It Takes Two

Yes, it will take two sides of the aisle to reform our tax and benefits systems:

8:44PM EST November 14. 2012 - Whenever talk turns to the federal deficit, activists on the political left have a common refrain: Don’t touch our benefits! Since Nov. 6, they’ve been trying out a variant that goes something like this: Because our side won the election, definitely don’t touch our benefits!

This argument, being made by labor and seniors groups in an advertising and grass-roots campaign, is as nonsensical as it is mistaken. It rivals Republican intransigence on taxes as an obstacle to taming the deficit and averting the year-end “fiscal cliff” of spending cuts and tax hikes.

Yes, taxes need to go up, and not just for the wealthiest Americans. And yes, there’s room for cuts in the Pentagon and other federal departments. But changes in these areas, as needed as they may be, would still be overwhelmed by the burst in spending on Social Security and Medicare as the Baby Boom generation retires and lifespans increase….

he more urgent and difficult issue is the surge in spending on Medicare, Medicaid and related programs. The numbers tell the story. In 1990, Washington spent $180 billion on health care, accounting for 14% of federal spending. In 2017, the expected tab is $1.4 trillion, or 30% of federal spending. As President Obama said at his news conference Wednesday, “Health care costs continue to be the biggest driver of our deficits.”

About Scot McKnight

Scot McKnight is a recognized authority on the New Testament, early Christianity, and the historical Jesus. McKnight, author of more than forty books, is the Professor of New Testament at Northern Seminary in Lombard, IL.

  • Tom

    What about defense cuts? It seems that we should be able to get some of the funds needed from the military before we cut benefits to seniors.

    I would also think that we could liquidate assets including excess federal lands to help cut some of the deficit. I dislike hearing that the only thing we can cut is programs that help the poor and seniors.

  • http://www.theupsidedownworld.com Rebecca Trotter

    I thought this way until I stopped think about a specific issue with Social Security. There are two options for dealing with the deficit Social Security is facing. One would be to remove the cap on Social Security withholdings and using means testing for benefits. This would have a minimal practical effect on the fortunes of those who have benefited most from living and working in America – no one will suffer poverty or a serious dent in their material well being as the result of such a change. Or we can reduce COLA increases and raise the retirement age further. This will have serious impacts on the people who struggle the most and those whose work is physically taxing or whose mental facilities don’t hold up so well. i just don’t see how we can seriously consider the latter option until we’ve tapped into the former.

    I really think that we need to re-examine our commitment to principles over effects. I think there’s this assumption that if we follow the right principles eventually everything will right itself. However, there’s little evidence that this produces a good real world outcome and even less that we can get to a point of agreeing on those principles anyways. Not that we throw principles out the window entirely, just that we become more demanding of the results. If something only works in principle, it doesn’t work in actuality.

  • Gene

    @Tom #1 — The seniors aren’t a big threat to our national security. Lowering defense is. Which is not to say we should cut seniors and not the military. It is simply to say that this is not simplistic.

    The reality is that the desired tax cuts raise somewhere in the neighborhood of 2% of the deficit for one year. That means we still have to come up with the other 98% for one year, plus the $16 trillion of debt already on the books.

    In fact, skip taxes and just do a total confiscation of all the wealth of all “the rich” and we still can’t balance the budget.

    There have to be severe cuts in spending. In addition, a cut in the tax rate has historically raised revenue because it frees up capital that enters the marketplace. It’s not a politically popular argument, but it’s the right one.

  • Kyle J

    @Gene

    That’s the very definition of a popular political argument: it’s a completely free lunch. And if it worked, the Bush tax cuts would have us flush with tax revenue, not at historically low collection levels.

    All parts of the budget equation will absolutely have to be addressed to get to a real deal. But the GOP intransigence on taxes is a much bigger problem than the Dems on entitlement spending. We just finished a campaign, after all, in which a major GOP talking point was that they’d restore Medicare cuts Democrats had made.

  • kevinchez

    its all very frustrating. my property taxes on a 1700 sq ft townhouse built in 1985 (so we aren’t talking about luxury) are 11k/year in Long Island NY. so it pains me to read i need to pay more.

    i fume when i hear public employees tell me how they have 150 sick days that they have accumulated and can cash in at the end of their career.

    why are people so sick? so heavily medicated? (one of my favorite lines from seinfeld is when kramer says, “why take a walk in the park when you can just pop a pill”)

    i’m 35…i don’t expect to see 1 cent of the social security that i paid in. i don’t want to forfeit it to the politicians who made this mess. politicians can privatize their social security right? clergy can exempt themselves.

    do we expect the current people in congress to change the way they have been acting? they won’t fix this…they can’t fix this. something radical needs to happen. this is atlas shrugged berfore our very eyes.

  • Joshua Wooden

    http://www.nytimes.com/2012/02/12/us/even-critics-of-safety-net-increasingly-depend-on-it.html?pagewanted=1&_r=5&

    Fact: cuts to entitlements is something rejected across BOTH parties. Not just the left. This isn’t a liberal problem – it’s an American problem.

  • Gene

    @Kyle, #4,

    Actually, in 2003-2007, federal revenues were at all time highs. The economy collapse in 2008 hurt revenues, and federal spending was not adjusted for it. We kept spending money we don’t have.

    High taxes, particularly on investment income, hurts the economy because money goes overseas, or to tax sheltered munis, or remains invested rather than becoming a capital gain and going to work in the economy. Read this article by Thomas Sowell: http://www.tsowell.com/images/Hoover%20Proof.pdf

    And remember, even if we raise taxes, it doesn’t help. As I mentioned above, if the president’s tax policies take effect, you raise 2% of the deficit for one year. You still have to get 98% of the deficit for that year from somewhere, plus you have to also get the $16 trillion of debt already on the books.

    Frankly, I am not sure there is any solution. But we can at least be straight about the problem, and the Bush tax cuts aren’t the problem. The Bush spending, followed by the Obama spending is the problem.

  • Kyle J

    @Gene

    In nominal terms, federal revenues peaked in 2007. Compared to the size of the economy, they were at average levels and have plummeted since then. You have to compare to the size of the economy to measure the level of services the revenues can fund and what the effective tax burden is.

    http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200

    If the Bush tax cuts had not been enacted, tax revenues would, in fact, be substantially higher than they are now.

    Your supply-side theory is based on the “Laffer Curve,” which basically says that you collect no taxes at a 0% tax rate and at a 100% tax rate (if all income is really covered by the tax). There’s a peak somewhere in the middle. No one thinks were on the side of that peak where tax cuts lead to more revenue.

    http://voices.washingtonpost.com/ezra-klein/2010/08/where_does_the_laffer_curve_be.html

    Again, until the conservative dogma on taxes if finally beaten back, there will be no “grand compromise.” You don’t hear liberals claiming that increasing Social Security benefits is costless.

  • Chuck

    I am in complete agreement. Both sides seem to be engaging in petty rhetoric to sound as if they are really doing something about the deficit. The Republicans are intransigent as they try to find the magic elixir that will get them back on the positive side with the electorate. The President continually harps about the wealthiest Americans needing to pay more of their “fair share.” This may be true but it does almost nothing to address the real problem. Neither side has the political will to attack the main culprits (entitlement programs) as outlined in the article. A sad lack of leadership indeed.

  • Kyle J

    @kevinchez

    Your concerns are certainly valid, but it’s easy to exaggerate the size of the problem. Even with no policy changes, Social Security will be able to pay out over 80% of benefits based on current law down the road.

    No one thing is going to fix the entire a problem, but with a reasonable mix of solutions, it’s not impossible to overcome. In fact, just letting the Bush tax cuts expire and the sequestration cuts kick in would put us on a sustainable path. The problems are (1) no one thinks those are the right mix of solutions and (2) there’s a significant short-term economic cost.

  • T

    I’m with Kyle J and Rebecca Trotter. Kyle J is right in that one can’t cut taxes again and again again and always get revenue increases. At best (and that’s being generous) the Bush tax cuts were revenue neutral. There was certainly no boost to total revenues caused by the cuts.

    As for the spending side of the equation, I think Rebecca is right in that we need to take take the caps off of Social Security withholdings, and also add a need requirement for benefits, both for social security and for Medicare, but it doesn’t have to be as severe as Medicaid’s asset and income tests. (The ICP program in Medicaid, for example, requires that applicants have, as a general matter, less than $2,000 in non-exempt assets and less than $2,000 per month in income.) If we restrict Medicare and SS benefits to the low and middle class, that may be enough to make up the expected shortfall.

  • Gene

    Couple of quick points:

    1. To say that the Bush tax cuts hurt revenue is something that cannot be proven. If the economy is exactly the same yes. But we don’t know that the economy would have been the same. It is entirely possible that there would have been less economic activity.

    2. Kyle said the issue is taxes/revenue compared to the size of the economy. That is false. The issue is taxes/revenue compared to spending. No matter what the size of the economy is, when you spend more than you take in, you end up in deficit. When you do that for repeated years in a row, you attract a significant debt. The reason the size of the economy matters is because better economic growth creates more taxable revenue. You are right about the Laffer curve to some degree, but it is not exactly clear where that line is. The fact is that when taxes are high, more people put them in tax-free or tax-deferred instruments.

    3. Entitlements are a huge problem, and social security is not sustainable for the long term. The failure to privatize at least part of social security has been a gross dereliction of duty. The 2008 was what everyone feared in privatization, and it has someone been passed over the the market has almost completely recovered. The ACA did not do anything to make health more affordable, and there is no scenario I am aware of in which it does not explode the deficit.

    4. Whether tax rates were set right or not is a matter of debate and experimentation. What we cannot do is simply assume that higher rates bring more taxes. As in any business, higher rates may result in few sales. So raising your price by a dollar may cause more people to stop buying your product.

    5. The best tax structure is probably a VAT with no income tax, and secondarily a flat tax.

    6. What the final outcome is of the tax debate, there is still not enough money in taxes to solve the problem. Spending has to be cut.

  • Kyle J

    @Gene

    So we have to fix the deficit, but one side of the ledger is completely unknowable, so we should ignore it.

    “The ACA did not do anything to make health more affordable, and there is no scenario I am aware of in which it does not explode the deficit.”

    That’s a false statement. The act takes a number of steps toward cost reduction: electronic health records, effectiveness research, taxing high-cost plans, bundled Medicare payments.

    Reducing health care costs absolutely will have to be a major piece of the equation, but that means you actually have to talk about the complex issues surrounding health care, not just demonize your opponents’ positions. Time to move past the dogma.

  • Gene

    Kyle,

    It’s not completely unknowable, but there is no way to completely know it, and that’s the point. We can say all day long that the Bush tax cuts “cost” us “X dollars,” but we simply don’t know because tax revenues depend on a lot of factors that vary greatly depending on the economy which is also dependent on tax rates. Furthermore, the whole language of “cost” implies that it belonged to the government originally. It didn’t. When I don’t give you money, that is not costing you anything. It’s money that wasn’t yours to begin with.

    The reality remains that there is not enough money in this country to pay for this current spending. Spending is the problem and has been for years. Bush exploded it, and Obama hasn’t done anything to change that.

    On healthcare, no, there is no reputable source (actually any source, reputable or not) that I know of that believes that this cut costs in any significant way. Every doctor I have talked to, from being in their office, to playing golf, to being personal friends, says this is a bad deal. Every study that I have seen, even those in favor of it, say it will cost more, not less. It will not improve health care. The government is notorious for underestimating costs, and when they say it will cost more, you know it’s going to cost a lot more.

    It is ironic that those who want the government out of the doctor’s office when it comes to abortion, want it in the office when it comes to insurance. There are many things that could have been done to lower health care costs without this monstrosity of a plan. There were many people willing to talk to the complexities of the issue, but the president shut them out. He demonized them over and over again.

    The bottom line is that I am one who would benefit from universal health plan because I pay my own health insurance out of pocket, to the tune of about 30% of take home pay every month. And that is after tax income.

    So yes, let’s get past the dogma. Let’s talk reality. We can raise taxes, though I think it will hurt the economy ultimately. It certainly won’t help it. But raising taxes is not enough. Spending must drastically be cut.

  • Ruth Anne shorter

    Gene is right. It is spending–and raising taxes will hurt the economy. Spending is the problem and especially some of the present administrations’ policies. Weird how many college students receive checks in the mail……for what? They do not know either.

  • metanoia

    The 500 pound gorilla in the room is, government waste and corruption. The duplication of agencies to cover the same issues and the resultant bureaucracy is mismanagement on an epic level. Any tax rate hike so far proposed does little address the existing deficit. It only “cuts” the rate that we are taking in water as we continue with trillion dollar yearly deficits.
    Even if SS can deliver 80% of benefits promised past 2035, can anyone say they can actually live on SS? Medicaid spending is over a trillion dollars a year when federal and state government contributions are added together.
    Revenue is not the problem, spending is, coupled with the 500 lb gorilla of waste and corruption.


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