'The Long-Term Budget Problem Is 100 Percent Spending'

Republicans have been called hypocrites and worse for supporting the Bush tax cuts, which come up for renewal at the end of the year. Some deficit groups project that, if extended, they could add up to $3 trillion to our deficit. I've repeatedly called the tax cuts unjustifiable in the long run, and I've called for tax increases in the next few years to repair the budget.

But I'm wrong. Well, plenty of people think of wrong, including Brian Riedl, a research fellow with the Heritage Foundation who recently wrote the WSJ article "The Bush Tax Cuts and the Deficit Myth." Yesterday we talked about the Bush tax cuts, the deficit, and big government spending. An edited transcript follows:

Brian Riedl.png

Make the case for the Bush tax cuts. Why aren't they as bad as liberals and moderates say? Why should we strongly consider extending them forever?

There are a lot of myths about the Bush tax cuts and the deficit. The first myth is that it caused the deficit. Going by CBO numbers, you take the $5.6 trillion surplus that was projected in 2001 and look at where we are today, and the tax cuts are responsible for only 14% of the swing. Everything else was the result of huge new spending and two recessions.

The second myth is that even if we extend all the tax cuts and fix the Alternative Minimum Tax, revenues will still exceed the historical average of 18 percent by 2020. The deficits projected by 2020 are because of spending. Let me say that again: the long term budget problem is 100% a problem of spending. There is no long-term revenue decline.

That leaves a lot of heavy lifting on the spending side. How do you close the gap?

First, when you're in a hole stop digging. Repeal ObamaCare, repeal the stimulus, repeal TARP.

Repeal the Recovery Act ... does that mean you were against the stimulus tax cuts as well?

I think Making Work Pay [that's the Recovery Act's tax cut plan, which gave families tax rebates up to $800] has had no positive effects. Making Work Pay was just a tax credit. Tax rebates never work because they don't change behavior. On the other hand, if you cut marginal tax rates, you create productivity, which causes growth.

How about long term?

I would create one cap for the whole budget. Government shouldn't grow faster than income. Under the cap, you can do what you want. But the federal budget as a whole should not grow faster than the family budget. That includes Social Security, Medicare and Medicaid reform.

How do you fix Social Security?

For Social Security, there are only three levers: means testing, raising the retirement age, and raising taxes. Raising taxes is the worst way. The reasonable way to fix Social Security is to raise the eligibility age combined with modest means testing of benefits at the top. If you do that you can pretty much fix it right there without new taxes.

How about Medicare?

Nobody has the answer, but I'll give it a shot. First, remember that payroll tax only funds Medicare A. The rest is funded by 25% premiums and 75% general taxes. Why should we pay for Warren Buffett's medicine? We shouldn't. So let's have heavier means-testing at the top, which could shave trillions off our long-term liability. 

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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