Arnold Kling  

The Budget Debate

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The Congressional Budget Office provides an analysis of the long-term Budget outlook.

The projections also assume for analytical purposes that aggregate federal revenues will level out at 19 percent of GDP in 2020, reflecting the higher end of the range over which they have fluctuated during the post-World War II period (18 percent was the average from 1950 through 2001).

Essentially, what this exercise shows is that it will be impossible to maintain revenue at 19 percent of GDP and pay for future entitlement programs. Either revenues must be higher, or entitlement spending must be cut.

Paul Krugman makes a similar point.

As the baby boomers retire, spending on Social Security benefits and Medicare will steadily rise, as will spending on Medicaid (because of rising medical costs). Eventually, unless there are sharp cuts in benefits, these three programs alone will consume a larger share of G.D.P. than the federal government currently collects in taxes.

For Discussion. Krugman says that "to close the fiscal gap, spending on these programs would have to be cut by around 40 percent...this sounds politically impossible...Yet closing the fiscal gap by raising taxes would mean rolling back all of the Bush tax cuts, and then some. And that also sounds politically impossible." Should the American people be asked to choose explicitly between a gradual increase in the retirement age and an increase in taxes? Should the trade-offs be spelled out and then put to a vote?

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COMMENTS (8 to date)
Matt Young writes:

America is suffering the European disease in which entitlement costs are starting to kill off the young people who are supposed to pay the taxes.

The US cannot get taxes beyond 19% for any length of time, especially because of the state/federal government structure.

The US will do what it has always done, reform the system bit by bit, just as the Europeans are doing. We see a movement toward the rationing of Medicare, the drug prescription plan as delayed, a majority of young workers doubt Social Security will be there for them, and California is moving toward a cash labor market to avoid the tax bite.

Sean writes:

First off, historical data does not support the conclusion that increased marginal rates lead to increased tax revenue as a percentage of GDP. In fact, if one looks at a graph of top marginal rates and revenue as a percentage of GDP over time, there appears to be no correlation at all.

Next, there seems to be an implicit assumption in the current debate of the long-term fiscal outlook that there must be a trade-off between fees and services. I don't accept that assumption. If we were to enact fundamental reform of our two major entitlement programs (Medicare and Social Security), wouldn't the trade-off be unnecessary?

Why should Americans have to choose either higher taxes or less services if the option of fundamental reform is still on the table?

David Thomson writes:

Nothing is going to be accomplished as long as our senior citizens are encouraged to feel sorry for themselves. The vast majority of them are among the wealthiest Americans alive. Shockingly, these same folks have been seduced into embracing the rhetoric of victimization. To be blunt, many of our elderly are merely a bunch of selfish rascals out to essentially steal from the young. Do I seem a bit harsh? Hey, I’m just telling the truth---and everybody knows it.

Mcwop writes:

These things are all politically difficult, because there are no guarantees that politicians will follow through with what is promised. Instead, politicians are more likely to react only to the situation at hand. The potential solution is to provide fixes that structurally secure individual benefits (lock box idea that generates taxpayer conficence that their money won'y be squandered). Separate benefits from the daily whims of politicians and change might stand a chance with many taxpayers.

Eric Krieg writes:

>>Should the trade-offs be spelled out and then put to a vote?

What do you think this is, California? Nothing is put to a direct vote in our republic.

I said it before and I will say it again. Taxes will NEVER be raised in order to pay for the baby boomer's retirement. What have they done that they deserve free prescription drugs?

As soon as the WW2 generation is gone, benefits will be cut.

Thorley Winston writes:
Should the American people be asked to choose explicitly between a gradual increase in the retirement age and an increase in taxes? Should the trade-offs be spelled out and then put to a vote?

Yes and yes. While I agree in part with Sean that some of these problems can be mitigated through reforms, these reforms usually entail things such as phasing in a higher retirement age, COLA adjustments, some market reforms/competition for health care, letting younger workers opt out and invest a portion of their FICA dollars, and means testing all of which reduce expenditures on the programs (although with the exception of means testing, they don’t actually “cut” anyone’s benefits).

Randall Parker writes:

Would such a vote be a one-time thing? If so, it would be binding on those too young to vote and the interests of those too young to vote or not born yet would be ignored.

We let oldsters vote but not children. As a result the tax system shifts money from the young to the old. Perhaps parents should have an extra vote for each kid they have so that they can vote on behalf of their kids' interests?

Lawrance George Lux writes:

Federal expenditures must reduce, there is no way Taxes will pay for the huge expenditure. I have previously stated Federal expenditures cannot exceed 14% of GDP. This can be achieved without fundamental loss of current Services, simply with alteration of current methods of payment. I will re-rant some of my proposals.

Government Supply contracts will be mandated to provide a mandatory Profit ratio of Eight percent. The IRS will be empowered to remove any excess Profits as taxation.

Any Individual drawing Pay from any Government program will be considered a Federal Employee if his Salary or Benefits exceed $75,000. He will be paid no further renumeration. This includes Doctors, Lawyers, independent Consultants, or other independent Service providers. The IRS will be empowered to insure no level higher than the stipulated amount is retained.

All independent Service Providers--Hospitals, Clinics, or commercial interests--are limited to a Cost plus Eight percent Profit ratio. The IRS again empowered to enforce the limitation.

Claims this Policy will reduce the number of Providers are falicious. Providers will provide services at these rates, or they will not have the Work; a serious reduction of their Income potential. Claims of inferiority of Services provided can be counteracted by Government regulation, backed by Jail time for malfeisance. lgl

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