Economic and Fiscal Debates Must Distinguish Between the Short Term and Long Term

The U.S. Capitol building is seen after a snowstorm in Washington, January 3, 2014.

Understanding the federal budget requires distinguishing between the short-term and the long-term fiscal outlooks. In the long term, tax revenues will not be adequate to support foundational programs such as Social Security, Medicare, and Medicaid as the U.S. population ages. Therefore, deficit reduction is an important long-term concern. In the short term, however, deficits are low, and temporarily increasing deficit spending is an appropriate response to a struggling economy. Spending now on new investments such as infrastructure, education, and research helps build the strong economy that will be critical for a stable long-term budget. In the short term, growing the economy and raising wages should be the top priorities, and long-term fiscal issues should not be used as an excuse to block immediate investments to grow the economy.

Policymakers and the media often confuse this distinction between the short term and the long term, as in a recent Huffington Post article about Antonio Weiss, who co-authored a 2012 Center for American Progress report on tax reform and who President Barack Obama nominated to be under secretary for domestic finance at the Department of the Treasury. The article interprets the 2012 report’s emphasis on deficit reduction as not progressive and at odds with CAP’s more recent work. But in the long term, tax reform must focus on deficit reduction to protect Social Security, Medicare, and Medicaid. In contrast, opposing new revenue for long-term deficit reduction requires fundamentally altering and deeply cutting these programs, which is the approach taken by the House Republican Budget for Medicare and Medicaid.

CAP’s 2012 tax reform report advocated a highly progressive tax code to ensure that those at the top, who reaped the vast majority of the economy’s recent gains, would pay their fair share. The report recommended raising revenue to reduce deficits by $1.8 trillion over 10 years, in part by increasing the top income tax rate and reducing tax breaks for those at the top. CAP also recommended taxing dividends as ordinary income and taxing capital gains at a top rate of 28 percent, which is higher than the capital gains rate that President Obama supported at the time. Tax preferences for investment income are skewed heavily toward the wealthiest Americans, making this proposal especially important for progressivity.

After CAP published the 2012 tax reform report, lawmakers passed a tax bill that raised revenue relative to 2012 levels, though by far less than CAP recommended. As a result of that bill—along with deep spending cuts; slow growth in health care costs; and an improving, but still struggling, economy—deficits fell dramatically. Despite these changes, many lawmakers and pundits were still treating the deficit—rather than the economy—as the most urgent crisis facing the country. CAP called for a renewed focus on economic growth in a report called “It’s Time to Hit the Reset Button on the Fiscal Debate.” This did not mean that revenue was no longer needed for long-term deficit reduction—it still is—just that this should not prevent action on more urgent economic issues.

The political landscape has changed along with the fiscal landscape, and political context is important to remember for both the 2012 tax reform report and the 2013 fiscal reset report. The tax reform report was published on December 4, 2012, with the Bush tax cuts set to expire at the end of that year. This expiration was going to force lawmakers to take major action on taxes, and the CAP report was written to inform that decision. Understanding the larger fiscal context is critical for sound tax policy, since anyone would prefer lower taxes to higher taxes in the absence of other trade-offs. That is why the CAP report emphasized the importance of deficit reduction in tax reform.

CAP subsequently published the fiscal reset report to address a new political context, as well as the changing fiscal landscape described earlier. Sequestration was supposed to force lawmakers to take action on long-term deficit reduction, but lawmakers instead allowed the across-the-board spending cuts imposed by sequestration to take effect on March 1, 2013, an outcome that was never supposed to happen. Sequestration hobbled the already slow economic recovery by increasing fiscal austerity instead of making new investments. This austerity hurt the economy in a misguided effort to reduce short-term deficits and did not even address the aging population, rising health care costs, or inadequate tax code, all of which drive long-term deficits. In fact, any progress on long-term deficits was now highly unlikely; the threat of sequestration failed to force meaningful action, and the expiration of the Bush tax cuts no longer drove tax policy after Congress resolved this issue at the end of 2012. As the fiscal reset report, published on June 6, 2013, explained:

With conservatives calling [President Obama’s] compromise offer “dead on arrival,” we remain stuck in perhaps the worst of all possible fiscal realities. We remain living with the painful, counterproductive, and near-universally derided “sequester” spending cuts. The long-term fiscal challenges remain mostly unsolved. We remain unable to use federal fiscal policy to address immediate economic problems, to say nothing of underlying structural ones. And the budget issue itself remains an obstacle to progress on all manner of unrelated policy areas.

The economy has improved since 2013, but it is still operating well below its full potential, and too many Americans remain unemployed or underemployed. As long as this continues, growing the economy should be the top priority.

In a perfect world, lawmakers would pair short-term investments to grow the economy with long-term deficit reduction that includes new tax revenue, but that is clearly not the world in which we live. As a result, insisting that the cost of short-term investments must be offset with long-term deficit reduction only serves to block those short-term investments that are so necessary for growth. But there is nothing wrong with stressing the continued need for more revenue to address the nation’s long-term fiscal challenges, and progressives do our cause a disservice by marginalizing people who make that case effectively.

Harry Stein is the Associate Director of Fiscal Policy at the Center for American Progress.