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CAP's Budget Plan: Not Enough Revenue for Future Challenges

David Callahan

The Center for American Progress is out with a budget plan that would reduce deficits by $4.1 trillion over the next decade and, at first glance, seems to makes a good deal of sense.

Two former Treasury secretaries -- Larry Summers and Robert Rubin -- are listed as co-authors of the plan, along with Roger Altman, William Daley, John Podesta, Leslie Samuels, Neera Tanden, Antonio Weiss, Michael Ettlinger, Seth Hanlon, and Michael Linden. An impressive brain trust by any measure.

The plan would raise about $1.8 trillion in revenue over the next decade, which is about $200 billion more than what President Obama is asking for. It would do this by raising the top tax bracket back to 39.6 percent, where it was under Clinton, and also raising the top rate for capital gains to 28 percent -- nearly double what it is today -- as well as treating dividends as ordinary income. CAP's plan would also simplify today's labyrinth of tax deductions and exemptions, and limit the value of some deductions for high-income earners. 

On the spending side, CAP's plan counts the $1.5 trillion in spending cuts already enacted last year toward its overall $4.1 trillion figure. Then the plan tosses in another $100 billion in defense spending cuts, an additional $100 billion in other cuts, and $385 billion in savings on healthcare spending. The plan would also spend $300 billion in new money on job creation. 

The bottom line here: No drastic new domestic spending cuts and a tax plan that whacks the rich and no one else. 

All that sounds good, right? Well, not exactly. The big problem with CAP's plan is that it doesn't raise enough revenue to meet future national challenges and would lock in place a good chunk of the Bush tax cuts, handing conservatives a historic victory on the size of government. 

Under CAP's plan, revenue as a share of GDP would increase to about 20.5 percent by 2022. In comparison, letting all the Bush tax cuts lapse would raise revenue to 21.5 percent. Over time, we're talking about well over $2 trillion that CAP's plan forsakes in revenue in order to keep in place Bush's tax cuts on less affluent earners. CAP estimates that households making between $75,000 and $100,000 would pay $2,233 less in taxes in 2017 under its plan than if the Bush tax cuts lapsed entirely. 

But here's an obvious question: Why should taxes on the vast majority of earners be kept as low as they are right now? After all, according to a recent New York Times investigation:

most Americans in 2010 paid far less in total taxes — federal, state and local — than they would have paid 30 years ago. . . . the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Putting aside the question of taxes on the wealthy, what CAP is basically saying is that today's historic low rates for most people are fine and good -- that America can afford to have the majority of its citizens paying the lowest taxes in thirty years. What CAP is also saying is that overall revenue as a percentage of GDP should not rise above the high point it reached in 2000, of 20.6 percent. 

Neither of these propositions make sense, given the spending challenges the U.S. faces as the Baby Boomers retire and global competition intensifies. 

Even if healthcare expenditures can be contained, a big If, the retirement of the Boomers -- which is already underway -- will be an expensive proposition, and yesterday's tax burdens won't be up to that challenge. This is especially true given that most Boomers have not saved nearly the money they need for retirement and, realistically, anti-poverty spending on seniors will need to be greater than anyone wants to admit. As a study by Senator Harkin's office noted earlier this year: "nearly half of the oldest Baby Boomers are at risk of not having sufficient retirement resources to pay for basic retirement expenses and healthcare costs." The U.S. also will need to spend more on anti-poverty efforts if it ever wants to achieve CAP's goal of reducing the poverty rate by half in the next decade. 

At the same time, the U.S. is facing unparalleled competitiveness challenges. One key to dealing with the rise of China, India, and other emerging nations -- not to mention competition from Europe once it recovers -- is to invest far more heavily in the foundations of prosperity: education, infrastructure, science, and renewable energy. Sorry, but the $300 billion in spending that CAP proposes along these lines -- a mere $30 billion a year in a $15 trillion economy -- isn't going to cut it. One analysis, from 2009, argued that the United States needs to spend $2.2 trillion in infrastructure over the next five years. Another analysis estimated that the United States needs well over $700 billion in additional spending on water and waste treatment infrastructure alone in the next decade. And never mind the cost of actually addressing the U.S.'s education challenges. 

Now, maybe new spending on this level is unrealistic. But why is Washington's leading progressive think tank putting out a proposal that would prohibit nearly all future large-scale new investments by government in order to lock in place Republican tax cuts? 

Moreover, if something bad happens down the line: a serious spike in global interest rates or a major national security emergency or pandemic, then we'll really be in trouble with CAP's bare bones revenue plan. 

I think Robert Greenstein, the president of the Center for Budget and Policy Priorities, had it right when he said earlier this year at a roundtable discussion organized by The American Prospect:

If we're not able to think more broadly about revenue -- not just about people at the very top -- then the numbers aren't going to work, and you're likely to have serious damage: deeper cuts in low-income programs than other parts of the budget. That really is a challenge for progressives to get beyond the obvious politics and populist appear and be able to talk about revenues in a significantly broader way.

Greenstein estimated that federal taxes will need to be between 23 and 25 percent of GDP in order to pay for all the spending priorities that most Democrats generally embrace. 

CAP's plan has many good elements, but it simply doesn't face up to revenue realities.