Tuesday, July 11, 2006

Today's Fiscal News

The Mid-Session Review of the Budget, to be released today, will show surging revenues and a shrinking budget deficit. Today's Washington Post gives us the predictable response of the right and left:

"The supply-side tax cuts of 2003 are working exactly as we would have expected," said Daniel Mitchell, a budget specialist at the Heritage Foundation. "Lower taxes on work, saving and investment leads to more work, saving and investment."...

"This all relates to the widening income disparities between high-income individuals and the rest of the population," said Robert Greenstein, executive director of the liberal Center on Budget and Policy Priorities.
Note that, logically, Mitchell and Greenstein could both be correct. One can simultaneously believe (1) that tax cuts encourage work, saving, and investment, and (2) that because of our progressive tax system, increasing income disparities help bring in tax revenue.

Indeed, the two points may be complementary. Gruber and Saez tell us that high-income people are more responsive to changes in tax rates. If they are right, then the supply-side effects that Mitchell applauds may be one of the causes of the income disparities that Greenstein deplores.

Meanwhile, we should not lose sight of the longer-term fiscal challenge:

"Even if somehow we balanced the budget by, say, 2010, we would look forward to an enormous fiscal problem," said Douglas Holtz-Eakin, a former CBO director and Bush White House economist.

"The projections are that the Social Security surplus will peak in 2010, and diminish every year thereafter, so ultimately, instead of collecting 5 cents on the national dollar and paying out 4 1/2 cents, we will continue to collect 5 cents and pay out 7 cents," Holtz-Eakin said. "And that's the good news. The bad news is Medicare. The demands on the Treasury go from 4 cents on the national dollar to 22 cents in the next 50 years."

These are facts that all economists, right and left, should be able to agree on.