Tax Increases Are In Your Future
In addition to its “current law” scenario, the Congressional Budget Office’s Long-Term Budget Outlook document also considers an “alternative fiscal scenario” in which certain accounting gimmicks suck as pretending that congress won’t continue passing AMT patches and rejiggering Medicare reimbursement rates are dispensed with. The results for the medium-term look like this:
Note that the much-debated stimulus and bailouts and such don’t really have anything to do with the problem here. And also note that while the increasing unsustainability of the fiscal picture is primarily driven by cost growth in Medicare and Medicaid that’s not the whole story. In addition to all that, Barack Obama’s current budget would fix the level of revenue at a smaller share of GDP than where it was during the late 1990s. And it would do this during a period of time when population aging are making Social Security and Medicare more expensive over-and-above health care cost growth. Meanwhile, even at its “bend the curviest,” the administration doesn’t claim it will be able to get cost growth down to zero. And progressives have—or at least my understanding is that we have—an agenda that also involves spending more money on things like schools and transportation and fighting poverty and so forth.
Some of the gap can and should be made up with by reducing the share of GDP currently dedicated to defense. And tax increases should be avoided over the short-term as we cope with a severe recession. But pretty soon taxes will need to be higher than what this chart lays out.
16 Responses to “Tax Increases Are In Your Future”
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June 25th, 2009 at 5:31 pm
I think some economists would argue that these days there really isn’t such a thing as a tax cut, but rather just tax deferments.
The Bush tax cuts (and arguably the Reagan era cuts) weren’t cuts in the sense that no one would have to pay those taxes, just that we’d leave it up to people in the future to pay them.
The Tea Parties were full of people waving signs around how much debt their children would be born under. They acted like this was something new born from the stimulus bill and bailouts, but a vast majority of that debt was the direct result of the policies of the very group these tea baggers have supported for decades.
And you are right, these are problems we desperately need to address in the long-run, but not right now in the middle of a recession. That would do more harm than good.
June 26th, 2009 at 9:27 am
You should stop listening to the economists you listen too and start listening to these guys
As long as people like you and Jason Furman don’t understand how money is created, we are doomed to hiking taxes and spending less than we should be.
In a fiat currency environment, deficit spending is necessary if any savings are desired. This is an accounting identity. Like 2+2 = 4 in regular counting, this accounting identity states that for there to be net savings the money has to come from deficit spending. U.S. dollars cannot be created except by government spending. It really isn’t a matter of dispute except by people who don’t know accounting, like economists.
Imagine for example the first U.S. dollar the govt spent. From who did they borrow it? None existed yet, so it could not be borrowed. It had to be spent by the U.S. govt first.
This fundamental misunderstanding by most economists is a huge reason why our economic policy is so bad, and why we are facing something like a great depression once again. Do you know what the Great depression and our current 10 year economic slump have in common? Govt spending surpluses immediately preceding.
Taxes are there to create demand for a currency and to soak up excess demand. That is their only function in a fiat currency environment.
June 26th, 2009 at 9:36 am
Schools and fighting poverty aren’t the same kind of spending as F-22s. A kid that goes to a better school today, and gets better nutrition to avoid stunting his/her brain development, will be more productive in ten years when he/she enters the workforce. An F-22 in ten years will cost even more money in maintenance and post-peak-oil fuel, unless we give it away to the Israelis first.
Similarly, if you build a true HSR train track now, you can run the American equivalent of the Shinkansen or TGV on it for decades for only the much lower *maintenance* costs of the track.
Counting investments that can reasonably be expected to be productive in the medium and long term as dead losses is dishonest.
P.S. All the future data is necessarily speculative – I’d like to see more past data. Can you add the 20th century? I’d like to see how the Depression, WWII, and various postwar economic movements affected the factors shown on this chart. (Of course some categories don’t exist for the entire century.)
June 26th, 2009 at 9:41 am
2:The Post-Keynesians at the Levy Institute say pretty much the same as mentioned in 2. Tax increases support the printing of fiat money and government spending. You should increase taxes in a recession and decrease taxes in an expansion.
I do not quite understand how the New Keynesians became supply-siders and Lafferites.
June 26th, 2009 at 9:46 am
I’m a firm believer in playing by your opponent’s rules. In this case:
“Deficits don’t matter; it’s our due”.
June 26th, 2009 at 10:07 am
I don’t dispute the claim that the stimulus isn’t a driver of long term structural deficits but I can’t help noticing that the chart leaves out interest on the federal debt, which is precisely where the stimulus would contribute to the long term deficit.
June 26th, 2009 at 10:09 am
So if the president keeps insisting otherwise, when can we expect Paul Krugman to issue an op-ed healined, “Obama Lied”?
Even if he doesn’t continue to adhere to his campaign promises regarding new taxes, wouldn;t it also be possible to write that same op-ed anyway? Seems that a lot of people were saying his promise was nonsense when he was making it.
More broadly, now that it appears that people are playing fast and loose with the budget, when can we expect the larger progressive narrative on this administration to switch from “it ain’t so” to “he’s a lying scumbag”?
June 26th, 2009 at 11:41 am
dr, the stimulus is what, $700B? and long government paper is running, what, at 4%? so the interest cost of the stimulus is a staggering $28B annually, and that’s almost certainly offset in the near-term by the larger amount of tax revenue that will result from the effects of the stimulus. so really, it’s trivial.
June 26th, 2009 at 11:56 am
Hi Bob at 4:,
Many of the people at the blog I referenced have been part of the Levy institute or done papers for them.
I think you might have misinterpreted what the Levy institute is saying about tax policy.
I can’t find a link but I would be very surprised if they were in support of higher taxes during a recession. They view taxes as a way to remove demand from the population and taxes as a way to control demand for the fiat currency.
June 26th, 2009 at 11:58 am
Sam,
As far as I am aware, Obama has been extremely clear about his intentions to return to budget balancing policies.
He says it over and over. I find this hard to reconcile with your view he is lying.
June 26th, 2009 at 2:44 pm
Mike S Says:
June 26th, 2009 at 11:58 am
Sam,
As far as I am aware, Obama has been extremely clear about his intentions to return to budget balancing policies.
He says it over and over. I find this hard to reconcile with your view he is lying
============================================================
He also has said *over and over* he has no intention of raising taxes on anyone who makes under $250K a year. So reconcile that
June 26th, 2009 at 11:25 pm
Imagine for example the first U.S. dollar the govt spent. From who did they borrow it? None existed yet, so it could not be borrowed. It had to be spent by the U.S. govt first.
This is false. Back when the first dollar existed, it was a weight of gold (1/20 of an ounce, I believe). The government had nothing to do with it. We didn’t use fiat currency until sometime between 1933 and 1971, depending on how you define things.
In a fiat currency environment, deficit spending is necessary if any savings are desired. This is an accounting identity. Like 2+2 = 4 in regular counting, this accounting identity states that for there to be net savings the money has to come from deficit spending.
The issue of savings is that people put off spending on consumer goods in order to spend the money on higher-order, producer goods. People can still save money, it just gets loaned out again. While this may not seem like “net savings,” the ultimate effect is to shift resources to higher orders of production, which is what the whole point of savings is, anyway. You’re reducing savings to money, which is a mistake. Actual resources and where they are going are always the real issue, money is simply a veneer over the reality.
June 27th, 2009 at 12:57 am
Maybe Matt should have mentioned this before the election, back when Obama was claiming he’d cut taxes for most people?
June 27th, 2009 at 3:56 pm
[...] state of things in 2024? Something’s going to have to be done in the 2011-2014 period to make this graph look different but doing climate and health (which is related) in 2009-10 looks substantively and politically [...]
June 27th, 2009 at 3:56 pm
[...] state of things in 2024? Something’s going to have to be done in the 2011-2014 period to make this graph look different but doing climate and health (which is related) in 2009-10 looks substantively and politically [...]
June 28th, 2009 at 5:14 pm
Democrats are allergic to the concept of dynamic scoring but had better get used to the idea that simplistic assumptions about how much incremental revenue can be had by raising taxes lead to simplistic answers. Garbage in, garbage out. One of the reasons the Obama budget was so roundly criticized was its premise of real GDP returning to the old trend growth rate of 3%-4%. You can work fiscal miracles with numbers like that. But you can’t find any miracles in EU-15 and Japan’s growth since 1991: 2.0% and 1.52%, respectively (annual averages). The US was 3.07%. There are a lot of reasons that US grew faster, but two of the most important were lower taxes and exploding private-sector debt. Everyone here seems to agree that taxes must rise, and we all know that debt in the consumer and financial sectors will (must) go down for years to come.
With that having been postulated, what growth rate are you assuming for the US in the coming, say, 20 years? What impact does it have on tax revenues and thus on ability to finance the kind of spending you favor?