Government has a revenue problem, not a spending problem

I do not accept the premise of this blog post.

Government debt today is not a bigger problem than collective under-investment in our health, education, infrastructure, and environment. And fortunately, there does seem to be at least a short-term consensus that government should spend what is necessary to protect us during this crisis.

However, policymakers are already preparing for the debt battles to come. Robert Rubin recently wrote that "Congress should commit now to address -- when conditions allow -- the increase in debt as a share of our economy, which was already seriously worsening before the crisis." He recognizes that "There will be ample room to increase revenues, on a highly progressive basis, for example, by increasing corporate taxes, restoring individual rates, repealing pass-through preferences and imposing a financial transactions tax."

Every 18 months or so the Congressional Budget Office publishes an Options for Reducing the Deficit report. It shows how much the CBO estimates that government could save by implementing various policies. A quick glance makes it pretty clear that anyone pushing for deficit decreases without pushing for at least some tax increases is probably not being entirely serious.

The top 10 options for raising revenues result in savings almost four times as great as the top 10 options for cutting spending. Not to mention that policies to increase revenues generally don't have much impact beyond slightly smaller numbers in the personal finance spreadsheets of comfortable Americans, while policies to decrease spending generally affect the least fortunate or do not solve problems -- for example cutting Medicaid costs and shifting parts of it onto state budgets.

PS: certain economists might say that the CBO estimates do not account for macroeconomic feedback and incentive effects. This is correct. However, those impacts are much less conclusive than is assumed in mainstream macroeconomic models, and in fact sometimes go the opposite way.

Additionally, the CBO document (and therefore the chart above) does not include estimates for recent larger revenue plans such as a wealth tax, which could raise more than $3 trillion over 10 years.

PPS: Olivier Blanchard basically said as much in his concluding remarks in November 2019 House testimony, Reexamining the Economic Costs of Debt -- government has a revenue problem, not a spending problem.