With so much talk of the fiscal cliff, it would be nice if, along the way, a few of the more simple facts about taxation and the federal budget found their way into the conversation. Unfortunately, we’ve seen more slogans than fact-facing from both sides.
Last week, I tried to explain marginal taxation and suggested politicians and media talk about increasing tax rates on income over $250,000 instead of tax rates on people who earn more than $250,000.
Today, I try to explain why it’s easier to understand federal revenue and spending levels as a percentage of GDP. The spending level has averaged 18.5 percent of GDP since the 1950s, but it varies as the GDP varies. Some have proposed capping it at 20 percent or so (including Warren Buffett), but such calculation ignore a fact of American life that has been obvious for half-a-century: the baby-boomer demographic bulge is hitting retirement age. To accommodate that cohort, America had to expand its maternity wards, then its schools, its suburbs, then its universities, back in the ’50s and ’60s. Now we have to expand the retirement and medical programs. You can scream “Social Security is not sustainable” as loud as you want, but it’s like someone saying “we can’t afford to build a new elementary school” back in the ’50s, when the alternative was sitting two kids to a desk. Boomers earned their benefits through lifetimes of working and paying taxes.
The writers of a NYT oped last week explained it better than I can. Among the facts they mentioned that are all but ignored in the tedious fiscal cliff debate:
- By themselves, earned benefits for baby boomers add will add 3.7 percent of GDP to federal spending.
- The “Obama spending spree” doesn’t exist: “While there was a temporary and necessary spike in spending from the Recovery Act, annual appropriations actually declined by 1.4 percent a year between 2008 and 2012 in inflation-adjusted dollars — after growing by 6.1 percent a year during the George W. Bush administration.”
- 200,000 boomers are leaving the workforce every month, which distorts employment data. Thus, “the rule of thumb that the economy needs to add 140,000 jobs per month to keep up with population growth no longer holds. The new normal is 100,000.”
It’s not like no one saw the retirement of the boomers coming. Tip O’Neill and Ronald Reagan saw it coming, which is why they raised SS taxes far more than was needed for then-current retirees. In any event, the baby boom can’t be undone, but eventually we’ll all die and federal spending can revert to the old normal.