The Outlines of Fiscal Sanity

Published Mar 25, 2013. In The Virginian-Pilot.

Second of two parts

Any way you count it, and unless you want to radically alter the character of post-war America, this country's government is spending too much and taxing too little.

Among the expenditures we've created since World War II: A national highway network, a health insurance system for the elderly and the poor, a military with much more expensive equipment. Protection for the nation's air and water and for its borders. Protection from terrorists.

Meanwhile, the tax system has also changed, but not enough to pay for our desires.

America's corporate citizens used to contribute nearly as much as individuals to the operation of the federal government. Now, corporate taxes are one-quarter of what individuals pay. Fuel taxes are no longer enough to maintain highways and interstates.

U.S. Rep. Scott Rigell and others argue that federal spending and revenue both need to be about 20 percent of the nation's gross domestic product, about the average since World War II. Instead, federal revenue is just above 16 percent of GDP; spending is closer to 24 percent.

The Concord Coalition's budget game (goo.gl/rYizd) provides insight into the scope of the problem. (So will the one at the Committee for a Responsible Federal Budget, crfb.org/stabilizethedebt.) The principle is the same: To balance the budget and pay down the debt, taxes have to go up. Spending has to come down. Both will have to move radically.

Last year's vicious fight over the expiration of the Bush tax cuts ended up raising rates by about 10 percent on individuals making more than $400,000 and couples making more than $450,000. The Congressional Budget Office says that compared with allowing all the tax cuts to expire, the deal added $4 trillion to the deficit over the next decade.

Big a

utomatic budget cuts are just beginning to affect the economy of Hampton Roads and Virginia. That sequester - $1.2 trillion in cuts over the next decade - is unlikely to be noticed much in most places.

Which is to say that neither the tax increase nor the budget cuts so far this year are anywhere near what will be necessary to balance the federal books in the coming decade or two.

To reduce expenses to 20 percent of GDP, leaders have to cut spending wherever and whenever they can.

Redundant programs - such as the dozens of job-training programs cited by Republicans in the House - should be eliminated. The 13 agencies funding 208 science and math education programs should have to explain why 207 of them shouldn't go away. The agencies running the dozen or so financial-literacy programs should be forced to prove they can count.

Those are just a few of the redundancies cited in a Government Accountability Office report issued last year. It's hardly the first report to find wasteful spending in the federal government. It won't be the last.

While it's looking for savings, Washington can also freeze federal pay and discretionary spending, eliminate the dollar bill and ditch the flawed and exorbitantly expensive F-35. But even cutting every dollar of extraneous spending won't balance a $3 trillion federal budget or pay down a debt expected to top $24 trillion in a decade.

For revenues to get to 20 percent of GDP, federal receipts would have to rise by a fifth.

There are lots of ways to do that. Income taxes are the bulk of federal revenue, but it will take a lot more than tinkering with the deductions for mortgages and charitable giving.

As they have been for generations, increases in the federal income tax rate should be weighted so the highest earners pay the highest percentages. Tax increases would have to be significant and broad enough to alter the nation's fiscal trajectory. That happens by raising rates or trimming deductions.

Capital gains should be taxed at the level of income or close to it. And although it's true that the United States has one of the highest corporate tax rates in the world, at 35 percent, its effective rate (including loopholes) is much lower. It's how corporations such as GE managed to pay no federal corporate income tax.

If corporations paid as much a percentage of the federal budget as they did in the 1940s, 1950s and 1960s, the nation's deficit would be cut in half. Corporations should be subject to an alternative minimum tax to prevent them from shifting earnings overseas and their U.S. tax burdens to the rest of us. Welfare for corporations should end.

Like Virginia, the United States has no way to evaluate the effectiveness of the tax subsidies it gives to major corporations. It must devise a means to measure results. And it should require sunset clauses for all subsidies.

Excise taxes - gasoline and diesel fuel, among others - produce a smaller amount of federal revenue, as a percentage of GDP, than at any time since President Dwight Eisenhower built the interstate system. The federal gas tax, at 18.4 cents per gallon, has not changed since 1997.

Inflation has eroded the levy's value by about half, even as construction costs and needs have risen. If America wants to continue to have the roads and transportation network necessary for commerce and modern life, those taxes will have to rise, too.

Washington can fix Social Security by raising the level of income subject to payroll taxes. If it means altering Medicare benefits so that the wealthiest receive less - a proposal that has garnered some bipartisan support - both programs can be set on the path to permanent solvency.

America's national debt passed $1 trillion in 1982. It topped $2 trillion in 1986 and $4 trillion in 1992. It took until 2006 to hit $8 trillion. It is likely to hit $17 trillion any moment, on its way above $20 trillion before 2016.

The trajectory is clear. It has taken 30 years of bad decisions by presidents and members of Congress to get the nation into this fiscal trouble. It will take painful decisions and difficult politics over at least that long to get us out.

The hard work must start now.