The issue of taxes has quickly become the leading issue of the 2012 presidential election. In his State of the Union speech President Obama called for a “Buffet Rule” which would ensure a 30% tax rate on millionaires. Mitt Romney and Newt Gingrich, the two leading Republican presidential candidates, both have proposed lowering tax rates, even on the wealthiest Americans. The revelation that Romney only pays a 13.9% tax rate on a multi-million dollar income brought even more attention to the issue. Thus far the debate has centered on fairness, capitalism, and allegations of class warfare and envy. However, the real focus of the debate should be on Medicare, Medicaid, and Social Security, because the fate of those programs will ultimately be decided by what happens on tax reform.
For a second let us put aside arguments over fairness and class warfare. To a certain degree, such claims are based on perceptions which vary by person, and certainly cannot be verified with science. Numbers, on the other hand, are objective.
The numbers show that America is currently running a deficit of approximately $1.29 trillion in 2011, and is expected to run a deficit of $1.10 trillion in 2012 even after making hundreds of billions in spending cuts in the last budget agreement. Deficits are created when there is less revenue than outlays. While analysts disagree about the severity of the problem right now, all agree that the deficit problem must be solved in the long term. The deficit can only be solved by raising revenues, though economic growth and/or higher taxes, or by decreasing the outlays.
The Republican plans would undoubtedly reduce government revenue. A joint-study by the Urban Institute and Brookings Institution found that Romney’s tax plan would lead to $600 billion in less revenue in 2015. According to the Tax Policy Center the Gingrich plan would reduce revenues by $1.28 trillion in 2015.
Republicans are fond of arguing that they can reduce taxes while simultaneously keeping revenue the same. This was the argument used by presidents Reagan and George W. Bush to pass their tax cut packages. The federal debt doubled under President Reagan, and then nearly doubled again under President Bush. The economic growth created by tax cuts never fully bridges the gap on lost revenues. In contrast, President Clinton raised taxes on the wealthiest Americans, and then left office with a budget surplus rather than a budget deficit.
So keeping that we are already running a deficit of over $1 trillion, the Romney and Gingrich plans would only expand that further unless spending cuts are made. And this is where Social Security, Medicaid, and Medicare come in to play.
The total federal budget for 2011 was $3.8 trillion. Conservatives sometimes claim that they could pass tax cuts without touching Social Security or Medicare, but the math simply does not work. Social Security, defense spending, Medicare, Medicaid, and interest on the federal debt make up 64% of the total federal budget. Medicare, Medicaid, and Social Security will actually take up a larger part of the budget in the future as more Baby Boomers become beneficiaries. Even if Romney and Gingrich completed eliminated discretionary spending to programs like the Food and Drug Administration, the EPA, and the Department of Veteran Affairs they still would not have enough money to pay for their tax cuts. The only possible way to pay for the tax cuts would be by making large cuts to Medicare, Medicaid, Social Security, or defense. Both Romney and Gingrich have actually announced their opposition to any further defense spending cuts.
The alternative involves letting the Bush tax cuts expire in 2013. If all of the Bush tax cuts were allowed to expire it would actually eliminate the deficit within a decade. President Obama has said he would like to keep the tax cuts for the poor and middle-class, while allowing the cuts for the wealthiest 2% to expire. The Obama plan would not solve for the deficit, but it would at least raise some revenue to help pay for Social Security and Medicare.
Polls consistently show that Americans oppose any cuts to Medicare and Social Security. This is likely why we have not heard many mentions of the inevitable cuts that would come to these programs if Romney or Gingrich cut taxes. Americans like lower taxes, but prefer not to think about the tough decisions that must be made as a result of the lower revenues. This phenomenon is at least partly to blame for our current deficit. Americans have been promised that the tax cuts of the last three decades can be paid for by just cutting down on “wasteful spending.” However, there are not enough “bridges to nowhere” in the world to pay for the tax cuts, and now the public is finally facing the reality of keeping their tax cuts, or keeping their social programs, the two are simply not compatible with each other.
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