Taxes

TAXES….Taxes, taxes, taxes, how much is enough?

This post isn’t about persuading anybody about anything. I just want to present a few numbers to put the whole tax/budget debate into perspective.

The chart on the right shows total federal tax receipts. As you can see, they have been relatively steady for the past 50 years, averaging about 18% of GDP (yellow line). There’s also a pretty obvious dynamic at work: whenever taxes start to rise to around 20% of GDP, they get reduced. This happened most recently in 2001, and during the 2000 election there was a bipartisan consensus that taxes ought to be lowered. (Bush and Gore differed on the size and nature of the cuts, but both agreed that taxes should come down.)

But what about the future? It’s remarkable, really, that even with the growth of Social Security and Medicare over the past half century tax rates have stayed pretty stable. But it can’t last forever, and the best estimates of the Social Security trustees are that taxes have to increase by about 3% of GDP over the next three decades in order to fund Social Security at its present level (Figure II.D5 in this report). Medicare has similar problems, and the best estimate is that its cost will also grow by about 3% of GDP during the same period (Figure I.E2 in this report). That’s a total of 6%.

(Of course, it’s possible that Medicare as it currently exists will be gone by 2030 and America will have some kind of national health plan. I’m ignoring that possibility.)

So here’s the deal: if tax rates have averaged 18% of GDP, and we need to raise that by 6 points over the next few decades, that’s an increase of about one-third. In other words, a lot.

But ? if we’re running budget deficits of 3-4% of GDP into the far future, then in order to fund Social Security and Medicare and balance the budget, tax rates may need to rise by 9 or 10 points. That’s an increase of over 50%.

This is why deficits and current tax cuts matter. If we want to keep Social Security and Medicare around in their current form ? and I think a large majority of people do ? then taxes will have to rise by about 1% a year over the next 30 years. If Republicans keep cutting taxes and we end up having to fix a chronic deficit as well, then taxes have to go up nearly 2% a year instead. That’s a big difference.

Social Security and Medicare are expensive programs, and we should have a national debate about their future. The current round of tax cuts is part of that debate, but their impact is being obscured by tax cut zealots who are deliberately trying to create a crisis atmosphere in which it’s “obvious” that we can’t continue to fund these programs.

But we can. Repeal the Bush tax cuts and agree to a tax increase of 1% a year for the next 30 years and we can do it. If you don’t think that’s worth it, fine. Make your argument. But in any case, let’s argue honestly and may the best argument win.

UPDATE: From comments, I see that a couple of things are unclear. First, this chart does include payroll taxes, which have gone up fairly steadily for the past few decades. Second, the final year in the series is 2003. My charting software didn’t make that clear.

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