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Douglas Holz-Eakin Lectures the Politicians

He writes about our long-run fiscal problems:

Out on A Limb: Government forecasts predict that budget deficits will narrow as revenues rise from the current level, which is below the post-World War II average of 18 cents on the dollar, to a level near the postwar peak of 20 cents. Is that realistic? Historically, when taxes reach that level, U.S. politics drive them back down.

Moreover, the rise in tax revenues would primarily come from the expiration of the tax cuts passed between 2001 through 2005. President Bush has asked Congress to make the current rates permanent, but if he fails it will mean a return to higher top marginal tax rates and higher tax rates on capital gains and dividends, the elimination of the 10 percent tax bracket, scaled-back child credits and an increase in the marriage penalty. Will the U.S. public tolerate that?

Most Americans also expect the administration and Congress to do something about the alternative minimum tax (AMT). As it stands, forecasts assume that as economic growth raises incomes, more and more taxpayers will move into the AMT's higher tax rates. This assumption collides with a strong sentiment in this country: that the middle class should not be expected to carry more of the nation's tax burden, especially if its members don't feel any richer than they were before. But nothing's been changed yet.

In short, it's easy to see why the current level of taxes will fail to cover the type of government Americans have grown used to. That's bad news because despite the GOP's rhetoric, the government will not be getting any smaller. If anything, current budget forecasts underestimate future spending. The forecasts assume that government will remain roughly the same size as a proportion of GDP. To do that, spending on items other than relentlessly expanding mandatory programs such as Social Security and Medicare must remain fixed in inflation-adjusted terms for a decade. Quite simply, that's never happened.... While everyone is in favor of eliminating waste, Americans want to protect defense, education, environment, transportation and a myriad of other programs. Congress expended a tremendous effort last week and just barely adopted $39 billion in cuts from projected spending -- less than 7/100ths of 1 percent of GDP....

Amid all this... will come a rise in mandatory spending.... Fixing the budget is not an issue that either party is engaging now. The Democrats want to avoid offending their constituencies and so have mostly sidestepped initiatives on trimming big entitlement programs. The Republicans have chosen to stand by low taxes and big security spending, and even introduced a new Medicare prescription drug benefit. This combination falls short of a cohesive package that would ensure a limited but balanced government in the future.

Fifteen years ago, the federal government faced up to its fiscal duress and Congress and the first Bush administration reached a giant compromise on spending and taxes. Many people suggest running the 1990 playbook again.... In 1990, the baby boomers were 15 years further away from retirement; even gradualist, slow-acting medicine in old-age programs had time to work. In 1990 it was possible to imagine a peace dividend.... In 1990 attempts to control big government or improve federal efficiency could focus on domestic discretionary spending....

It is safe to say that things will change, because they must. I'd rather not raise taxes, but unless government remains at its traditional size, I don't see any way around it. On the other hand, just getting rid of the 2001 tax cuts won't solve the problem either; they're just not big enough.... A serious approach should embrace strategies for growth that ensure that the economic pie is as large as possible. It should rethink the package of support for old-age medical care, long-term care services and retirement income. And it should balance the other demands on the Treasury against the virtues of low, efficient taxes. But most of all, a serious approach should make sure that the budget adds up.

Note the phrase "fifteen years ago... congress and the first Bush administration reached a giant compromise on spending and taxes." This is code for: where are the grownup Republicans? I don't know where they have been hiding since January 21, 1993. But it's time that somebody found them.

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