David Leonhardt has a good piece on the deficit and economic growth, riffing on two deficit reduction reports out recently. The Simpson-Bowles plan was a serious look at reforming the tax code and closing many of the loopholes that reduce tax revenue, while lowering overall tax rates on businesses and taxpayers. The more recent report is the Domenici-Rivlin plan, which is similar to Simpson-Bowles in its efforts to reform the tax code, but includes also a one year payroll tax holiday in order to provide more stimulus to the economy. Both plans take the deficit seriously and make good faith efforts to do so in ways that would be most beneficial to the economy.
Leonhardt wonders, however, if either plan focuses enough on the question of economic growth:
If the economy grew one half of a percentage point faster than forecast each year over the next two decades — no easy feat, to be fair — the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears, based on my reading of budget data from the economists Alan Auerbach and William Gale.
To get a concrete sense for what this would mean, you can play around with the The Times’s online deficit puzzle. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by the year 2030. If growth were a half point faster than expected, the needed savings would instead drop to less than $700 billion. That would mean many fewer painful choices, be they tax increases or Medicare cuts.
So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth. Ideally, it will lift growth.
I tried the Times deficit reduction puzzle and ended up with major surpluses by 2015 and even more significant surpluses by 2030. To do that, however, you have to have almost no sacred cows. The military, entitlement spending, foreign aid – everything has to face cuts, and the Bush tax cuts have to expire. The estate tax returns to the Clinton-era level, and loopholes are almost entirely done away with in the tax code. The mortgage-interest deduction would be reduced for high-income homeowners. I avoided a national sales tax and the bank tax and opted for a small carbon emissions tax instead. In the end, my plan found 69% of its savings in spending cuts and 31% of its savings in tax increases.
Now, according to Leonhardt, if we spurred the economy now – perhaps with stimulus such as a payroll holiday tax – we would be able to cut the deficit in 2030 almost in half. All it would take is a half point faster growth than currently projected. That’s a pretty good argument for stimulus now, long-term austerity.
Leonhardt rightly focuses on the deficit commissions’ focus on tax reform as a potential driver of economic growth:
Absolutely. This has been the argument for tax-reformers for years, and it’s good to see Leonhardt pushing this line of thought at theTimes. In fact, it’s good to see such bold, sweeping tax reforms on the table. The question is whether the president and congress will take any action to enact them. I hope so. It would be good for the economy well into the future.
