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Obama’s Revenue Shortfall

By Matthew Yglesias on March 21, 2009 at 1:13 pm

"Obama’s Revenue Shortfall"

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I seriously doubt that this is the line any members of congress are going to take, but as I read through the CBO analysis of the president’s budget it’s clear that the problem is here—the taxes are too low:

Under the President’s proposals, revenues would climb from 17.2 percent of GDP in 2011 to 18.8 percent in 2013 and remain near 19.0 percent thereafter (see Figure 1-2 and Table 1-4). That level is slightly above the average of 18.3 percent over the past 40 years and below the baseline projection of 20.3 percent for 2019.

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The past 40 years have been the 40 years of conservative backlash politics following the unraveling of the New Deal coalition after the advent of Civil Rights and the Great Society. Barack Obama has, quite rightly, an ambitious progressive agenda. But in budgetary terms you can’t really implement an ambitious progressive agenda and pair it with revenues that are only “slightly above” the average at which they rested during an era of conservative governance. This is not an issue in the short-term, since we’re dealing with a recession, but what you see at the right hand side of these charts is not sustainable. And I think the administration is correct to think that they should not compromise on their main policy pillars. The issue, though nobody wants to say it, is that taxes need to be higher.

Relative to Obama’s proposed ideas, I would observe the following:

  • His carbon targets, though nice, aren’t actually adequate to the problem; more aggressive targets would generate more revenue, though admittedly this isn’t a major source of net revenue since much of it would be rebated.
  • There’s no reason that the top tax bracket should have such a relatively low floor. A guy who makes $300,000 should pay more taxes than a guy who makes $30,000 but by the same token a guy who makes $3 million should pay even more.
  • The value of the federal gas tax has fallen in real terms over the years; it should be raised and indexed.
  • The value of the federal alcohol tax has fallen in real terms; it should be raised and indexed.
  • We should consider the possibilities of other public health taxes—on sweeteners, possibly.
  • If we implement an ’86-style tax reform in which we close loopholes and expand the income tax base, we could raise more revenues and increase growth.
  • Much the same is true of corporate taxes; we really ought to imitate Ireland.
  • The defense budget could probably be quite a bit smaller before we’re really running the risk of Brazil dominating the hemisphere and enslaving us.
  • Last, insofar as the point of these new taxes is to make it possible to finance progressive health care and retirement security programs it makes sense to rely in part on fairly regressive taxes like a VAT to finance some of it.

This isn’t, as I say, really a problem for the short run. But it’s a significant medium-term challenge. Were Obama to win re-election, real problems would arise during his second term unless growth over the next few years winds up coming in higher-than-expected. That could happen, of course, but we shouldn’t bank on it. More likely, in the future taxes are going to need to go up and revenue is going to have to be higher as a percent of GDP than it was under Clinton, not lower.

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