In his new study, Dennis Ippolito examines the critical relationship of taxes to other components of the federal budget over the course of American history. The volume demonstrates conclusively how wars, changing conceptions of the domestic role of national government, and fluctuating views about fiscal deficits and public debt have profoundly shaped the development of tax policy. Ippolito’s mastery of his subject and his confident deployment of a mass of evidence confirms his status as one of the leading and most prolific scholars of U.S. budgetary policy.
Anyone wishing to understand key changes in federal taxation since the 1787 Constitution endowed Congress with the power of the purse can do no better than to consult this volume. In addition to cogent analysis, it offers a plethora of helpful figures and charts to trace fiscal developments over time. Ippolito traces the evolution and decline of various tax regimes from the 1790s to the present to demonstrate the changing linkage between spending, borrowing, and tax policy. His study demonstrates how the nexus between this trinity was broadly maintained during the long ascendancy of the so-called “balanced-budget principle,” a convention whose authority prevailed for much of American history. In Ippolito’s thesis, the nexus was weakened in the 1960s and 1970s when domestic considerations – initially the promotion of economic growth and later the expansion of entitlement programs – took priority regardless of the incapacity of taxes to provide the necessary funding. It finally broke apart in the 1980s when Ronald Reagan established a quasi-wartime defense expansion while promoting tax reduction on a scale more usually found in the aftermath of war. It might be argued, of course, that ultimate Cold War victory at the start of the next decade was worth the cost of huge deficits, but fiscal imbalances would have been smaller had Reagan’s tax policy been more in tune with defense spending trends.
The restoration of outlay-revenue nexus in the 1990s proved short-lived. In explaining the spectacular transition from large deficits to large surpluses, Ippolito rightly credits policymakers for making politically tough decisions on spending restraint and tax increases, but notes the fiscal dividend reaped from the end of the Cold War that permitted large defense retrenchment. Arguably, however, he underplays another important and exceptional factor of that period—the stock market boom—which created a massive bonanza of tax revenues from capital gains and related levies that disappeared when the dot.com bubble burst. A new era of large budget deficits then came into being in the early twenty-first century, initially driven in large part by George W. Bush’s revival of the Reagan fiscal paradigm—with the important difference that his administration also promoted the expansion rather than reduction of domestic spending.
Ippolito’s historical review of budget policy provides the contextual prelude to discussion of the current deficit/debt dilemma facing the United States in the wake of the Great Recession of 2007-09 and how it might be resolved. The United States faces the risk of its public debt ultimately becoming unsustainable (if only in the sense that foreign creditors who currently permit its easy finance take flight because of concerns that it has become unmanageable). Ippolito is rightly adamant that increasing taxes—whether only on the rich or more broadly—is not the sole answer to this problem. He is equally right in insisting that holding the line against tax increases in the hope that adequate spending cuts will materialize has never worked in the past. Accordingly, it is essential that American government rediscovers the fundamental importance of taxes for revenue-raising—a reality lost since the 1960s (with the brief exception of the 1990s).
The author also contends that there should be “an informed debate over the most economically efficient way to raise revenues” [p. 267-68]. In pursuit of this, he offers some informative and, to this reviewer, sensible policy ideas that could feature in a partisan grand bargain that agreed expenditure restraint, particularly with regard to entitlements, and revenue enhancement. However, he stops short of suggesting how informed debate to discuss these and other options might come about. This is a pity as political scientists surely have something to say on this score.
A century ago, the Progressive era witnessed a series of budget reforms—culminating in the Budget and Accounting Act of 1921 to create a presidential budget—that improved the efficiency of the budgetary process to deal with the massive debt legacy of World War I. Today’s budget process is in similar need of an efficiency fix according to some commentators. But are there procedural reforms that might achieve similar benefits for making the budget serve national rather than partisan needs? And were this the case, should present-day parties agree on such measures, there would actually be no need for them in the first place because politicians would then also be capable of reaching more direct consensus on substantive policy.
Despairing of politicians, Francis Fukayama has suggested that the job of budgeting should be transferred to a blue-ribbon super-committee of technocrats, allowing Congress only amendment-free ‘yes’ or ‘no’ vote on its recommendations. However the capacity of technocrats to produce efficient fiscal policy is not borne out by the experience of the European Union. Moreover, the public is hardly more likely to accept austerity imposed by experts rather than by their elected representatives. In essence debt-reducing solutions that seek to depoliticize the budget ignore the reality that it is a highly political entity.
In Ippolito’s view both parties have “indulged the public” (p. 270) for decades that their competing visions of costly domestic programs (Democrats) and low taxes (Republicans) have not required pain elsewhere in the budget. This implicitly puts the blame on the people—and the quotation from Washington’s Farewell Address on page 1 about their duty to pay adequate taxes appears to confirm this. But surely the real culprits are the political classes that have failed for so long to exercise far-sighted fiscal leadership. In my opinion, a better start to the book would have been Alexander Hamilton’s words from 1782 that “when inquiry is what will please, not what will benefit the people … there can be nothing but temporary expenditure, fickleness and folly.”
Such carping aside, Dennis Ippolito has produced an important, insightful, and informative study. It powerfully makes the simple but fundamental point that, whatever short-term deviations may be justified, the broadly paramount goal of tax policy in the longer term has to be to raise the revenues necessary for government to achieve its purposes and run its functions. This truth has not shaped fiscal deliberations for nigh on half-a-century. Ippolito’s book will doubtless become required reading for students and scholars of public policy, but it also deserves a more general readership that can be informed about the nature of America’s fiscal problems and the ways of correcting them.
