This morning, President Obama proposed confronting our long-term debt crisis with “modest adjustments” to Medicare and Medicaid, as well as higher taxes. But in reality, even if tax revenues were raised to record levels, we’d still need to make significant changes to entitlement programs to put to the nation on a sustainable fiscal path.
Just so I won’t be accused of misquoting Obama, here’s what he said:
At the end of the Clinton administration, which we’re told was much more equitable than the tax system that came in place under the Bush era, tax revenue as a percentage of GDP hit 20.6 percent, near the record of 20.9 percent in 1944, during World War II. So for the sake of discussion, let’s say Obama was able to bring tax revenue to 21 percent – an all-time record.
In the two graphs below, I demonstrate what the fiscal gap could be if we held revenue constant at a record 21 percent of GDP, but allowed spending to grow as projected. The first graph is based on what the Congressional Budget Office calls its “baseline” scenario, which assumes all current laws get implemented as written. The gap between the two lines, represented in red, are the deficits.
The CBO also provides us with an alternate scenario, “which incorporates several changes to current law that are widely expected to occur…” For instance, under current law, doctors are supposed to see their Medicare payments reduced, but each year Congress prevents those cuts from going into effect, so the alternate scenario assumes that Congress will continue acting in this fashion. Here’s how that much worse scenario looks:
Keep in mind, that in today’s dollars, 1 percent of GDP is roughly $150 billion. So when the gap reaches 20 percent, for instance, that would translate into a deficit of $3 trillion for one year alone.
No amount of rhetoric by Obama is going to change the numbers. Obama says he only wants to raise taxes on higher-income earners, but the Clinton era revenues were achieved with higher tax rates on everybody, not just the rich. And as we see, even those levels get us nowhere near closing the fiscal gap. To close that gap, we have to address entitlements – and “modest adjustments” won’t do.
