There Is No Painless Way to Balance the Budget

By Kevin D. Williamson

Thursday, January 19, 2023

 

You cannot balance the budget just by cutting programs that you don’t like. You cannot balance the budget by booting layabouts off welfare, by reducing “waste, fraud, and abuse,” by eliminating foreign aid, or by repealing the grievously misnamed Affordable Care Act. And, progressives, take note: You cannot balance the budget by reinstating Eisenhower-era tax rates, either. 

 

Here are a few things to keep in mind. 

 

“Non-defense discretionary spending”—meaning everything except the military budget and statutory entitlements such as Social Security—adds up to a pretty small share of federal spending. 

 

In fiscal year 2022, the federal deficit was about $1.4 trillion, which was 5.5 percent of GDP. All discretionary spending combined was about $1.7 trillion, but non-defense discretionary spending was only about half of that. What that means is that if you cut total non-defense discretionary spending to $0.00 (an absurd notion, but useful for the purposes of illustration) you would not eliminate the deficit—you would, in fact, only roll it back to its approximate level in 2018. If you want to balance the budget by cutting both defense and non-defense discretionary spending, then you’d have to eliminate the Army and the Air Force and get by with the Navy and the Marine Corps, or make cuts of roughly equivalent depth—cutting nickel-and-dime “woke” programs won’t get it done. Obviously, that is not a thing that is going to happen—so we should not pretend that this is a plausible option. 

 

It is time to stop playing make-believe with the budget. 

 

The biggest part of the budget is so-called mandatory spending, meaning entitlements. Some people bristle at the word “entitlement” when it is applied to a program they like, but Social Security, Medicare, etc., are entitlements in the formal sense, i.e., programs with benefits to which Americans are entitled by law absent some legislative action changing the parameters of benefits and eligibility. These are programs in which the spending is in effect on autopilot—Congress doesn’t have to authorize new spending or do anything else to keep the spending going on its current course, but it would (and will) have to act to change that course. That’s what we are talking about when we talk about “entitlement reform”—changing the formula that determines what all that automatic spending adds up to. 

 

In 2022, almost two-thirds (63.8 percent) of federal spending went toward five outlays: Medicare (16.4 percent), Social Security (14.3 percent), defense (13.1 percent), Medicaid and other health care entitlements (11.9 percent), and the one bill that absolutely has to be paid to avoid default, interest on the debt (8.1 percent). The politically untouchable category of veterans’ benefits was 3.1 percent of spending by itself. By way of contrast, a lot of programs that you would think would add up to a pretty big sum turn out to be (relatively) small change: The administration of justice—meaning all federal law enforcement, the federal courts, the federal prisons, and federal support for state and local law enforcement and justice activities—adds up to just 1.1 percent of federal spending. “General government,” meaning the basic administrative work of managing payrolls, managing inventories, keeping the lights on in federal office buildings, etc., is less than 5 percent of federal spending. All “income security” programs—what most people mean when they say “welfare”—combined add up to less than 10 percent of federal spending. 

 

If you are looking for places to make real cuts to federal spending, then you have to hunt where the ducks are. In reality, a great many of our self-professed budget hawks are budget geese (“You souls of geese / That bear the shapes of men!”) unwilling to address the politically popular programs where the real spending action is. 

 

And now, the unpleasant matter of the bill … 

 

Our Democratic friends insist that our problem is not excessive spending but excessively low taxes. In one sense, they are correct, albeit in a way they are loath to admit—while the United States is not unusual in its tax treatment of high-income residents, it is a real outlier when it comes to the relatively low taxes it imposes on the middle classes and lower-middle classes: In the Scandinavian welfare states our progressive friends profess to admire (even though they often do not understand how those countries actually manage their affairs), taxes on middle-income workers are radically higher than what those workers would pay in taxes if they lived in the United States.

 

If you want to talk about raising taxes on the middle class to pay for all those middle-class benefits, then there is a reasonable case to be made. But Democrats do not usually want to talk about that—instead, they insist that the problem is that the rich do not pay their “fair share.” Yet the upper half of income earners pay 96 percent of the total federal income tax. The top 1 percent pay almost 40 percent of the total income tax collected. (The payroll tax and other taxes are less weighted toward the high income, but even these are lopsided.) They point to the very high tax rates of the prosperous postwar era as evidence that we can have high taxes, a thriving economy, a generous welfare state, credible defense, and a reasonably balanced budget all at once—if we just reinstate those Eisenhower-era tax rates. 

 

Since Dwight Eisenhower is not here to set them straight, I will do my best. 

 

When you look back at the tax system of the 1950s and 1960s, those top-bracket numbers are startlingly high. But, as anybody who has studied this issue even a little bit can tell you, there is an enormous difference between the top statutory tax rate and what people actually pay in taxes—it matters what that rate is applied to, what exemptions and deductions are available, whether there is differential treatment of different kinds of income, etc. Dwight Eisenhower himself was a careful tax planner, structuring his big payday from selling his memoirs so as to avoid ordinary income tax on it. In 1955, the top tax rate was 91 percent, whereas today it is 37 percent. But we pay more income tax today than we did then, counterintuitive as that may seem: Even with the top rate set very high, federal revenue in 1955 added up to only 15.4 percent of GDP, whereas today, with the top rate at 37 percent, federal revenue is about 20 percent of GDP, roughly one-third more than it was when rates were higher. Federal revenue as a share of GDP has varied through the years in response to both tax policy and economic conditions, but it has generally run from peaks around 20 percent of GDP to valleys around 15 percent of GDP. 

 

That can be a big deal: At the turn of the century, we had a (notionally) balanced budget with revenue around 20 percent of GDP but big deficits with revenue around 15 to 17 percent of GDP. We have a very large economy, and a point or two of GDP adds up to a lot. But in 2021, federal spending was almost 30 percent of GDP; in 2022, it was 23.5 percent of GDP. Forecasts for the near future have spending running around 24 percent of GDP and tax revenue running around 19 percent of GDP. Restructuring the tax code in such a way as to add another 5 percent of GDP to annual federal revenue would mean some deep and radical changes—changes that are likely to be economically disruptive and that, as a consequence, may not actually achieve their revenue goals. Individuals, firms, and markets will react to tax incentives in both predictable and unpredictable ways. 

 

But what the above math implies is that what’s needed is a combination of spending cuts and tax increases that add up to about 5 percent of GDP—that, or we keep running relatively large deficits until there is a debt crisis that takes most of our fiscal options off the table. It would be better to address our fiscal situation before it is a genuine crisis, while we still have many options from which to choose, rather than wait for the unpleasant side of economic reality to start making decisions for us. 

 

There is no easy or painless way out of this. We either pay the price now or pay the price in the future—with interest.