The time has finally come for both parties to create a federal budget that simultaneously addresses the economy's structural deficits—tackles the immediate, recession-driven shortfall and still allows us to invest long-term in education, infrastructure, energy, and research and development.
There are basic budget and revenue facts that are not in dispute. These should factor into every discussion about the budget:
1. Top marginal rates have been generally descending for the past 70 years, from 81 percent in 1940 to 35 percent today.
2. Over the past 30 years, income has grown nearly 300 percent for the top 1 percent, but only 25 percent for middle-income Americans.
3. The percentage of all taxes paid by each income group—including income, payroll, sales, etc.—roughly reflects its total income. In other words, our tax system is barely progressive. Despite the cries of the wealthy for tax relief, they pay only a slightly greater share of taxes than the significantly less wealthy, as a percentage of total income earned.
4. Our annual budget is significantly out of balance:
a. Spending is about $3.8 trillion.
b. Revenue is about $2.5 trillion.
c. This leaves a deficit of about $1.3 trillion.
5. The big buckets of spending are pretty clearly separable:
a. Defense—about $900 billion.
b. Social Security—$730 billion.
c. Medicare—$490 billion.
d. Medicaid—$300 billion.
e. Interest—$250 billion.
f. Nondefense discretionary—$610 billion.
Where do you begin to scale back spending or raise revenue to bring us into long-term balance, while laying a foundation for a competitive economy?
Keep in mind, there are only three things that can be done to close the gap—borrow more, tax more, or spend less. There is a clear consensus that dramatic borrowing will not be acceptable to the markets once we are beyond the immediate recession. The political will to raise taxes, unfortunately, is not there—witness the unfortunate extension of the Bush tax cuts last December. This means that the only real issue becomes which spending will be cut—and by how much?
The Republican answer is simple, and wrong. We got a glimpse of the Republican answer last week, in the Spending Reduction Act issued by the Republican Study Committee—the policy voice of the Republican Party. (Presumably, the response to the president's State of the Union, to be delivered by Rep. Paul Ryan, the Republican anointed budget whiz and incoming chairman of the House budget committee, will echo this document.)
First off, the RSC proposes to cut only $2.5 trillion over 10 years—not even enough to make up for the additional deficit created by extending the Bush tax cuts.
And where exactly do the Republicans want to cut? Not at all in defense, Social Security, Medicare, or Medicaid, the biggest drivers of current spending. Moreover, these are the buckets of spending that if not altered will generate larger deficits every year and contribute almost nothing to our future competitiveness.
Instead, they propose that virtually the entirety of the cuts—$2.3 trillion of $2.5 trillion—come from nondefense discretionary spending. That means slashing spending in everything from education to scientific research funding by a whopping 20 percent to 30 percent over the next decade.
This approach is a political punt of the worst form. The Republicans appear to be afraid to make a single tough decision on entitlement spending, defense, or equity issues. They are simply caught in a dogma of "cut where the political cost will be least" and ignore what the impact on the future will be.
Nowhere in the Republican document is there mention of even sensible defense cuts—such as the trillion dollars over a decade suggested by Lawrence Korb, a senior Reagan Defense department official, or any discussion of raising the retirement age for Social Security, or any consideration of raising payroll taxes on the wealthy to keep Social Security solvent into the future.
Nope. The Republican approach to the federal budget continues to be vapid and dangerous for our future.
The moment for President Obama to draw a line in the sand approaches. Whatever disappointment there may have been over the decisions that got us here—the lame-duck tax agreement in particular—this is the moment when budget decisions will set the trajectory for the next decade. He must insist that the obligation to bring greater balance to the federal budget not forsake the education, R&D, and infrastructure investments critical to the future.