Your taxes are going up. You just don’t know it yet.


Diminishing returns. (Daniel Acker/Bloomberg News)

It’s a question of when, not if.

Looking at our politics today, it’s hard to imagine taxes rising anytime soon—certainly for the middle class, and probably even for the wealthy. President Obama has forsworn hiking taxes on anyone earning under $250,000. Republicans might take control of the Senate in 2014 and the White House in 2016, presumably dashing the hopes of anyone looking to raise more tax revenue.

Yet look out over the next 10 years, and it is also hard to find a scenario where the United States doesn’t raise taxes, potentially even on the middle class. The only alternatives may be for the country to significantly pull back on the country’s commitments to seniors and the poor, or to forfeit its global competitiveness.

It is too soon to declare the U.S. economy in decline. But U.S. spending on infrastructure, research and development and early childhood education is not a source of optimism. On some of these measures, the United States has already fallen behind; on others, it is at risk of doing so. The only way to do better is invest more. And to pay for that, you either need to cut a substantial amount of spending elsewhere—Social Security, Medicare and the safety net are the biggest sources of spending—or raise taxes.

America's R&D problem 

Perhaps the most vivid example of where the country is falling behind is R&D, which more than anything else is what generated the innovations that made the U.S. economy the most productive and most dynamic in the world. Since 1976, federal R&D as a percentage of gross domestic product has fallen from 1.23 percent to .78 percent.

In large part as a result, the United States, which used to be first in the world, is losing ground to other countries in overall R&D—which consists of federal, state and private dollars. As a percentage of GDP, the United States ranks tenth in the world. And the President’s Council of Advisors on Science and Technology warned in 2012 that "China’s investment as a percentage of its GDP shows continuing, deliberate growth that, if it continues, should surpass the roughly flat United States investment within a decade."


(Source: OECD)

To alter these trends, the United States is going to need to significantly boost R&D spending. In recent years, however, Congress's impulse has been to cut or limit R&D, which is part of a category of domestic expenditures known as non-defense discretionary spending. It is usually the easiest to whack, and both Democrats and Republicans have gleefully done so.

After 2015, in fact, discretionary spending will fall further, when so-called sequestration kicks back in, chopping agency budgets indiscriminately.

To cancel those cuts and free up some cash for other priorities, Obama's fiscal blueprint—his 2015 budget—would hike taxes on the wealthy primarily by scaling back a wide range of tax deductions and loopholes that disproportionately benefit top earners.

Just how big would these tax hikes be? 

The size of the tax hike—$1 trillion over a decade—sounds very large, and it is. But it also may not be enough to fully invest in R&D and other high-return parts of the economy. For instance, even under Obama's budget plan, funding for the National Institutes of Health continues a long stagnation. Obama protects it from deep reductions but doesn't invest much more.

This week, Obama and Democrats have been spending quite a bit of time talking about the importance of paid family leave, which research has shown provides plentiful benefits both for parents and children. Only a handful of countries don't offer new parents at least  some paid time off to spend with their new children. By contrast, only 12 percent of Americans enjoy such a benefit.

A program of national family leave would likely cost more than $20 billion a year. You could pay for it with new taxes on the wealthy -- for instance raising income tax rates beyond the current 39.6 percent threshold.

Leading Democrats, in their proposal, do something else: They increase payroll taxes for all workers and companies by .2 percentage points. A worker earning $50,000 a year would pay $100 more in taxes, as would his or her employer.

Obama is unable to embrace this proposal, which emulates what several states have done. The president has promised not to raise taxes on the middle class, which the higher payroll tax would certainly do. It is another example of a way the country will be forced to reconsider whether the current level of taxation is too low to support the benefits Americans will want in the future -- and to keep the U.S. economy competitive.

The Congressional Budget Office projects that this year, taxes will represent 17.6 percent of gross domestic product, and spending will represent 20.4 percent. Over the coming decades, the CBO says taxes will rise only to 19.5 percent of GDP, while spending will rise to 26 percent of GDP, largely driven by demographic changes.

That will grow the federal debt to its largest level ever. And that will necessarily require spending cuts, tax hikes or a mix of the two to bring spending and revenues into line. If you are willing to radically reduce the nation's commitments to retirees or slash the safety net, then you will find plenty of savings.

Otherwise, it's hard to see a way to preserve the nation's entitlements without raising taxes further, at least on the wealthy. And if you are looking to go beyond simple fiscal sustainability and toward substantial national investment, you're going to have to think about substantial amounts of new tax revenue.

It is, of course, far more likely that Democrats than Republicans would introduce tax hikes. But don't assume Republicans will forever oppose any tax increase. Despite the fervor for tax cutting among Republicans, outgoing House Ways and Means Committee Chairman Dave Camp (R-Mich.) strove for revenue neutrality in his proposed comprehensive reform earlier this year -- even if he did not quite achieve it.

Presidents Ronald Reagan and George H.W. Bush also accepted tax hikes. While Reagan cut taxes significantly at the beginning of his term, he and Bush then were content to see taxes rise multiple times in the 1980s and 1990s.


(Department of Treasury)

 

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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