The Long-term Budget Outlook
By Arnold Kling
In testimony before the House Budget Committee, William Gale of the Brookings Institution says,
there is another big part of the problem: namely, the sunsets that are in the tax code. If all of those sunsets were removed, revenue would fall by 2.4 percent of GDP on a permanent basis. If, in addition, the alternative minimum tax is reduced so that only 3 percent of taxpayers stayed on it—about the current level—revenues would fall by about 2.7 percent of GDP.
…The notion that federal spending can be held to its post-WW II norm of about 18 or 19 percent of GDP seems virtually impossible to maintain without severely cutting the major entitlement programs or eliminating the rest of government. In future years, spending on Social Security, Medicare, and Medicaid alone is anticipated to exceed 19 percent of GDP. The unpleasant implication is that a long-term resolution of these issues that does not destroy the role of the federal government in American society will have to include significant increases in tax revenues as a share of the economy.
In an essay, I argue that whether the economy can grow fast enough to supply tax revenue for entitlements depends on the outcome of a contest between Moore’s Law and Medicare.
I believe that if we have both Medicare reform and success with Moore’s Law, then the economy will win its race with government decisively, leading to what I call Capitalist Utopia…
At the other extreme, if Moore’s Law fails and Medicare is not reformed, then the tax burden on the working population will increase beyond anything that has been seen in a viable economy, which means that we could see an Economic Implosion. Many of the most creative, hard-working people will be driven out of the mainstream economy. Some may go abroad, to take advantage of low-tax havens. Others will work underground, in a growing black-market sector. This in turn will force the government to raise tax rates further, driving more productive workers away, in a vicious downward spiral. Health care is rationed, and its quality deteriorates for everyone.
For Discussion. Gale and I agree that existing programs imply a need to increase tax revenue in relation to GDP. He sees the increase as necessary. I see it as potentially catastrophic. What do you think?