Sunday, February 24, 2013

The Impact of "A Balanced Approach"

All the discussion from the President has been about the need for "a balanced approach" to the sequester which, roughly stated, means replacing half of the spending cuts with tax increases.  Let's leave aside, for the moment, that the other aspect of "a balanced approach" seems to be kicking the can to the future and focus for a moment on the impact on spending growth and tax rates of this approach assuming it were to happen.

For the purposes of this argument, I'm going to assume that this notion of balance applies to both the sequester and the BCA caps.  The reason I'm making this assumption is that, were one to believe the President's argument, it probably should.  After all, why allow caps to be all spending when you can achieve the same deficit reduction through a mix of spending and taxes.

To make the analysis simple, I'm going to focus on the last year of the caps, fiscal 2021.  In the CBO baseline, total government spending is forecast to grow by 5.25% on average per year.  Now what happens if we let the caps go.  Well, in 2021, the caps and the sequester restrain spending by $178 billion (Table 1-5).  But we are going to go halfsies so we'll raise spending by only $89 billion that year.  This then would take the growth rate of spending up to 5.46% and spending as a percentage of GDP up to 22.8% from the current forecast of 22.4%

Now on the tax side, let's make the assumption that all of the tax increases come from "the rich" and that this plan continues through the period.  In total, on a 10 year basis, this would equate to a tax increase at least as large at the increase that just went through on the top rate over 10 years.  That increase raised the effective tax rate of the top 1% of taxpayers by 3 percentage points.  We might rightly assume that this would do similar taking the effective tax rate of that group to 39.4 percent, the highest rate ever by a fair margin.

Such is the effect of "a balanced approach."  Spending back up over 23 percent of GDP by the end of the forecast, the highest effective rates in measured history (which I remind you only goes back to 1979 where there was a 70 percent marginal tax rate), and an accelerating deficit and debt to GDP ratio.

No comments:

Post a Comment