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The public policy blog of the American Enterprise Institute
US federal revenue as a share of GDP averaged 17.9% from 1960 through 2013, dipping as low as 15.1% in 2009 and 2010 and climbing as high as 20.6% in 2000. This year it’ll be roughly 17.5%.
The big question: can we keep revenue/GDP at the average level of the past 50 years for the next 50 years? Some things to keep in mind when approaching that question:
1. To cover the projected increase in health and Social Security spending, the tax burden would have to be roughly one-third larger in 2038 and more than one-half larger in 2063 than it is today.
2. Keeping these programs at 10.6% of GDP rather than growing to 20.8% by 2063 would require that benefits be cut in half from the level implied by current policy.
3. As e21’s Charles Blahous recently explained, the aging of American society will increase health care spending even if we are able to get a handle on health-cost inflation: “Last year CBO estimated that over the next quarter-century, cost growth in the federal health entitlements and Social Security will be 75% attributable to population aging and only 25% to health cost inflation. Thus even in the unlikely scenario that we completely conquer health cost inflation, we would still have to confront the bigger problem of the growing number of people receiving federal health benefits.”
4. Even Paul Ryan’s budget proposal calls for revenue to rise to 19.1% of GDP by fiscal 2023, significantly above the 1960-2013 average of 17.9%.
5. Taxing the wealthy won’t be enough. Economists at the Urban-Brookings Tax Policy Center have calculated that raising the top two ordinary income brackets to more than 95% would not be enough to bring the ratio of debt to annual GDP down to 60% by 2035. And that ignores likely changes in taxpayers’ behavior such as less working and saving, not to mention tax avoidance.
Some of the above numbers and analysis comes from a new paper by AEI’s Michael Strain and Alan Viard.
They see six fiscal realities that many folks on the center-right need to understand when thinking about tax and spending policy going forward: a) defense spending will decline as a share of GDP; b) entitlement benefits will be restrained relative to current policy; c) revenue will rise as a share of GDP; d) a shift toward consumption taxation will occur in some form; e) much of the burden of fiscal consolidation will fall on the broad middle class; f) and consolidation will be achieved through bipartisan agreement.
Their bottom line:
Policies to reduce the long-run deficit should be agreed upon and enacted as soon as possible, to be implemented over a period after the economy recovers from the Great Recession. We particularly warn against waiting to see whether the long-run projections will change. Even if healthcare costs grow at a dramatically slower pace than projected, it is still certain that a large imbalance will need to be addressed. Given the massive size of the projected imbalance, prudence dictates that the projections be taken seriously, if not conclusively, and acted upon. To support robust economic growth, we propose heavy reliance on entitlement cuts rather than revenue increases. We emphatically recommend acknowledging that the broad middle class must bear much of the burden of long-run deficit reduction.
If there is a data-driven, fact-based countercase, I would love to hear it.
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