Budget Battles: Tax and Spending Myths and Realities

Government spending needs to be brought under control. But slashing vital services just to pay for more tax cuts is bad public policy and bad economics.

It won’t fix the deficit, no matter what the Republicans claim.

We’ve seen this play before. President Ronald Reagan promised that tax cuts would spur more economic growth and pay for themselves. During his tenure, the deficit hit what was then a peacetime high of 6 percent of gross domestic product, and he eventually decided that he had no other alternative but to raise taxes to try to close the gap.

The Clinton years disproved the notion that higher taxes would inevitably stifle economic growth, or cost politicians their jobs. Taxes were raised in 1993, including higher income tax rates on the wealthiest. The economy was strong, and the stock market surged. Taxes were then cut in 1997 in a deal with the Republican-controlled Congress, but by then the combination of higher tax rates on the wealthy, a strong economy and a rising stock market was boosting revenues significantly.

By the end of President Bill Clinton’s term, the federal budget had been in surplus for four straight years.

President George W. Bush and Congress undid that progress with $1.65 trillion in tax cuts, heavily skewed to high earners. The economic recovery of the Bush years was extraordinarily weak by historical standards. By early 2009, shortly before Mr. Obama took office, the Congressional Budget Office projected a budget deficit for that year of more than $1 trillion.

These are the economic facts, which Americans need to hear. The Republicans certainly won’t tell anyone. And, so far, the Democrats haven’t had the political courage to challenge them head-on.

President Obama’s proposed budget for fiscal-year 2012 does call for a mix of tax increases and tax cuts, but he hasn’t made a serious effort to explain the need for substantially more revenue.

The bigger test will come on Wednesday, when Mr. Obama presents a long-term deficit reduction alternative to the Republican proposal. It must include significant sources of revenue, as well as defense cuts and a long-term plan for bringing spending on health care and other entitlements in line with revenues.

As a matter of fairness, raising income taxes must start with requiring the richest Americans — who have been the biggest beneficiaries of Bush-era tax cuts — to pay more. But even that won’t dig the country out of its hole. The middle class is also going to have to pay higher taxes. That is the only way to pay for needed services, tackle the deficit and slow the borrowing and the rise in interest payments.

That means higher income taxes further down the income scale than Mr. Obama has previously called for, and new sources of tax revenue, like energy taxes or a financial-transactions tax or a value-added tax.

Those details are the easy part. More than anything, Mr. Obama must change the political debate, by rebutting, once and for all, the tax-cuts-above-all ideology that has gotten this country into this deep mess.

Here are a few more numbers to consider: Stimulus spending since Mr. Obama took office — including tax cuts — accounts for about $600 billion of the current $14.2 trillion in accumulated debt. The Bush-era tax cuts coupled with major new spending for two wars and a Medicare drug benefit, have added $3.2 trillion to the debt.

Mr. Obama must make the case for tax increases, based on reality, not ideology. Then, and only then, can a serious debate on the deficit begin.