Arnold Kling  

The Long-Term Budget Outlook

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From the Congressional Budget Office:

How would the economy be affected if the projected rise in primary spending under CBO’s alternative fiscal scenario (from about 18 percent of GDP in 2007 to about 35 percent in 2082) was financed entirely by a proportional across-the-board increase in individual and corporate income tax rates? Answering that question is difficult because the economic models that economists have developed so far would have to be pushed well outside the range for which they were initially developed. Any numerical estimate would be very speculative and heavily dependent on the model producing it.

Nonetheless, tax rates would have to be raised by substantial amounts to finance the level of spending projected for 2082 under CBO’s alternative fiscal scenario. With no economic feedbacks taken into account and under an assumption that raising marginal tax rates was the only mechanism used to balance the budget, tax rates would have to more than double. The tax rate for the lowest tax bracket would have to be increased from 10 percent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent. Such tax rates would significantly reduce economic activity and would create serious problems with tax avoidance and tax evasion.

In my opinion, the fiscal outlook in the United States is worse than that anywhere else in the industrialized world. Other countries will be hit sooner and harder by demographic changes. However, looming much larger than demographics is the fact that health care spending is rising faster than the economy. In other countries, governments have clamped down on health care spending. To do that in this country would require a major revolution carried out in Washington, with hospitals, doctors, and many patients screaming in protest.

A simpler approach would be to convert Medicare from a blank check for reimbursing providers to a voucher system that allows seniors to purchase catastrophic health insurance. Vouchers would probably vary by income and by the person's medical condition. Apparently, Roger Feldman has a book explaining this concept.

My guess is that ultimately we will find our way to that sort of voucher system. But meanwhile, we'll try all sorts of futile alternatives.

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COMMENTS (2 to date)
Dr. T writes:
A simpler approach would be to convert Medicare from a blank check for reimbursing providers to a voucher system that allows seniors to purchase catastrophic health insurance.
An even simpler approach would be to eliminate Medicare. People would have to consider health care costs when planning their retirements. Poor elderly persons would be treated like other poor persons and would be eligible for Medicaid benefits.
Jim Glass writes:

Forget 2082 and the 75-year projection, the next 20 years are going to kill all of today's budget projections.

CBO just released a report saying that by 2030 to keep even with spending income tax rates are going to have to go up 50% on everybody -- including on AARP members and their Social Security benefits, they will be very happy to hear! -- or alternatively without tax hikes GDP starts falling in the 2040s and "the end" comes in the 2060s.

S&P project that without reform the credit rating of the US starts falling in 2017, only nine years from now, and reaches "junk" in 2027, only 19 years from now.

On the good news side, S&P says the US is not the worst. It has France going off the cliff first, which will cheer some of us up, and Germany and the UK jumping with us.

Japan has already jumped, its credit rating is falling now, it has all gov't funded pensions, much worse than us, and is projected to lose 70% of its workforce by 2050. ...70%!... So who's going to be paying for all those pensions?

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