FacebookTwitterGoogle+RedditEmail

The Importance of Revenue

by ANDREW FIELDHOUSE

Via Ezra Klein comes a must-read leaked memo from Senate Budget Committee Chairwoman Patty Murray (D-Wash.) to Senate Democrats ahead of fashioning a Senate Budget Resolution. It’s an excellent chronology of the deficit reduction enacted in the 112th Congress—a hefty $2.4 trillion expected to take effect and $3.6 trillion if sequestration goes into effect—and the looming phases on the Beltway budget fights following the American Taxpayer Relief Act (i.e., the lame-duck budget fight, or ATRA for short).

Klein hones in on tables depicting the fundamentally unbalanced nature of deficit reduction in the 112th Congress: Ignoring sequestration, 70 percent of policy deficit reduction measures (i.e., excluding additional debt service savings) enacted came from spending cuts as opposed to revenue, and if sequestration takes effect as scheduled, the share of spending cuts ratchets up to 80 percent. Murray’s memo contrasts these ratios with a 51 percent revenue share proposed by the Simpson-Bowles Co-Chairs’ report and 52 percent in the Senate’s bipartisan “Gang of Six” proposal. Hence Murray’s conclusion:

Revenue Must be Included in Any Deal. Tackling our budget challenges requires both responsible spending cuts and additional revenue from those who can afford it most.”

She’s absolutely right, but the memo hits only on the budgetary half of why compositional balance is important. Accepting on face value that the 113th Congress will pursue more deficit reduction measures (more forthcoming from us on this premise)—at the very least replacing sequestration in chunks or entirety—including progressive revenue is critical for minimizing the economic drag of austerity. As we’ve explained before, revenue increases on upper-income households and corporations are, per dollar, the least economically damaging policy option for deficit reduction—see the table below. (Again, why policymakers are abandoning what works and fixating on damaging an economy already depressed nearly $1 trillion—or 5.6 percent below potential output—with bleak prospects for emerging from depression, is a question for another post.) Some simple math helps underscore the benefit of increasing the revenue share in hitting a fixed deficit reduction target.

Replacing the blunt, intentionally unpalatable sequester, which would require annual cuts of $109 billion totaling $984 billion over nine years, will be the next budget fight, so offsetting this austerity is an illuminating framework. The government spending multiplier—meaning the economic impact of a dollar of government spending—is estimated at 1.4, so $109 billion in spending cuts would knock $153 billion off gross domestic product (GDP). For a $15.9 trillion U.S. economy (Congressional Budget Office’s latest projection for 2013), that would amount to a hit of just less than 1.0 percent of GDP. But the fiscal multiplier for a permanent increase in the corporate income tax rate is just 0.32, and we impute an even lower multiplier of 0.25 for tax increases on upper-income households. (Murray’s letter emphasizes curbing tax expenditures for upper-income households and corporations, which if anything would have slightly lesser impacts on demand per dollar.)

So if this sequester cut were to be contemporaneously replaced with revenue from corporations or upper-income households, the economic drag would fall to $35 billion or $27 billion, respectively—just 23 percent or 18 percent, respectively, of the drag imposed by an equivalent dollar amount of spending cuts. The more you shift the composition of any sequester offset toward progressive revenue, the less austerity will retard growth in 2013 and beyond. At a 1:1 ratio of spending cuts to revenue from upper-income households, the damage from $109 billion in policy savings falls to $90 billion (0.6 percent of GDP), or just 59 percent of the drag from an equivalent dollar amount of spending cuts. This result holds especially valid while the economy remains depressed—the next four years as currently projected by CBO, though likely longer if fiscal policy remains deeply contractionary. (Relatedly, maximally delaying offsets or inevitable deficit reduction until the economy is back to full health would also be highly advisable.)

In other words, balanced deficit reduction is critical not just for protecting the basic functioning of government, social insurance (Medicare, Medicaid, and Social Security), public investment, and more broadly the progressivity of the tax and transfer system—it’s critical for minimizing the economic damage of the premature austerity that Congress misguidedly remains hell-bent on enacting.

In a sane world, the sequester would simply be repealed without offsets—which would still leave real GDP growth in the ballpark of an anemic, inadequate 1.6 percent for 2013—and deficit-financed spending would be used to boost demand and ensure a return to full employment. We previously estimated that $700 billion of deficit-financed spending would be needed in 2013 and sustained for several years to return full employment—the equivalent of roughly three more Recovery Acts. But given the misguided obsession with austerity at hand, maximizing the share of progressive revenue in expected subsequent deficit reduction measures is a decent second-best option. To that extent, Murray’s emphasis on balance and progressive revenue is encouraging, albeit from a very low bar in economic policy management.

Andrew Fieldhouse is a federal budget policy analyst at the Economic Policy Institute, where this article originally appeared.

 

More articles by:
May 25, 2016
Eric Draitser
Obama in Hiroshima: A Case Study in Hypocrisy
Ryan Mallett-Outtrim
Does Venezuela’s Crisis Prove Socialism Doesn’t Work?
Dan Arel
The Socialist Revolution Beyond Sanders and the Democratic Party
Marc Estrin
Cocky-Doody Politics and World Affairs
Sam Husseini
Layers of Islamophobia: Do Liberals Care That Hillary Returned “Muslim Money”?
Susan Babbitt
Invisible in Life, Invisible in Death: How Information Becomes Useless
Mel Gurtov
Hillary’s Cowgirl Diplomacy?
Kathy Kelly
Hammering for Peace
Dick Reavis
The Impeachment of Donald Trump
Wahid Azal
Behind the Politics of a Current Brouhaha in Iran: an Ex-President Ayatollah’s Daughter and the Baha’is
Jesse Jackson
Obama Must Recommit to Eliminating Nuclear Arms
Colin Todhunter
From the Green Revolution to GMOs: Living in the Shadow of Global Agribusiness
Binoy Kampmark
Turkey as Terror: the Role of Ankara in the Brexit Referendum
Dave Lindorff
72-Year-Old Fringe Left Candidate Wins Presidency in Austrian Run-Off Election
May 24, 2016
Sharmini Peries - Michael Hudson
The Financial Invasion of Greece
Jonathan Cook
Religious Zealots Ready for Takeover of Israeli Army
Ted Rall
Why I Am #NeverHillary
Mari Jo Buhle – Paul Buhle
Television Meets History
Robert Hunziker
Troika Heat-Seeking Missile Destroys Greece
Judy Gumbo
May Day Road Trip: 1968 – 2016
Colin Todhunter
Cheerleader for US Aggression, Pushing the World to the Nuclear Brink
Jeremy Brecher
This is What Insurgency Looks Like
Jonathan Latham
Unsafe at Any Dose: Chemical Safety Failures from DDT to Glyphosate to BPA
Binoy Kampmark
Suing Russia: Litigating over MH17
Dave Lindorff
Europe, the US and the Politics of Pissing and Being Pissed
Matt Peppe
Cashing In at the Race Track While Facing Charges of “Abusive” Lending Practices
Gilbert Mercier
If Bernie Sanders Is Real, He Will Run as an Independent
Peter Bohmer
A Year Later! The Struggle for Justice Continues!
Dave Welsh
Police Chief Fired in Victory for the Frisco 500
May 23, 2016
Conn Hallinan
European Union: a House Divided
Paul Buhle
Labor’s Sell-Out and the Sanders Campaign
Uri Avnery
Israeli Weimar: It Can Happen Here
John Stauber
Why Bernie was Busted From the Beginning
James Bovard
Obama’s Biggest Corruption Charade
Joseph Mangano – Janette D. Sherman
Indian Point Nuclear Plant: It Doesn’t Take a Meltdown to Harm Local Residents
Desiree Hellegers
“Energy Without Injury”: From Redwood Summer to Break Free via Occupy Wall Street
Lawrence Davidson
The Unraveling of Zionism?
Patrick Cockburn
Why Visa Waivers are Dangerous for Turks
Robert Koehler
Rethinking Criminal Justice
Lawrence Wittner
The Return of Democratic Socialism
Ha-Joon Chang
What Britain Forgot: Making Things Matters
John V. Walsh
Only Donald Trump Raises Five “Fundamental and Urgent” Foreign Policy Questions: Stephen F. Cohen Bemoans MSM’s Dismissal of Trump’s Queries
Andrew Stewart
The Occupation of the American Mind: a Film That Palestinians Deserve
Nyla Ali Khan
The Vulnerable Repositories of Honor in Kashmir
Weekend Edition
May 20, 2016
Friday - Sunday
Rob Urie
Hillary Clinton and Political Violence
FacebookTwitterGoogle+RedditEmail