The Budget Debate, VII
By Arnold Kling
I want to follow up on the attempt by the Center for Budget and Policy Priorities to compare the future bulge in entitlement spending to the Bush tax cut–see this thread. The CBPP was able to shrink the gap between entitlement spending and tax revenues in the middle of the century from something in the range of 5-10 percent of GDP to something less than 2 percent of GDP.
With Paul Krugman’s extensive use of the term “present value,” I inferred that this was due primarily to using a nominal discount rate. Instead, I now think that footnote 5 in the CBPP report is the major explanation:
The reason is two-fold: First, the Administration’s figures exclude the Social Security and Medicare Trust Funds. They thus focus on the future cash flow associated with the programs (which ignores the existence of the trust funds), rather than the actuarial deficits (which include those trust funds)… Second, the Administration’s figures include Part B of Medicare (Medicare physicians’ services). Our figures include the Hospital Insurance component (Part A) of Medicare, but not Medicare Part B. Under federal law, Medicare Part B, like most government programs, is supported primarily by general revenues rather than by a dedicated trust fund.
Basically, what the CBPP is saying is that entitlement expenditures should not be counted if they are funded by something other than current payroll taxes. The trust funds are accounting buckets for tax payments from previous years, plus accrued interest. General revenues also are a different accounting bucket from current payroll taxes.
Thus, simply by changing the accounting buckets, the CBPP was able to dramatically reduce future entitlement expenditures. According to this logic, we could eliminate the entitlement deficit entirely by accounting changes, such as switching the funding mechanism from payroll taxes to general revenues.
Compared with this shrunken Social Security deficit, the CPBB is correct that the Bush tax cut appears large. By the same token, I would appear big in comparison with Shaquille O’Neal–if I could put 70 percent of him in a different accounting bucket.