Government

Can We Tame The Deficit Without Squeezing The Middle Class? (Cont'd)

In his latest New York Times Magazine column, Adam Davidson writes, "To solve our debt problems, we have to go to where the money is — the middle class."

To continue the discussion, we asked two economists on different sides of the debate — Jared Bernstein, former economic adviser to Vice President Joe Biden, and Alan Viard, who was an economic adviser to President George W. Bush, — to answer the following question.

Can we get the country on a sustainable spending path without raising taxes or cutting benefits on Americans who make $30,000 to $200,000 a year?

Jared Bernstein's answer is below. To read Alan Viard's answer, click here.

I wouldn't ask the question this way. I'd ask: What tax and spending changes are necessary to achieve a sustainable budget path, meaning a stable debt-to-GDP ratio?

Such changes will ultimately require higher taxes on households below $200,000, but they neither need to, nor should, occur right away.

In fact, a stable debt ratio can be temporarily achieved without raising middle-class taxes, as revealed by the budget released by President Obama a few months ago in his recommendation to the deficit reduction "supercommittee" (though households below this income level would be hit by the impact of some spending cuts—see here).

Still, while the President's budget does achieve sustainability within 10 years, the debt ratio would begin to rise again after 2021. This is partly a function of inadequate tax revenues, although the most important contributor to our long-term debt burden is the growth of health costs.

We will, down the road, need to raise federal taxes on families with incomes below $200,000 (though I certainly wouldn't want to see us raising taxes on families with incomes as low as $30,000). Still, we can whack the middle class all we want, but we'll never achieve sound budgets unless we deal with health-care spending, which continues to grow much faster than the overall economy.

We should also be mindful of just how hard things have been on the broad middle class in recent years. Even before the recession, middle-class incomes were falling — from $61,600 in 2000 to $59,500 in 2007. In the past few years, the decline has accelerated. And that's before the recession cost those families another $4,200 a year (that's their real losses, 2007-10).

To hit those families with a tax increase while the economy remains weak strikes me as what a football referee would call "unnecessary roughness." For many of these families, economic growth has largely been a spectator sport, as whatever prosperity this economy has achieved has done an end run around them on its way to the top 1 percent. (Ok, enough with the sports analogies!)

Analytically, I understand the argument that we need to raise taxes on the middle class. Putting aside the new spending cuts and tax increases in the President's September budget, a full, glorious sunset of the Bush tax cuts — for people at all income levels — would mean a deficit to GDP ratio of about 3.5% in 2021.

That gets you most of the way to "primary balance," meaning we'd be generating enough revenues to pay for current spending outside of debt service. That's an important step on the path to stability (with a deficit of 3% of GDP, the debt-to-GDP ratio stops rising).

On the other hand, if we only allow for the expiration of the Bush cuts on high-earners, the deficit-to-GDP ratio will be 5% by the end of the decade, and that's not sustainable.

But we must consider timing. One can't know for sure, but I'm afraid it will be a few years before the pretax income of middle-class households begins to steadily grow in real terms. Until then I'd argue to implement the President's budget and holding off on any middle class tax increases.

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