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Is This U.S. Tax Windfall for Real?

It's not often that you find an extra $12 trillion in tax revenues, but Stanford University economist Michael J. Boskin appears to have done just that. Actually, the former chairman of President George H.W. Bush's Council of Economic Advisers in the late 1980s and early '90s "found" the huge sum by simply calculating the value of deferred taxes on people's current 401(k)s, individual retirement accounts, and traditional pensions. Since retirees will pay ordinary income taxes as they withdraw money from these accounts, the value of those deferred taxes through 2040 comes to about $12 trillion in today's dollars, give or take a trillion or two.

Think about that for a moment. If Boskin is right (his paper on this will soon be published by the National Bureau of Economic Research), the forecasts of fiscal crisis when baby boomers retire are overstated. The unfunded liabilities of Social Security and Medicare's hospital insurance total $9.4 trillion. Tax revenues on retirement accounts will cover it. Predictions of gargantuan deficits in the years ahead due to the Bush Administration's huge tax cuts appear wrong as well. Tax revenues may well cover that, too.

Why hasn't anyone else thought of this before, since it seems so obvious? Part of the reason is that the federal government takes account of the accumulation of future debt in its projections but not the value of its assets, such as legally owed taxes in tax-deferred accounts. Boskin figures that such retirement accounts already amount to $11 trillion, and the present value of the taxes is nearly $3 trillion. Depending on which assumptions you choose -- and there's the rub, of course -- these figures will grow a lot, and the tax take for Washington through 2040 will range from $9 trillion to $19 trillion. He chooses $12 trillion as a reasonable estimate.

But what about taxes? The recent cut in dividend and capital-gains taxes could encourage people to shift savings away from deferred accounts, where they would pay a top rate of 35% when they retire, to stocks in private accounts, where they pay 15%. That could sharply change the government tax take down the road and alter Boskin's math. Moreover, once boomers start retiring and realize that the feds are going to take about one-third of their 401(k)s and IRAs, they'll probably use their strong political clout to cut taxes. Keeping that money or using it to bolster Social Security and Medicare may well turn out to be the key political choice in the future.

Free lunches are rarely free. The supply-side promise of paying for tax cuts through higher growth looks chimerical. So turning a skeptical eye toward Boskin's newfound tax wealth is warranted. Yet Boskin deserves a serious hearing. He is a conservative, credible economist. Even if his estimates are overstated, Boskin's new analysis has awesome implications.

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