What percent of the economy should be redistributed via government?
August 29, 2012 9 Comments
Keith Hennessey has usefully focused attention on what I believe to be the most important long term policy choice facing our nation: what percentage of the economy should be redistributed via the federal government? He brackets the options:
Over the past 50 years federal taxes have averaged 18% of GDP.
Governor Romney proposes taxes “between 18 and 19 percent” of GDP.
The House-passed (“Ryan”) budget proposes long-term taxes of 19% of GDP.
President Obama’s budget proposes long-term taxes at 20% of GDP.*
The Bowles-Simpson plan proposes long-term taxes at 21% of GDP.
It is worth noting that average spending over the same 50 year period was just under 21% of GDP, and Hennessey judges the President’s budget as worthy of an asterisk for reasons that I won’t get into now because I want to wholeheartedly agree with his focus on the size of the federal budget expressed as a percentage of GDP as a key question.
On page 4 in chapter 1 of my book Balancing the Budget is a Progressive Priority, I say:
Conservatives have correctly identified a key question we must address as a nation:what proportion of our economy will be redistributed by the federal government? However, they have done so as a foil to argue for lower taxes, but have not identified the spending cuts required for a balanced budget given our current tax code, much less one that brings in even less revenue as a percent of GDP.
Answering this question and following through with policy choices to implement it is required if we are going to develop a sustainable federal budget….
- Even the Ryan budget calls for an increase in taxes collected as a percent of GDP over the 50 year historical average (though the tax reform details necessary to get there are non existent). Most importantly, because health care costs are the primary driver of the long term budget shortfall, the lower the percent of GDP you target, the more aggressive must your health reform cost control be. Go stare at this chart, especially if you want balance at 19% of GDP (During Rep. Ryan’s speech tonight at the convention he mentioned 20% of GDP).
- Hennessey views Bowles-Simpson not as a compromise/bipartisan plan, but as a spending high water mark. This ignores the fact that it sets federal spending around the level of the past half Century, the only change is that we would now pay for our spending. A key part of Bowles-Simpson was the consequential health policy steps that it specified beyond its assumed implementation of the ACA. I think that 21% of GDP as a balance point in ~ 2035 is plausible, but aggressive. Keep in mind that we spent more than 21% of GDP in 1975, 1980 and 1985….and the baby boomers were paying taxes then instead of moving into Medicare and Social Security.
- There are many budget plans that aim for balance between 18-23.5% of GDP, so the Bowles-Simpson chairman’s mark is an attempt at a bipartisan plan and not a high water spending mark. For example the Center for American Progress Budget aims for balance at 22.5%. If your singular goal is a balanced budget, the CAP budget has a much better chance of success than do some of the more aggressive plans that aim for balance at lower levels simply because it is far easier (technically) to raise the taxes necessary for balance at 22.5% of GDP than it is to actually pass and implement a health reform plan that achieves the health care savings necessary for balance at say, 19-20% of GDP (especially if your first step is repealing the ACA).
- The hardest part of moving toward a sustainable budget is having a health reform framework that can address health care costs in a flexible manner while expanding coverage and improving quality. The ACA provides such a framework; the question is whether we will implement the law and move to the next steps/tweaks, or not. In this sense, the President has far more credibility at claiming a route to a long run sustainable budget than do Gov Romney and Rep Ryan since we have seen how hard it is to pass a health reform law. We have yet to see the President’s final “grand bargain” offer, but he does have a vehicle through which to do the hardest part–address health care costs.
- The President has embraced the other inevitability of ever having a sustainable budget, an increase in taxes. However, we are stuck in the discussion of only what the highest marginal tax rate will be, which will not be enough to get to balance. I think this is a mistake and allows Gov. Romney and Rep. Ryan to say they want to cut rates but increase tax receipts, while not identifying the tax expenditures necessary to get there. A focus on the percentage of GDP that will be collected and spent by the federal government, and then working into the tax and spending side (esp health care) details needed to get there is the conversation we need to have.