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December 05, 2012 10:41 AM The Misguided 18 Percent Budget Solution

By Ezra Klein

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.

One Dissent

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.

Dreaded Taxes

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 columnist for Bloomberg View.
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Comments

  • jonah on December 06, 2012 12:19 PM:

    One small quibble. Well, a trillion dollar/year quibble.

    U.S. Healthcare spending right now is way out of line with spending in comparable economies. By 1/3 to 1/2.

    Success should be in terms of health care spending increasing at a rate slightly above overall inflation from a baseline of 1/2 to 2/3 current spending per person. That would mean achieving efficiency comparable to Britain, France, Italy, or Spain. Maybe a high goal, but if we can (or once could) land a man on the moon....

    If we had health care costs and military spending comparable to France's (per capita), we would have a balanced budget right now.

  • paul on December 06, 2012 2:28 PM:

    Where's the evidence that tax rates on anyone but the lowest quintiles has any substantial effect on the economy? Clinton raised taxes, and the economy boomed. Bush cut them and it stayed in the post-internet-crash doldrums. Tax increases damage the economy insofar as they reduce (velocity-adjusted) spending/consumption, but as long as the money the government takes in is going right out again, total consumption isn't changing. (For instance, if I tax you an extra 10% and then provide you with healthcare that you formerly spent 10% of your income to buy, nothing changes.)

    Sure, at some point marginal rates are high enough to cause really weird behavior by rich people, aimed at reducing their tax bills instead of productive economic activity (ahem), but we don't know where that point is. For some rich people, the marginal rate that makes them act crazy is up in the 70s or 80s, for others it seems to be anything greater than 0.

  • gdb on December 07, 2012 12:07 PM:

    Jonah is right on health care costs in the US. But Obamacare won't fix that. Obamacare is really insurance reform, and VERY inadequate heath care reform. Employer-based health care is way past it's time. A mix of increased tax rates (also on th middle class), real health care reform consisting of single-payer universal coverage, reduced military spending, increased infrastructure spending is the Progressive Keynesian solution. And a solution already supported by pluralities or majorities of the voting public when polled as individual items.

  • Aaron Morrow on December 07, 2012 9:41 PM:

    Wait a minute. Ezra Klein said:
    ===========================
    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.
    ===========================

    Having read Warren Buffet's op-ed, I can say why.

    There is no need to balance the budget in the short run.

    Despite Klein's support for austerity in this column, Buffett is focused on controlling deficits rather than eliminating them. We did not have balanced budgets until the late 1990s; clearly they are not the problem. Buffett says that we merely need to eliminate the growth in budget deficits.

    Even the neoliberal Matt Yglesias says repeatedly that balanced budgets are unnecessary in a time of low interest rates. The government should encourage economic growth by running controlled deficits until unemployment is under about 6%.

    Why does Ezra Klein assert that balancing the budget should be a goal of public policy at this point in time? Well, he doesn't really say why he supports Austerity Now!, he just does.