We Only Need $1.4 Trillion in Deficit Reduction Before 2022


CBPP says just $1.4 trillion more in tax increases or spending cuts will stabilize the debt. There is no need to do more:

With the “fiscal cliff” deal in place, President Obama and Congress are now expected to seek more deficit reduction to replace the automatic spending cuts (“sequestration”) that are scheduled to take effect on March 1. Policymakers can stabilize the public debt over the coming decade, ensuring that it doesn’t grow faster than the economy and risk eventual economic problems, with $1.4 trillion in additional deficit savings over the next decade (see Box 2). Policymakers can achieve the $1.4 trillion with $1.2 trillion in policy savings — tax increases and spending cuts — because that would generate almost $200 billion in savings in interest payments. That $1.4 trillion in deficit savings would stabilize the debt at about 73 percent of Gross Domestic Product (GDP) over the latter part of the decade (see Figure 1).[1]

That $1.4 trillion — and not a larger amount — would stabilize the debt is due primarily to the deficit-reduction policies that the President and Congress have enacted over the last two years. First came $1.5 trillion in appropriations cuts (and another $200 billion in associated interest savings), primarily through the annual caps in the 2011 Budget Control Act (BCA).[2] Second came the tax increases in the fiscal cliff deal, officially called the American Taxpayer Relief Act (ATRA).

Comments

  1. John says:

    Thought we had already agreed that 10yr projections were worthless?

    • Jon Geeting says:

      Sure. But that’s a reason not to try for a grand bargain on the deficit, and just muddle through instead.

  2. Jack Contado says:

    that, and the Affordable Care act will eliminate the deficit, won’t it?

  3. GDub says:

    The assumptions seem logical, though this one might be a tough one to pull off: Congress “will offset the costs of any extension of the so-called “tax extenders” (a total cost of $416 billion, including interest, if the full package of extenders is continued throughout the decade.” It would seem that, since the wealthiest families have already had their taxes increased with minimal fiscal effect, a tax increase in the future would have to be broad based to get the kind of “effect” the plan needs.

    That said, at the same time as this is being said many are arguing that major cuts and broad tax increases are a poor idea in such a bad economic environment. Lets say this lasts 2-3 more years, which means that Congress has much less than a decade to act.

    • Jon Geeting says:

      Everything about deficit reduction is tough. These are the least bad choices. I would say that we should do zero deficit reduction between now and 2016, and then have a broad based tax increase and Medicare provider cuts after that.

  4. Mitchell says:

    i am just curious Jon. If you were King, what would be the progressive tax rates you would advocate?

    The problem i see with concentrating on the federal tax rate is that it neglects the impact of the state, local taxes and all the other taxes such as gas levies etc.

    I bet if you include all those taxes together, an average working guy is probably paying well over 55 to 60% to uncle sammy and his brothers.

    • Jon Geeting says:

      If I were King of America, I’d fund the federal government mostly through a combination of carbon taxes, a progressive consumption tax and an income tax with perfectly progressive tax rates that ratchet up infinitesimally for every dollar earned. In other words, you replace the tax bracket system with an algorithm. On the tax side, this would be somewhat more regressive than our current system, but it could raise a lot more revenue in a more pro-growth way.

      You don’t have to guess at what percentage of income is paid in taxes, you can verify it. For the median worker, earning about $52K, the combined federal, state and local tax burden is about 28% of income – the lowest in 30 years. I would probably take it up to around 40% for the median wage earner.

  5. John says:

    At least you’re admitting that you want to soak everyone, not just the rich. That’s progress.

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