I’m listening to Congress debate Cut, Cap and Balance on C-Span web and yes, it’s self-inflicted torture. Each side claims solidarity with the American people, most of whom curl their lips in distaste when Congress is mentioned. We have a huge debt, but Punt, Pass and Kick (I mean Cut, Cap and Balance) or The Gang of 6 plan, or the McConnell plan are screens that obscure the main question, which is: How much of the GDP will we allow to be tax revenues?
My pardon to Republicans, but we are paying too little in taxes at this time, primarily because the Bush tax cuts were extended. We cannot sustain that low level of taxation, which is less than 15 percent of GDP. On average, the past 66 years, taxes have been 18.5 percent of the GDP.
Fact: We cannot sustain entitlements at that level. The real debate is over how high we will move taxes as a rate of the GDP. The highest level it has ever been is 1944, when it was 20.9 percent and we were fighting a war.
Last year’s debt commission recommended that taxes make up 21 percent of the GDP. It’s interesting that President Obama rejected that all-time high number. I suspect he rejects it because he, the president and Democrats, understand that the tax percentage of the GDP will have to be quite a bit higher to sustain even smaller-than-expected growths in Medicare and Social Security, and the Obama health care bill. Example: The Center for American Progress, which is a think tank closely adhered to by the White House, wants taxes to 23.8 percent of the GDP. (Read)
Republicans of course want the opposite, preferring to keep taxes low and cut non-discretionary spending as much as they can while tinkering with the big entitlements and doing away with the health care law.
Both of these “solutions” come with uncertainty. The Democrats’ plans could move tax revenues to a heighth that stalls the economy. Republicans who want low tax rates to continue have to understand that our entitlements can’t be sustained on a wing and a tax prayer. In any event, the percentage of taxes that makes up the GDP is the most important budget debate.