had to increase for the wars in Iraq and Afghanistan and for the war on terror. The result? Massive deficits, first to $200 billion, then $400 billion per year before the current recession hit in December 2007. The deficit would quickly balloon to about $1 trillion per year, due to bank bailout spending by the time President Bush left office in January 2001. At the end of Bush's presidency, the deficit had reach such levels that no amount of reasonable cuts in entitlement and discretionary spending, in addition to defense spending cuts, could eliminate the deficit.

Columnist Dionne knows this and he wants Americans to stop the nonsense and pass a tax increase on upper income citizens, as President Obama has outlined (with certain small business exemptions) -- these are the Americans who have enjoyed the biggest income gains over the past decade.

A 2007 compensation study has confirmed that the average S&P 500 CEO earns 344 times the average worker's wage. Not a bad decade. Other studies reveal that upper income groups have benefited far more, from an income standpoint, than typical Americans during the past decade.

But the question remains: Can upper income citizens afford to pay the extra 10 percent or 20 percent needed to balance the budget?

Presidential scholar (and my presidential studies mentor), W. Wayne Shannon, Professor Emeritus at the University of Connecticut at Storrs, had this argument which, basically yours truly has also observed throughout his life among family members. "You can tax upper-income citizens and the rich. The extra 3 or 5 percentage points they pay -- they won't miss it or need it, and it will do so much economic and social good," Shannon said.

Shannon was correct then and he's correct now. Oh, sure, you can hear the volume of protests from those earning $500,000 a year who'll say, "I'll sure as heck miss it." Maybe. But the stronger argument reasons that, "If you're throwing down five hundred or four hundred thou a year, be grateful that you are in that august club. You're quite fortunate." And if the higher tax means you get a new BMW every four years instead of every three, isn't that a modest sacrifice when compared to the good that tax money will do by balancing the federal budget? Isn't it better for the nation to live within its means, instead of having to borrow hundreds of billions of dollars from China and pay hundreds of billions of dollars in interest each year to foreign investors?

E.J. Dionne, Shannon, and many others think so, and that view is favored here, as well.


Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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