Why taxes will rise

at 01:37 PM ET, 07/13/2011

In Tuesday’s column on taxes and subsequent posts, I’ve focused mainly on historical tax rates. Revenues right now are less than 15 percent of GDP — a 50-year low, and well below the 19+% that historically accompanies balanced budgets. But more important than where the budget has been is where it’s going. And the answer, due to the baby boomers, is up.

Right now, about 13 percent of the country is 65 or older. By 2030, when the last of the baby boomers retire, that’ll be up to 18 percent. That means fewer workers and more retirees. And that means federal spending will go up as a percent of GDP, at least unless you have some way to keep all those retirees in the workforce or decide they don’t get Social Security and Medicare.

The Congressional Budget Office runs a calculation in which they split the rise in health-care costs into two parts: “excess cost growth,” which is basically how much faster health-care spending grows than everything else, and “aging,” which is the growth in federal spending on health care because more old people means more people depending on federal benefits. In the long-run, excess cost growth is the real problem. But over the next 25 years, aging is a much bigger deal. In 2035, it’ll mean federal spending has to rise by 3.5 percentage points — and that’s just for health care, and it’s assuming we manage to get cost growth completely under control this year.

So this is a very optimistic, very incomplete calculation, but let’s run it anyway. Between 1980 and 2007, federal spending averaged about 21 percent of GDP. Add 3.5 percentage points and you get 24.5 percent of GDP. So in a world where we slap a tight lid over the growth in health-care costs, where our efforts to control costs work beyond our wildest dreams, taxes are going to have to equal something near to 24.5 percent of GDP. Perhaps we’ll go through a period of real austerity and we’ll make very tough choices and we’ll cut an impressive four percentage points of GDP from federal spending. Fine. Now we’re at 20.5 percent of GDP. Taxes are still going up.

The reality is that we’re going to have higher taxes in the coming years, and beyond that, we’re going to have higher taxes than we’ve traditionally had during periods in which taxes were relatively high. That’s not because Democrats want higher taxes, nor because Republicans are poor negotiators. It’s because the country’s demographics will change.

If you want to draw some further policy conclusions out of this, I’d say it underscores the reasons liberals should worry about debt, as it shows how easy it would be for spending on the old to squeeze out all sorts of investments in the young and supports for the poor, and why conservatives should get serious about what sort of tax increases they would find most acceptable, as taxes are going to go up one way or the other. But you could also stop short of all that. The real point here is we’re moving to an age mix that’s going to require higher spending and that’s going to mean higher taxes. There’s really no way around it.

 
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