Between the Lines: To shrink the deficit, repeal the sequester

By David Lias

According to a recent Gallup poll, a lot of us Americans – 51 percent – don’t know enough to judge whether the automatic cuts in the budget put in place last Friday are a good or a bad thing for the country.

The remainder tilt toward negative evaluations of the sequestration’s impact on the country, by 30 percent to 18 percent. Similarly, the majority of Americans don’t yet have enough information to judge sequestration’s impact on themselves personally, but among those who do, the tilt is negative, by 26 percent to 17 percent.

Count us among the pack that is tilting negatively. We certainly aren’t in a position to claim exactly how the sequestration may affect us here in Vermillion, or the impact it may have on our fellow South Dakotans.

We know one thing – while it’s hard to argue with a cut in spending in an era where Washington, DC seems to reach new levels of fiscal irresponsibility, the sequestration is a dumb way to trim federal spending.

We also know the federal government plays a very important role in the economy, in employment, in supporting consumption and investment, and in building and running the infrastructure that enables commerce.

It’s still early. The sequestration, now only a week old, really hasn’t had time to have much of an effect on our daily lives. We’re waiting, as time marches on and Congress and the Obama Administration make no progress toward a compromise, for the full brunt of the cuts to hit.

We suspect things could become unpleasant in the near future. Needlessly.

The whole point of the sequester was to cut the deficit – meaning the difference between what the government makes in taxes and what it spends. Yet through natural forces, the deficit has already been cut by essentially the same amount the sequester would cut.

This seems to have escaped everyone, according to Daniel Gross, a columnist for The Daily Beast.

He notes that when the sequester was set in motion in the summer of 2011, the government was about to complete its second straight fiscal year with a $1.3 trillion deficit.

This deficit followed a slump in the economy of which we are all aware. Tax revenues from payroll, income, and corporate taxes fell. At the same time, spending on unemployment benefits rose and the political system provided stimulus through tax cuts or higher spending.

That all happened in the 2009-2011 period. So the deficit quickly grew by big leaps and chunks.

Gross points out that the opposite can also happen. When the economy improves, and more people go back to work, receipts from corporate, payroll, and income taxes rise at the same time that money spent on unemployment benefits decline. That means the deficit can decline quickly.

Plus, in January 2013, taxes rose significantly. The Social Security payroll tax rose from 4.2 percent of income up to $113,700 to 6.2 percent (that’s an increase of almost 48 percent), while taxes on very high earners rose a few basis points.

According to the Treasury Monthly Statement for January, through the first four months of fiscal 2013 the government has collected $468 billion in individual income taxes, up 15.8 percent from $404 billion in the first four months of fiscal 2012.

Also, through the first four months of fiscal 2013, social insurance and retirement taxes (Social Security, Medicare) came in at a $254.9 billion, compared with $241.1 billion in the first four months of fiscal 2012 – an increase of $13.8 billion, or 5.7 percent. So far this fiscal year, the combined receipts of taxes tied to jobs and employment are $723 billion, up $77.9 billion from $645 billion in the first four months of fiscal 2012. That’s a 12 percent increase.

Rising payroll-tax collections and declining unemployment have produced $86 billion of deficit reduction in the first four months of fiscal 2013 – which is almost exactly the amount the sequester hopes to achieve.

Let me repeat that – rising tax collections and declining employment have produced $86 billion of deficit reduction in the first four months of fiscal 2013.

Let’s assume that these trends continue through the remaining eight months of this fiscal year. Gross notes that if employment-related taxes rise and spending on unemployment benefits declines at these same rates, it will mean an extra $228 billion in revenue in fiscal 2013 compared with fiscal 2012, and $21.6 billion less in spending on unemployment benefits – or $249.6 billion in deficit reduction. That’s three times the amount of deficit reduction the sequester will produce.

The sequester wasn’t needed. Our economy was doing a fairly good job of hitting on all cylinders. Our economic recovery has been slow, we’ll acknowledge. But the ship of state, once moored, seemed to be charting a course in the right direction.

We can’t help but wonder if that grand ship, slowly gaining steam, may eventually become the equivalent of that ill-fated Carnival Cruise – adrift, with no power, and lots of unhappy people on board. That may be end result of the sequester.

Maybe the smart thing to do is simply repeal the sequester, and watch as the deficit keeps shrinking on its own.

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