Taxes And Entitlements: Second Thoughts
Even as recently as reading Matt's terrific book, but before the furor over the AIG bonuses and compensation for execs of TARP-owned financial institutions, I shared Matt's view that inevitably federal taxes as a share of GDP will have to rise in order to meet our large and rapidly growing entitlement obligations. To be sure, some cuts in future benefits would be in the mix, but in the end I suspected that the tax/GDP ratio would settle somewhere in the mid-to-high 20s.
I am now not so sure, for a number of reasons. The deep recession, the huge loss in wealth, the marked increase in workers' anxieties, are likely to make a large portion of the electorate highly resistant to tax increases of any kind for a very long period. In addition, the controversies over the stimulus, TARP, bonuses, and various federal rescue plans -- however necessary they have been to ensure financial stability and to keep a very bad situation from getting worse -- have eroded the publics' confidence in the ability of the federal government to spend wisely. Working in the other direction is the publics' increased desire in the wake of the recession for a stronger safety net, or at least one that won't be significantly weakened.
And so I see a sharp political debate coming as the recovery takes hold -- perhaps sooner than later if domestic and foreign creditors are willing to keep funding our trillion dollar deficits only at rapidly rising interest rates -- between two camps: those who would prefer that the government sharply cut future retirees' social security and medicare benefits as a way of squaring the deficit circle, and those want the benefits and are willing to shoulder the higher taxes to pay for them. If I had to guess which view will prevail, I am increasingly (but still not totally) inclined toward the first view: one that would keep our federal tax-to-GDP share at 20% or perhaps the low 20s, but with sharply reduced benefits compared to what they would otherwise be under existing law.
I don't love the idea of them raising the retirement age and I think there are tons of problems with doing that (you have to make sure that older workers still have access to good jobs, for one thing) but it seems like that rather than a straight benefit cut, would be the solution. It does have something going for it in terms of people living longer, healthier, more productive lives.
March 24, 2009 3:12 PM | Reply | Permalink
"...those who would prefer that the government sharply cut future retirees' social security and medicare benefits as a way of squaring the deficit circle, and those want the benefits and are willing to shoulder the higher taxes to pay for them..."
I'd love for these people to come forward and volunteer to pay higher taxes individually, instead of forcing everyone to do what they think is right. But I doubt that such leading by example will create many advocates.
On the other hand, it would appear that "Matt's terrific book" hasn't inspired you to label this divide a "dead idea" and look for something new and fresh and out-of-the-box.
Oh well...
But if we truly want to break the tyranny of the old ideas (and not just marketing tricks that sell a book so Matt can pay more taxes) - then why not get out of the centuries-old corner of "tax vs spend" mentality?
You present the choices as between reduction of income versus reduction of entitlements.
I think it's a really dead idea when we keep arguing within this left pocket/right pocket paradigm because everyone and no-one is always right.
What about rethinking the tax code so that it doesn't punish people for having a job (like payroll tax) or income? Why can't we take the cap-n-trade concept and applying to all taxation - where tax is designed around specific type of behavior, like the cigarette, alcohol, gun, energy guzzler, violent computer games, etc, so it works to motivate or discourage specific types of behaviors?
What's wrong with rethinking how social security/medicaid is funded - or do we think the current system is not a dead idea?
What's wrong with reducing government spending, especially military and NASA budgets?
Why not have a bi-partisan spending commission that identifies and makes public the most notorious waste of taxpayer money and the amounts?
March 24, 2009 3:26 PM | Reply | Permalink
destor23 says = I don't love the idea of them raising the retirement age . . .
'Retirement age' is becoming more difficult to define and will be difficult to raise in any event.
Have friends who retired from the US Military at or around the age of 40 [50% of base pay with cost of living increases] and/or around 50 [75% of base pay with cost of living increases]. Have read that certain law enforcement officers in certain jurisdictions can also get full retirement benefits with 20 years of service - and before the age of 50.
Several friends from college got full retirement after 30 years of service around the ages of 51 or 52.
How is one who has retired from one job with full benefits and then goes to work again to be classified? And if that person is terminated - furloughed - laid off, can that person truly be classified if still receiving full retirement benefits?
Believe that those who qualify for Medicare can enroll at age 65, but will be faced with waiting up to age 67 (66 for those born between 1943-1954) to receive full Social Security benefits.
It seems that most private companies do not provide cost of living increases and for the most part no retiree healthcare plans.
On the other hand, it seems that most governmental retirees [US Military, US Government, USPS, amd others] do receive annual cost of living increases and participation in healthcare plans.
'Retirement age' and its issues are more complex than most of us imagine.
March 24, 2009 5:31 PM | Reply | Permalink
The manner of taxation and the amount of taxation are too separate issues. Most economists would agree that consumption taxes are more efficient than income taxes. I doubt that "sin" taxes get us anywhere near there.
Whatever the manner of taxation, spending and revenue sources as percentage of our GDP will have to be roughly even. To pay down debt revenue would have to exceed spending of course.
The thing is, the share of the public who will be working relative to the share who will be retired is going to fall from about 3 to 1 to about 2 to 1. Working people will produce the income to support those who are not working (to pay for public benefits and private asset). There are not too many ways out of that: reduce the consumption of workers, the standard of living of retirees, or try to shift the balance of those working and those retired, primarily by extending people's working lives. That last option ameliorates the issue, for individuals and for the nation but people would have to work substantially longer for there to be no need for more revenue.
There's very little we can do about demographics in the near term. The growth of health care costs will have the most dominant effect on what we can or cannot afford.
March 24, 2009 7:29 PM | Reply | Permalink
Gad, what a load of pretense. For folks on the left, everyday is a good day to raise taxes. Let's see you man up and get to who, and how much.
March 24, 2009 9:48 PM | Reply | Permalink
You. 90%. That sound OK?
March 25, 2009 5:17 AM | Reply | Permalink
That sounds about right to me. Confiscatory capital gains tax rates on high earners.
To try to pretend that today's younger wage and salary slaves, who are not only fewer but on average substantially less well compensated than the prior generation in just about every compensation category, are going to fund retirement programs seems pure fantasy, to me.
I also think that tax servitude without representation to support the financial overlords who dictate terms to "our" government is one dead idea that is due for a real comeback.
March 25, 2009 8:12 AM | Reply | Permalink
There's only one problem: it's pretty obvious that "shooter" is actually not a "high earner". :-)
March 25, 2009 7:16 PM | Reply | Permalink
Since when is it the "left" that wants to be fiscally conservative and balance the federal budget?
Obama has had a chance to raise taxes by placing a $50.00 a barrel tax on crude oil either pumped in the USA or imported into the USA. This would still have left the price of gasoline at less that it was just last summer and provide a large income for the Federal Government to pay for the excess spending of the "Conservatives" during the Bush years.
Is this specific enough for you, shooter242?
It could even be called the George W. Bush excessive spending tax.
March 25, 2009 8:23 AM | Reply | Permalink
I can see you folks need a little enlightenment. First, here is a pictorial illustration of Bush spending relative to Obama spending. Sobering, no?
On the other hand I like the $50.00 a barrel idea. DC traffic is brutal, and it would raise airline fees enough to get some leg space for a change. It would also raise the price of everything in the country that's moved from point "A" to point "B".
Considering that the other tax increases I've seen so far won't pay for the deficits pictured, a broad based tax on everyone is the only way to go. It's time for the non-payers to get on board.
March 25, 2009 11:03 AM | Reply | Permalink