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By Root 487 0

America today, where an ongoing thirty-year tax revolt predominates. Without adequate taxation, we can’t live in a civilized country. Middle-class Americans are so sure that higher take-home pay is the key to their happiness that they’ve lost track of the need to pay taxes to fund society-wide undertakings and avoid an explosion of public debt. More important, middle-class Americans have repeatedly given the green light to tax cuts for the richest Americans, allowing income and wealth to concentrate among a tiny fraction of the population. The richest then invest a very small fraction of their wealth to dominate the airwaves, enrich members of Congress and their families, and preserve their privileges. Congress needs little cajoling by lobbyists; it has itself become a millionaire’s club, with 261 members, almost half, of today’s Congress holding at least $1 million in assets.6

Getting the rich to accede to Justice Holmes’s wisdom is a big part of the challenge. Getting the government to plan and implement long-term policies properly and competently is another. The two changes are, of course, inseparable. There is no way to increase the scale of government if the government remains as incompetent and corrupt as it is today. This chapter takes up the challenge of how to pay for a government that does its proper job. The next chapter takes up political reform, how to take government back from the corporatocracy and put it back into the service of public well-being.

The Basic Fiscal Arithmetic

America’s peacetime budget deficit is unprecedented: $1.3 trillion in 2010, equal to 9 percent of the national income. And the deficit could well remain above $1 trillion for years to come. The problem with economic reform in America is how to pay for public goods: quality education, college completion, advanced energy technologies, improved roads, safe child care, and decent health care. The quality of life is deteriorating because we refuse to pay for the public goods needed for a civilized society.

The Tea Party’s answer is to leave the needed investments to the private market. This, as we’ve seen in earlier chapters, will not do. We are required, in one way or another, to address the budget deficit and at the same time address the challenges that we’ve inherited from these market failures and the powerful forces of global capitalism.

The lack of budget resources is now the fundamental constraint on effective governance and a sustainable recovery. It’s fair to say that all our civilian programs other than the entitlements programs are paid for with borrowed money and borrowed time. The result, as we know, is political paralysis. As much as we’d like to do more and better things, we simply can’t afford them. And the squeeze on civilian discretionary programs has tightened considerably over the years, since Ronald Reagan put the country on the course of repeated tax cuts.

There is nothing more important today than understanding the basic arithmetic of the budget and of household incomes to understand the predicament.

This is shown in Figure 11.1. Under the current tax system, the federal government will collect around 18 percent of GDP in 2015, with the breakdown shown in the chart. For this baseline calculation, I assume that the Bush-era tax cuts that were extended at the end of 2010 for two years will be extended again after 2012.7

Figure 11.1: Revenues and Outlays as a Percentage of GDP in 2015 Budget Projections

Source: Data from Office of Management and Budget Historical Tables and author’s estimates.

There are three main sources of federal revenues. Roughly 8 percent or so of GDP in 2015 will come from personal income taxes, around 6.3 percent will come from payroll taxes for Social Security and Medicare, and 2.2 percent from the corporate tax. The rest, around 1.5 percent, will come from a variety of excise and other taxes.

To prepare a spending baseline for 2015, I divide the budget into six main categories. Under current law Social Security will account for around 5 percent of GDP. On current trends, health care