Look at the trend lines for federal spending during the next decade, and you can see quickly where the problem with the budget deficit resides. The Congressional Budget Office projected that spending on Social Security would remain largely flat as a percentage of the overall economy. The same goes for discretionary spending. After a recent climb, it would descend to a level equivalent with a decade ago. The problem is health-care spending, mostly Medicare and Medicaid, the line climbing higher, driven by ever rising health costs, squeezing other federal priorities.
Thus, it makes sense to target health spending in an effort to put the country’s finances in order. The Affordable Care Act contains numerous promising, if yet unproven, plans to slow the increase in health-care costs. Still, more steps are needed, starting with means-testing, wealthier recipients paying a larger share of their Medicare coverage.
One other conspicuous element of the deficit problem is a lack of sufficient revenues, now at 15.8 percent of the overall economy. The average share for the years since World War II is 18.5 percent. That helps explain President Obama twice campaigning — and winning — on a pledge to raise modestly the top income tax rates.
A balanced approach to deficit-reduction requires nothing less. More, when congressional leaders from both political parties met recently with the president at the White House, they appeared to agree that increased revenues were necessary to deal with the problem.
The sticking point is how those revenues would be generated, Republicans resistant to any increase in tax rates, which is set to happen with the Bush tax cuts expiring at the start of the new year. That expiration, along with other tax increases and spending cuts of the “fiscal cliff,” have focused minds in Washington, worried about the full impact on a weak economy. A deal resolving all the elements isn’t likely. So negotiators appear intent on crafting a credible start, or framework, aiming at rough totals and identifying changes in concept.
News reports reveal Republicans looking for ways to keep the top rate at 35 percent, one idea for gaining the needed revenue calling for taxing at 35 percent the entire salary of those making more than $400,000. The package would include a sum generated by closing tax breaks, perhaps placing a limit on the deductions a taxpayer could claim.
All of this points to the ample room for striking a balanced compromise. It also highlights the false promise of closing tax breaks. Such a step hardly will reap sufficient revenue, largely because many of the breaks are popular, including the deductions for charitable giving and mortgage interest.
More, there is a strong argument for maintaining the progressive quality of the income tax for all taxpayers, including taxing capital gains as ordinary income. The principle should not be sacrificed just to maintain a misguided pledge.
If the long-term deficit is a problem, and it is, then a modest, and fair, tax rate increase for the those at the high income ranges is a reasonable, even necessary, step — along with curbing health and other entitlement spending.