21% of GDP: taxes v. health reform

Warren Buffet has a piece to today’s NYT calling for higher taxes and disputing the notion that this will reduce investment. Matt Miller (@mattmillernow) noted this morning via twitter that the most consequential aspect of Buffet’s piece is his call for federal spending to be capped at 21% of GDP.

I understand the percentage of GDP to be redistributed via government to be the most consequential public policy issue of our day. In my book Balancing the Budget is a Progressive Priority I also adopted 21% of GDP as a  target for capping federal spending, but noted that it would take very aggressive health care reform beyond what we now have (21% of GDP is suggested by the Simpson-Bowles commission as a balance budget point to be achieved around 2035). Miller is correct that in the 1970s and 1980s we routinely spent ~22% of GDP and the baby boomers were paying taxes then, not moving into Medicare, Medicaid and Social Security. So, 21% is very aggressive and will be hard, but I worry that higher levels of federal spending over the long term will harm economic growth.

However, it we cannot reduce health care spending enough to hold to 21% of GDP as a federal spending cap, then we need higher taxes to pay for our spending.

The key variable in playing the percentage of GDP collected in taxes up or down is what you are willing and able to do in the way of health reform. It is much easier (technically) to come up with a tax system that brings in 22 or 23% of GDP in taxes than it is to devise the health reform efforts necessary to constrain spending at 21% or certainly something lower given the reality of the baby boomers. The politics of both are hard, and I am unsure of which is harder, but the two questions should be explicitly linked. I don’t believe the most important barriers to constraining the growth in health spending to be technical, but instead cultural; by that I mean what the population (the 308 Million version of we) will tolerate. I think we need to move toward a cultural conversation that flows into explicit health policy that systematically asks the questions: does this extend life? does it improve quality of life? how much does it cost? Only with that information and the will to use it could we decide whether something “was worth it.”

And if the public decides we can’t face these questions with policy responses that allow us to spend 21% of GDP, then I suggest not scheduled cuts if targets aren’t achieved, but scheduled tax increases. Essentially a tax based fail safe. This will allow us to decide if we are willing to undertake health care cost per benefit policy necessary to have federal spending be 21% of GDP, and if we are not, we will be given a chance to pay for it.

About Don Taylor
Associate Professor of Public Policy at Duke University and author of Balancing the Budget is a Progressive Priority. On twitter @donaldhtaylorjr

2 Responses to 212 of GDP: taxes v. health reform

  1. Pingback: Miller on Buffet’s mistake « freeforall

  2. Pingback: A Chance for Normal Order « freeforall

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