With the expiration of the 2001 and 2003 tax cuts fast approaching, the debate over whether to extend the cuts, and for whom, has taken on a new face. Proponents of allowing for tax increases on the highest income brackets, or in some cases, on all Americans, argue that this is a necessary step to reducing projected federal deficits.
But, as Edward Lazear, former chairman of the President’s Council of Economic Advisors, explains in The Wall Street Journal, this creates a false choice between huge deficits or tax increases. He writes:
This argument rests on the flawed premise that we can reduce the deficit only by increasing taxes, as if high levels of spending are a given. Not so. … Americans don’t have to choose between an enormous deficit or high taxes. If we returned to the relative fiscal restraint that prevailed during the Clinton and Bush years, when spending was 19.7% and 19.6% of GDP, respectively, we could avoid the entire mess.
Lazear proposes returning spending closer to 2008 levels, then limiting spending in the future by imposing an “inflation-minus-one” rule, under which, if government expenditures exceed 18 percent of gross domestic product (GDP), Congress could only increase spending “by the last three years’ inflation rate, minus one percentage point.”
Reducing spending is the right way to reduce deficits, since it’s spending that is driving federal deficits in the first place. Heritage budget expert Brian Riedl writes:
By 2020, spending is projected to be 6.2 percent of GDP above the historical average, while projected 2020 revenues are 0.2 percent of GDP above the historical average. Thus, the entire expanded budget deficit will be caused by rising spending, rather than by falling revenues—even if the 2001 and 2003 tax cuts are extended.
Capping spending would require lawmakers to make trade-offs and set priorities for use of taxpayers’ dollars. What’s important is not how we cap spending, but that we cap it—for both discretionary and mandatory outlays. In “10 Elements of Comprehensive Budget Reform,” Riedl lays out several feasible ways to do this, including capping the percentage by which spending can increase from year to year, an overall “omnicap” on all federal spending, and caps on discretionary spending and mandatory spending on entitlement programs.
Achieving the ambitious reductions championed by Lazear would be difficult—and impossible if entitlement reform is not part of the equation. If untouched, Medicare, Medicaid, and Social Security alone will consume 18.2 percent of GDP—the historical average of tax revenue—by 2052. This would mean that all federal revenues would go towards paying for these programs, leaving other national priorities to be provided for by adding to the deficit.
Allowing the 2001 and 2003 tax cuts to expire, even just for higher income brackets, is not the solution to reducing deficits. Congress should extend current tax rates and then make the necessary spending cuts to put the nation back on a fiscally sound course.