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:
November 21, 2017
Gregory Elich
What is Behind the Military Coup in Zimbabwe?
Louisa Willcox
Rising Grizzly Bear Deaths Raise Red Flag About Delisting
David Macaray
My Encounter With Charles Manson
Patrick Cockburn
The Greatest Threats to the Middle East are Jared Kushner and Mohammed bin Salman
Stephen Corry
OECD Fails to Recognize WWF Conservation Abuses
James Rothenberg
We All Know the Rich Don’t Need Tax Cuts
Elizabeth Keyes
Let There be a Benign Reason For Someone to be Crawling Through My Window at 3AM!
L. Ali Khan
The Merchant of Weapons
Thomas Knapp
How to Stop a Rogue President From Ordering a Nuclear First Strike
Lee Ballinger
Trump v. Marshawn Lynch
Michael Eisenscher
Donald Trump, Congress, and War with North Korea
Tom H. Hastings
Reckless
Franklin Lamb
Will Lebanon’s Economy Be Crippled?
Linn Washington Jr.
Forced Anthem Adherence Antithetical to Justice
Nicolas J S Davies
Why Do Civilians Become Combatants In Wars Against America?
November 20, 2017
T.J. Coles
Doomsday Scenarios: the UK’s Hair-Raising Admissions About the Prospect of Nuclear War and Accident
Peter Linebaugh
On the 800th Anniversary of the Charter of the Forest
Patrick Bond
Zimbabwe Witnessing an Elite Transition as Economic Meltdown Looms
Sheldon Richman
Assertions, Facts and CNN
Ben Debney
Plebiscites: Why Stop at One?
LV Filson
Yemen’s Collective Starvation: Where Money Can’t Buy Food, Water or Medicine
Thomas Knapp
Impeachment Theater, 2017 Edition
Binoy Kampmark
Trump in Asia
Curtis FJ Doebbler
COP23: Truth Without Consequences?
Louisa Willcox
Obesity in Bears: Vital and Beautiful
Deborah James
E-Commerce and the WTO
Ann Garrison
Burundi Defies the Imperial Criminal Court: an Interview with John Philpot
Robert Koehler
Trapped in ‘a Man’s World’
Stephen Cooper
Wiping the Stain of Capital Punishment Clean
Weekend Edition
November 17, 2017
Friday - Sunday
Paul Street
Thank an Anti-War Veteran
Andrew Levine
What’s Wrong With Bible Thumpers Nowadays?
Jeffrey St. Clair - Alexander Cockburn
The CIA’s House of Horrors: the Abominable Dr. Gottlieb
Wendy Wolfson – Ken Levy
Why We Need to Take Animal Cruelty Much More Seriously
Mike Whitney
Brennan and Clapper: Elder Statesmen or Serial Fabricators?
David Rosen
Of Sex Abusers and Sex Offenders
Ryan LaMothe
A Christian Nation?
Dave Lindorff
Trump’s Finger on the Button: Why No President Should Have the Authority to Launch Nuclear Weapons
W. T. Whitney
A Bizarre US Pretext for Military Intrusion in South America
Deepak Tripathi
Sex, Lies and Incompetence: Britain’s Ruling Establishment in Crisis 
Howard Lisnoff
Who You’re Likely to Meet (and Not Meet) on a College Campus Today
Roy Morrison
Trump’s Excellent Asian Adventure
John W. Whitehead
Financial Tyranny
Ted Rall
How Society Makes Victimhood a No-Win Proposition
Jim Goodman
Stop Pretending the Estate Tax has Anything to do With Family Farmers
Thomas Klikauer
The Populism of Germany’s New Nazis
FacebookTwitterGoogle+RedditEmail