• Monthly
  • $25
  • $50
  • $100
  • $other
  • use PayPal

CounterPunch needs you. piggybank-icon You need us. The cost of keeping the site alive and running is growing fast, as more and more readers visit. We want you to stick around, but it eats up bandwidth and costs us a bundle. Help us reach our modest goal (we are half way there!) so we can keep CounterPunch going. Donate today!
FacebookTwitterRedditEmail

The Importance of Revenue

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:

bernie-the-sandernistas-cover-344x550

May 22, 2019
T.J. Coles
Vicious Cycle: The Pentagon Creates Tech Giants and Then Buys their Services
Thomas Knapp
A US War on Iran Would be Evil, Stupid, and Self-Damaging
Johnny Hazard
Down in Juárez
Mark Ashwill
Albright & Powell to Speak at Major International Education Conference: What Were They Thinking?
Binoy Kampmark
The Victory of Small Visions: Morrison Retains Power in Australia
Laura Flanders
Can It Happen Here?
Dean Baker
The Money in the Trump/Kushner Middle East Peace Plan
Manuel Perez-Rocha – Jen Moore
How Mining Companies Use Excessive Legal Powers to Gamble with Latin American Lives
George Ochenski
Playing Politics With Coal Plants
Ted Rall
Why Joe Biden is the Least Electable Democrat
May 21, 2019
Jeremy Kuzmarov
Locked in a Cold War Time Warp
Roger Harris
Venezuela: Amnesty International in Service of Empire
Patrick Cockburn
Trump is Making the Same Mistakes in the Middle East the US Always Makes
Robert Hunziker
Custer’s Last Stand Meets Global Warming
Lance Olsen
Renewable Energy: the Switch From Drill, Baby, Drill to Mine, Baby, Mine
Dean Baker
Ady Barkan, the Fed and the Liberal Funder Industry
Manuel E. Yepe
Maduro Gives Trump a Lesson in Ethics and Morality
Jan Oberg
Trump’s Iran Trap
David D’Amato
What is Anarchism?
Nicky Reid
Trump’s War In Venezuela Could Be Che’s Revenge
Elliot Sperber
Springtime in New York
May 20, 2019
Richard Greeman
The Yellow Vests of France: Six Months of Struggle
Manuel García, Jr.
Abortion: White Panic Over Demographic Dilution?
Robert Fisk
From the Middle East to Northern Ireland, Western States are All Too Happy to Avoid Culpability for War Crimes
Tom Clifford
From the Gulf of Tonkin to the Persian Gulf
Chandra Muzaffar
Targeting Iran
Valerie Reynoso
The Violent History of the Venezuelan Opposition
Howard Lisnoff
They’re Just About Ready to Destroy Roe v. Wade
Eileen Appelbaum
Private Equity is a Driving Force Behind Devious Surprise Billings
Binoy Kampmark
Bob Hawke: Misunderstood in Memoriam
J.P. Linstroth
End of an era for ETA?: May Basque Peace Continue
Weekend Edition
May 17, 2019
Friday - Sunday
Melvin Goodman
Trump and the Middle East: a Long Record of Personal Failure
Joan Roelofs
“Get Your Endangered Species Off My Bombing Range!”
Jeffrey St. Clair
Roaming Charges: Slouching Towards Tehran
Paul Street
It’s Even More Terrible Than You Thought
Rob Urie
Grabby Joe and the Problem of Environmental Decline
Ajamu Baraka
2020 Elections: It’s Militarism and the Military Budget Stupid!
Andrew Levine
Springtime for Biden and Democrats
Richard Moser
The Interlocking Crises: War and Climate Chaos
Ron Jacobs
Uncle Sam Needs Our Help Again?
Eric Draitser
Elizabeth Warren Was Smart to Tell FOX to Go to Hell
Peter Bolton
The Washington Post’s “Cartel of the Suns” Theory is the Latest Desperate Excuse for Why the Coup Attempt in Venezuela has Failed
Doug Johnson Hatlem
Analysis of Undecideds Suggests Biden’s Support May be Exaggerated
Peter Lackowski
Eyewitness in Venezuela: a 14-year Perspective
Karl Grossman
Can Jerry Nadler Take Down Trump?
FacebookTwitterRedditEmail