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The Best Worst Option? Raise Taxes and Reduce Spending.

The opening sentence of "Reducing the Deficit by Increasing Individual Income Tax Rates", a paper [pdf] jointly authored by the Pew Charitable Trust and Tax Policy Center, is worth noting: "Current federal budget policies are unsustainable." (A month before publication, the US debt-to-GDP ratio broke 100 percent.)

It's become an article of faith, thanks to the work several years ago of Carmen Reinhart and Kenneth Rogoff, that in Paul Krugman's words, "debt over 90 percent of GDP leads to drastically slower growth." As Krugman, Josh Bivens and John Irons and Robert Schiller have written, it's not so simple. Schiller's point, though nearly a year old, is still very much operative:

The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

I mention this because the paper's authors conclude that, in order to achieve a debt-to-GDP ratio of 60 percent, "raising the top income tax rates would need to be combined with spending reductions or other revenue measures to meet debt-reduction goals in the specified target years." The exact nature of these reductions isn't specified, which is fine in the abstract, but not so much in reality.

When the rubber meets the road, the reductions almost never occur in, say, the military's budget -- which, if not sustainable, is needlessly bloated -- as opposed to entitlements. This sort of thinking is what provoked last month's surreal scene, during which Defense Secretary Leon Panetta, in his apparent new role as head of the OMB, told Congress that "[if] you want a deal with the size deficits that this county’s facing, you better put everything on the table." By "everything" he meant, of course, entitlements.

All of which is to say that I agree with the conclusions of this paper, within reason. If cutting the deficit is a priority -- which, when stacked against unemployment and housing, I'm not sure that it is -- then by all means raise the top income tax rates, as the authors suggest. But we ought to be careful and not callous about how we allocate the austerity.