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History Lessons from Past Deficit-Reduction Packages

Compromise didn’t use to be a dirty word.  With revenue increases a major sticking point in the congressional “supercommittee’s” effort to cobble together a budget plan, we looked at past deficit-reduction packages and found that revenue increases were part of nearly every major package in the 1980s and 1990s, under Democratic and Republican administrations alike.

Revenue increases dominated the 1982 and 1984 packages, offsetting part of President Reagan’s large tax cuts of 1981, and were a major component of the 1987, 1990, and 1993 packages (see graph).

A key aim of fiscal sustainability is a stable or declining ratio of debt to Gross Domestic Product (GDP).  To achieve that, we need to get deficits in the medium term down to about 3 percent of GDP.   But under current policies, the deficit will be about 4 percent to 5 percent of GDP for the next decade even after the economy recovers and after we have phased down operations in Iraq and Afghanistan.

So we need to cut the deficit by 1 percent to 2 percent of GDP in the coming decade — an amount that rivals the biggest deficit-reduction efforts of the past.  The amount of deficit reduction for later decades will need to be even larger.  Meanwhile, the nation faces a graying population and continued demands on government in the areas of defense, homeland security, veterans’ care, infrastructure, and other needs.

Given the size of that challenge, and the need to phase in any entitlement changes gradually, the next round of deficit reduction must include substantial revenue increases.  In fact, simply letting the Bush tax cuts expire at the end of 2012 — or paying for those provisions that we choose to extend — would essentially stabilize the deficit for the next decade, buying us time to adopt gradual changes in entitlement programs and figure out the best ways to control health-care costs without jeopardizing coverage.

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