The Misguided 18 Percent Budget Solution
Since 1950, federal revenue has averaged about 18 percent of gross domestic product -- 17.8 percent of GDP, to be exact. A neat bit of trivia, but who cares?
Lots of people, it seems. Republicans on the House Budget Committee, in a news release titled “The Impact of Looming Tax Increases,” emphasize that “federal revenue rose to 18.5 percent of gross domestic product in fiscal year 2007, well above the 50-year historical average of 18 percent.” This proves, they say, that “tax relief did not cause today’s deficits.”
Utah’s Orrin Hatch, the ranking Republican on the Senate Finance Committee, also seeks guidance from the budget’s historical appendix. In a recent speech, he cited a Congressional Budget Office statement that if the Bush tax cuts were made permanent, “annual revenues would average about 18 percent of GDP through 2021 (which is equal to their 40-year average).” Interesting!
But Hatch takes it further: “So, according to CBO,” he said, “even if all the Bush-era tax rates were permanently extended, taxes would still be high enough when measured against the level of taxation in recent history.”
Warren Buffett, no enemy of raising taxes, is similarly committed to the historical average. “Our government’s goal should be to bring in revenues of 18.5 percent of G.D.P. and spend about 21 percent of G.D.P.” he wrote in the New York Times. Why? Well, he doesn’t really say. He just says those are levels “that have been attained over extended periods in the past.” Ah, well then.
Permit me to dissent from the Oracle of Omaha. The average of our past revenue isn’t sufficient to sustain our future. In fact, it wasn’t even enough to support our past. As Paul Van de Water of the liberal Center on Budget and Policy Priorities points out, revenue of 18.5 percent of GDP would have been sufficient to balance only three budgets in the past 50 years -- all of them in the 1960s.
The only balanced budgets of recent history came in the late 1990s and early 2000s, when growth was strong and revenue ranged from 19.5 percent of GDP to 20.6 percent. Our average tax receipts over the past 40 years have contributed to average deficits of 2.6 percent of GDP. That’s not terribly worrying, but it’s going to get worse. A lot worse.
Projected deficits are driven by two factors: health-care costs and old people. The coming years will bring more of both. Today, the elderly make up 13 percent of the U.S. population. By 2050, they’re expected to be 20 percent. There’s no way that the tax receipts of the 1980s will support the demographics of the 2020s or 2030s. Anyone who says otherwise isn’t taking the numbers seriously, or is planning cuts to Social Security and Medicare that dwarf anything that has been openly discussed in Washington.
Similarly, even if Obamacare proves stunningly effective at restraining health-care costs, it won’t work in a day, a year or even 10 years. Bringing down health-care costs will be a multidecade project no matter how we approach the task. Success will be defined by health-care spending growing a bit faster than the economy rather than much faster. Health care’s share of the economy will still grow -- which means the government’s share will probably grow, too.
“Eighteen percent may be a long-term historical average,” Alice Rivlin, a former White House budget director, said this week, “but it’s not a realistic average looking forward.”
The need for tax receipts to grow underscores the necessity of finding an efficient way to collect them. Experts say that should include tax reform and new tax sources that take the pressure off the income tax, such as a value added tax or a carbon tax.
Our politics, however, don’t support such innovations. Republicans dread a more efficient tax code as a step toward a larger welfare state. “You cannot get to a European-size government with an income tax because it gets to a point where it’s not collectible and it depresses the economy,” Grover Norquist, the president of Americans for Tax Reform, said. “So you need a consumption tax, and as a second best to that, an energy tax.”
For that reason, Norquist said, Republican opposition to such taxes will be unyielding. He appears to be right. Former Representative Bill Thomas, a California Republican who was chairman of the Ways and Means Committee from 2001 to 2006, supported a VAT. No prominent Republican supports one today.
But resistance to tax increases hasn’t stopped the government from growing, and it certainly won’t stop the population from aging or arrest the costly advance of health- care technology.
The nightmare scenario here is that it simply leads to the worst of both worlds: Spending keeps growing, but the tax code begins doing real damage to the economy, or deficits grow to the point that they cause a fiscal crisis. Sticking to the tax consensus of the last 50 years, in other words, could cause an economic catastrophe over the next 50 years.
(Ezra Klein is a Bloomberg View columnist. The opinions expressed are his own.)
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