Editor’s note: This op-ed is by Tom Pelham, Vermont’s finance commissioner in the Dean administration and tax commissioner in the Douglas administration.
Vermonters need to see beyond Washington’s double talk and understand the budget fight is not about compromise but about holding partisan ground gained over the last decade. The Republicans don’t favor taxes, and with President Bush taking the lead, income taxes dropped from 9.7 percent of Gross Domestic Product in 2000 to 6.2 percent in 2010. Total federal revenues dropped from 20.6 percent of GDP to 14.9 percent. In the other direction, Democrats favor expanded government, and as a percent of GDP, federal spending grew from 18.5 percent of GDP in 2000 to 23.8 percent in 2010. Spending has increased across the board, with discretionary spending up from 6.3 percent of GDP in 2000 to 9.3 percent in 2010 and “mandatory” spending up from 10.5 percent to 14.4 percent.
The result is a federal budget that went from surplus to deficit. In 2000, the surplus was $86.4 billion. In 2011, the year ended with a $1.55 trillion deficit, and the federal debt grew to a very worrisome $14.3 trillion. The International Monetary Fund profiles the United States debt now at 99.5 percent of GDP. During the Carter years, it was less than 40 percent, and Bill Clinton left office with it at 57 percent. For comparison, Germany is now at 80.1 percent, the United Kingdom at 83 percent, Italy at 120.3 percent and Greece at 152.3 percent.
This marriage of convenience between Republicans and Democrats survived until now, with both sides able to satisfy their political base with tax cuts and higher spending. Going forward, though, if these fiscally irreconcilable positions are not abandoned, the national welfare will be the collateral damage.
Both sides hold shaded self-serving positions. Democrats look back at the surpluses in the Clinton years and blame the “Bush Tax Cuts,” code words for tax breaks given the wealthy. But the facts are, the “Bush Tax Cuts” were for everybody, not just the wealthy. The U.S. Treasury values the “Bush Tax Cuts” at $3.6 trillion over the next decade, with only $700 billion, or 19 percent, going to “the wealthy” and $2.9 trillion going to the rest of us. In 2000, the effective federal income tax rate on the bottom 50 percent of filers was 4.6 percent. In 2008, the last year for which numbers are available, their effective rate was down to 2.59 percent. With these lower rates, 46.9 percent of all federal income tax filers in 2009 paid no federal income tax. Comparatively, for the top 5 percent of filers, the effective rate dropped from 24.4 percent to 20.7 percent by 2008.
Democrats argue only to reverse the tax cuts given the wealthy but are silent about the cuts given the rest of us and are silent as well about how to balance the budget if the “Bush Tax Cuts” for the less than “wealthy” remain in place. It’s misleading for Democrats to hang their hat on the surpluses of the Clinton years when Clinton’s budget surpluses rested on significantly higher tax revenues from low- and middle-income filers.
Further, Democrats want to close corporate tax breaks, with oil companies and jet owners as their whipping posts. Yet, an analysis by the joint congressional staff for the House Ways and Means Committee and Senate Finance Committee reveals the estimate of all corporate tax breaks in 2012 amounts to slightly over $94 billion, with energy-related tax breaks amounting to $5.4 billion. While I won’t argue that profitable oil companies deserve tax breaks, it’s impossible to argue their elimination will make a meaningful dent in the $1.4 trillion annual deficit. If the entirety of corporate tax breaks cited in the analysis, including affordable housing, Blue Cross and Blue Shield, ethanol, tax-free bonds, corporate charitable contributions, etc., were eliminated for 2012, the federal deficit would be reduced by less than $100 billion, remaining at $1.3 trillion.
Republicans take equally ridiculous positions. Unless Republicans are willing to reduce federal spending to match revenues at the current $14.9 percent of GDP, their rock-solid opposition to tax increases, whether through raising tax rates or eliminating tax breaks, is both fatuous and dangerous.
For this national crisis to be resolved, the partisan shouting and sleight-of-hand economics must stop. Our elected leaders need to embrace humility, as the current crisis is a product of their neglect. The fiscal gulf we now face is extreme, with federal revenues at just under 15 percent and federal spending at almost 24 percent of GDP. The national debt can only be lowered with federal budget surpluses. The hard work of cutting budgets and raising taxes on all of us over the coming months and years is necessary to reclaim the fiscal balance existing in the Clinton years, when revenues were at 20 percent of GDP and spending at just over 18 percent.
