Deficit Commission Delays Vote

The President's Deficit Commission delayed its final vote until Friday, but the final report will be released tomorrow. The final report will be a tweaked version of the draft proposal released a few weeks ago by Erskine Bowles and Alan Simpson. I think their health policy proposals are right on target as I wrote earlier, though I don't particularly like their Social Security proposals. I would rather not raise the retirement age, but would rather increase the payroll tax back to the 90th percentile of wages as it was in 1983 faster, and to reduce benefits for high income workers more. For what it is worth, I would prefer raising the Medicare age to 67 (unifying it with Social Security) beginning in 2014, when the health exchanges from the ACA will be fully on line.

Another key aspect of what Bowles/Simpson put out was that it shone a bright light on tax expenditures, or aspects of the tax code that benefit one group of taxpayers over others. We must address those if we are ever to achieve a balanced budget. A balanced budget means the ins (taxes) match the outs (explicit spending [like Military] + tax expenditures [like the mortgage interest deduction]).

The Bowles/Simpson draft proposal released a few weeks ago aimed to balance taxes and expenditures at 21% of GDP; liberals say that is too low, and conservatives say too high. That probably means it is a good place to start. For a bit of history it is worth noting that 21% of GDP would be the highest proportion of GDP collected in taxes at any time the past 40 years (it was close in 2000 at 20.6%). However, it is also worth noting that federal expenditures were higher than 21% of GDP in 1975, 1980, 1985 (22.8% in 1985), and 1990, for example. And the baby boomers were paying taxes in those years, not collecting Soc Security and Medicare. It is hard to imagine spending lower than 21% of GDP without tremendous cuts to Military, Social Security or Medicare. Federal spending of course was much higher in 2009 during the terrible recession (24.7% of GDP).

My point is that 21% of GDP would represent a historical raising of taxes, and cutting of expenditures. It will be interesting to see what target the report to be released tomorrow sets.

If you think 21% is too high, great, say what spending you will cut. If you think it is low, great, say what taxes you would raise.

Taxes and Spending as Percent of GDP, 1970-2009

Year	Taxes Collected, % GDP	Spending, % GDP	-Deficit/+Surplus, %GDP
1970	19.0	19.3	-0.3
1975	17.9	21.3	-3.4
1980	19.0	21.7	-2.7
1985	17.7	22.8	-5.1
1990	18.0	21.9	-3.9
1995	18.4	20.6	-2.2
2000	20.6	18.2	+2.4
2005	17.3	19.9	-2.6
2009	14.8	24.7	-9.9

source: my calculations from CBO sources.