Not a Penny More

Source: Not a Penny More
City Journal
December 12, 2012

During last summer’s debt-ceiling negotiations, David Brooks of theNew York Times wrote that Republicans who rejected “trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases” would reveal themselves as “fanatics” with “no sense of moral decency”—clearly “not fit to govern.” In November, after the failure of the congressional “supercommittee” spawned by the debt-ceiling crisis, theWashington Post’s Eugene Robinson made much the same point: bringing the federal debt under control without higher taxes made sense only “in the parallel universe inhabited by GOP ideologues, a place where the laws of arithmetic do not apply.” The problem, according to Robinson, was that among today’s Republicans, “tax cuts are not a matter of policy but of faith.”

This religion, all right-thinkers know, has a leader: Grover Norquist, president of Americans for Tax Reform (ATR) since the organization’s founding in 1985. Norquist and ATR are best known for the “Taxpayer Protection Pledge,” which, at the federal level, binds politicians to oppose both higher marginal income-tax rates on individuals and business and “any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.” In the GOP, only six congressmen and seven senators have not signed the pledge; only three of the 246 elected Democrats on Capitol Hill have signed it. The pledge, Garry Wills thundered in The New York Review of Books, “means that most Republicans in Congress . . . have left behind their consciences in the pocket of Grover Norquist.” Massachusetts governor Deval Patrick has even charged that “the Republican strategy is to drive America to the brink of fiscal ruin and then argue that the only way out is to cut spending for the powerless. Taxes—a dirty word thanks to Norquist’s ‘no new taxes’ gimmick—are made to seem beyond the pale.”

These critics would have you believe that the antitax movement is nothing but belligerent extremism. The truth, however, is that you don’t have to embrace Norquist’s famous ambition—to shrink government until it’s small enough to be drowned in a bathtub—to conclude that opposing tax increases is both smart politics and wise policy. Nor do you have to make the maximalist supply-side assertion that tax cuts always pay for themselves. In rejecting tax hikes, Republicans aren’t trading in fanaticism. Rather, they’re confronting a governing failure—an abiding lack of candor about what our welfare state costs—that voters grasp but Democrats refuse to admit.

The debate over closing the federal budget deficit has seen volleys of certitudes. Speaking to an Americans for Tax Reform meeting last April, Republican senator Orrin Hatch said, “We don’t have a revenue problem. We all know we have a spending problem.” Two months later, AFL-CIO president Richard Trumka insisted, “We don’t have an entitlement problem. We have a revenue problem.” Who’s right? Do we spend too much, or do we tax too little?

In terms of balancing the budget, there’s no way to answer that question—no mathematical basis for declaring either spending or revenues theproblem. Sure, the 2010 federal budget would have been balanced if the government had cut spending by $1.293 trillion to equal its revenues of $2.163 trillion. But it would have been just as balanced if the government had increased revenues by $1.293 trillion to cover its total expenditures of $3.456 trillion.

What we can say is that over the last 40 years, government revenues have kept pace with economic growth while government spending has run steadily ahead of it. If you look at federal finances from the dawn of the Great Society in 1965 to the beginning of the Great Recession in 2008 (see the chart below), you’ll notice that Gross Domestic Product and federal revenues, both expressed in per-capita terms and adjusted for inflation, were about two and a half times as large at the end of the period as at the beginning. Federal expenditures were three times as large.

Not only has spending risen faster than GDP or revenues over the years; a particular kind of spending has led the charge. Let’s divide all federal spending into three broad categories. One is national defense. The second, the welfare state, includes Social Security; other income-support programs, such as disability insurance and unemployment compensation; Medicare; other health programs, such as Medicaid and the Children’s Health Insurance Program; and all programs in education, job training, and social services. I call the third “housekeeping,” meaning everything else that the federal government does: federal courts, prisons, prosecutors, and the FBI; Amtrak and air-traffic control; national parks and the EPA; embassies and consulates; veterans’ programs; NASA; and so on.

Here’s the scorecard. Spending on national defense, adjusted for inflation and population, was 42 percent higher in 2008 than in 1965, while housekeeping outlays were 76 percent higher (see the chart below). Both, in other words, grew far less rapidly than the economy or federal revenues—both of which, remember, were about 150 percent higher in 2008 than in 1965. But welfare-state expenditures were 583 percenthigher. In fact, the welfare state became the core of the federal government, growing from 26 percent of federal outlays in 1965 to 61 percent in 2008.

Even the fact that the welfare state has grown relentlessly does not, in itself, mean that the growth has been excessive. What does begin to suggest that conclusion is the lack of candor with which the growth has been promoted. For years, the Democratic Party’s raison d’être has been to establish, defend, and expand the welfare state. The Democrats could have told us all along—forthrightly, scrupulously, and unambiguously—that their project would cost a lot of money and that, should economic growth be insufficient to pay for it, big tax increases would be necessary. Had they done so, they would be in a strong position to argue that the terms of the deal they struck with yesterday’s voters oblige today’s Americans to pay higher taxes.

But that’s not what they did. When the House Ways and Means Committee drafted Medicare in 1965, it predicted that the hospital-insurance part of the program would cost $9 billion by 1990. The actual figure was $67 billion. In 1987, Congress anticipated that a federal program to assist hospitals serving large numbers of Medicaid patients would require $1 billion by 1992. The final figure: $17 billion. One small Great Society Program, the Teacher Corps, never figured out what it was supposed to be and never accomplished any of the goals that it did set for itself, according to the political scientist Thomas E. Cronin; yet its budget quadrupled in its first seven years. Examples could be multiplied.

A more recent version of politicians’ deceptiveness about the costs of government is the Democratic insistence on calling government programs “investments.” Spending isn’t really spending, you see, because government outlays will be returned to the nation in multiples. The 2008 Democratic platform committed the party to “investing” more government money in areas as general as health, education, and energy and in programs as specific as women-owned small businesses, financial literacy, “alternative livelihoods to poppy-growing for Afghan farmers,” and the “long-term development of the Pashtun border region.” In endorsing bigger international programs, the platform also promised to “invest in our common humanity,” which doesn’t rule out much.

When Democrats do talk about taxes, they are often equally disingenuous. In 2004, John Kerry ran for president promising to raise taxes on families with incomes above $200,000 per year and to cut taxes for the other 98 percent of the population. Four years later, Barack Obama ran for president promising that the government could meet all its existing obligations and take on many new ones, while confining tax increases to individuals making more than $200,000 and families making more than $250,000.

Do these vows hold water? A 2010 study by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, found that reducing federal deficits by the second half of this decade to a reasonable 2 percent of GDP, while keeping Obama’s promise, would require increasing the rate in the second-highest federal income-tax bracket from 33 percent to 85.7 percent, the rate in the highest bracket from 35 percent to 90.9 percent, and the capital-gains tax rate from 15 percent to 39 percent. The study, Desperately Seeking Revenue, pointed out that such tax rates would give the prosperous a strong incentive to defer income, shift it to nontaxable forms, or spend it on deductible items, like charitable contributions. The resulting revenue shortfall would necessitate even higher tax rates or might simply make reducing deficits to 2 percent of GDP impossible. Even Jonathan Chait, who has devoted hundreds of New Republic blog posts over the years to advocating higher taxes on the rich, conceded after the August 2011 debt-ceiling agreement, “It has become clear that Obama’s pledge not to raise taxes at all on anybody earning less than $250,000 a year is no longer compatible with even the minimal demands of government over the next decade.”

That’s just the latest example of a half-century of dishonesty. Having dissembled for decades about the true costs of their agenda, Democrats now bring to their most urgent political task—securing large tax increases that will prevent a sweeping reorganization of the welfare state—all the moral authority of a bait-and-switch salesman.

The Democrats’ calculation was that when the debt hit the fan, voters and even the opposition party would fall in line to keep the welfare state intact and growing. It was a reasonable assumption. After all, the Democrats were accustomed to the genteel Republicans of yore, who had always joined them in decorously avoiding the topic of how much social-welfare programs had grown in the past when deliberating how much they should grow in the future. Back then, both sides implicitly accepted a baseline rising steadily and eternally; negotiations were merely about how quickly it should rise.

But the Democratic Party didn’t count on the antitax revolution. At the heart of the Norquist Republicans’ truculent fanaticism is the insistence that citizens can question and alter the endless growth of the welfare state, rather than submit to it as though it were a law of nature. No wonder, then, that so many liberal pundits and politicians are so furious at the newly obstinate GOP. Democrats must finally fight for what they spent long, happy decades taking for granted—a steadily growing supply of dollars to finance new and expanded government programs.

When Democrats conduct that fight by calling Republicans nihilists, they really seem to believe that the alternative to higher taxes is the end of civilization as we know it. “The GOP may not acknowledge that it wants to privatize public schools or drive students of limited means out of the universities, or eliminate tax-funded health care and social services for the poor, or destroy the last vestiges of publicly supported transit or shut the parks,” Peter Schrag, a veteran California journalist, has written. “But that clearly is what it’s accomplishing.”

To see why that argument is wrong, think all the way back to 1995, when America had social insurance for the elderly, health care and welfare for the poor, and various other appurtenances of a welfare state, to say nothing of public schools and colleges, mass transit, public parks, and lots more. Since then, the federal government’s total revenues, adjusted for changes in population and inflation, have grown, despite the recession. In other words, to duplicate now the revenue stream that paid for the 1995 menu of government services would mean cutting taxes, not increasing them. Tax-fighting Republicans aren’t ripping the social safety net to shreds; rather, they’re alerting voters to the simple fact that America is spending more and more money to render worse and worse services.

Nor does it make sense for the GOP to accede to tax increases in order to win concessions, such as caps on government spending. There is overwhelming historical evidence that the politicians who establish such limits never shrink from using their clout to evade them. In an age when market and voter apprehensions about sovereign debt constrain borrowing, the refusal to raise taxes is a spending limit, one far more effective than any parchment barriers that politicians can devise. Norquist once said that “grand bargains” combining spending cuts and tax increases recalled the deals that “the Soviet Union was offering as it left Eastern Europe. And every time we didn’t give them an answer they kept asking for less.” By restricting the fiscal oxygen supply that sustains a fundamentally flawed system, Republicans are hastening our welfare state’s perestroika.

At the same time, they’re playing smart politics. When they refuse to raise taxes, Republicans force Democrats to make a deeply unpersuasive argument. Major expansions of the welfare state are indispensable, this argument goes; but the $5.08 trillion of federal, state, and local government outlays in 2010—35 percent of GDP—is already being spent on its very best uses; therefore, our new government endeavors will require corralling more of the 65 GDP percentage points that now roam contentedly beyond the fence.

Such a platform would be helpful for any candidate seeking the presidency—so long as it was the presidency of the American Federation of State, County, and Municipal Employees. But no Democratic politician will ever use it successfully to win over a large, diverse electorate residing outside our blue ghettos, which is why Democratic presidential candidates avoid it and instead promise not to raise taxes. This silence is a deafening testament to Democrats’ morose conviction that Americans don’t like their party’s agenda enough to give it the only endorsement that really matters: voting to pay for it. It’s hard to see what incentive Republicans have to extricate Democrats from this dilemma.

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