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We Know How The Budget Got Here... Now What?

David Godow
January 31, 2011, 6:20pm

The Tax Policy Center's Joseph Rosenberg takes a crack at tracing the unsustainable path of the fiscal budget over the last 40 years while outlining a way to get us off it. It's interesting that while his "how we got here" narrative resembles what you'd expect from a fiscal conservative (long-term imbalance between spending and revenue, the impending crisis of entitlement spending), he proposes exactly the opposite remedy: raise revenues to meet spending.

Rosenberg argues that "even with sizeable and painful spending cuts, the Federal Government will need more revenue than the 18 percent historical average." He adds, quite reasonably,  that "we have to raise enough revenue to pay for the spending we choose." That second statement might seem tautological - obviously, everyone would like for the government to have enough money to pay its expenses - but it reveals a basic philosophical assumption about how government should fund itself. If Rosenberg is right, the government should ex ante decide what is worth having and, regardless of current income limitations, somehow find a way to pay for it. This is, of course, the equivalent of deciding you really need a Lamborghini, then, when things take a turn for the worse, breaking out the credit cards to make your payments rather than selling it. It's a fundamentally different approach from the one that American households employ every day: taking your income as a given and planning expenditures around that.

Later on, Rosenberg suggests that "we should seek a system that ... is flexible enough to adapt to changing spending priorities that our democratic process will ultimately determine". Public choice economists, of course, could have a field day dissecting just how "democratic" the process of spending taxpayers' money is.

But the real point here is flexibility. How "flexible" should a tax system be? Enough to turn on a dime and raise rates through the roof when revenues dip or Congress decides to spend more? Does "flexibility" mean the freedom to raise and lower tax rates every year to match expected revenues and spending patterns? Given the furor over the uncertainty created by the temporar extension of the Bush tax cuts last year, such a system would be devastating to business's ability to make long-term plans and invest.

There have been many hints that the two sides may be work together on budget reform and, at the very least, that understand the problem in the same way. Still, there's going to be no getting past the serious philosophical differences over how government should finance itself (nevermind what it should do). And that is a conversation no one is looking forward to


David Godow is Research Assistant


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