Take It From McCain's Advisers: The GOP Would Raise Taxes
Wall Street Journal, January 12, 2009
A political party shouldn't rely on a dead idea
This op-ed from the WSJ draws on reporting from my new book, The Tyranny Of Dead Ideas. It's followed by a Ben Bernanke version of the old baseball ditty, Casey At The Bat, from my blogby way of predicting where we may end up after all the Fed's interventions. Click on these links for more on early press coverage of Dead Ideas and upcoming tour events. See you soon as the Era of Obama unfolds...
hough Barack Obama is offering record tax cuts this year as part of a new stimulus package, make no mistaketaxes will rise substantially in the next decade. The reason is simple: As 76 million baby boomers hit their rocking chairs, we're poised to double the number of seniors on Social Security and Medicare.
We've already got $50 trillion in unfunded liabilities in these and related programs. There's no way to make the math work at current levels of taxation.
Don't take my word for it. Listen to some of today's pre-eminent Republican budget analysts, who've told me that taxes are going up no matter who is in power. Like every Republican who aspires to serve in a public role, they've been schooled by the party's antitax police to avoid saying things too definitively, or to leave themselves an "if we only got tough on spending" escape hatch. We know this spending talk is a charade, though, because Republicans balked at trimming a few teensy billion from the next trillion in planned Medicaid outlays when they controlled every corner of Washington a few years ago. So there's no mistaking what these folks are saying.
"If you do nothing on the spending side, you're going to raise taxes whether you're a Republican, a Democrat, or a Martian," says Douglas Holtz-Eakin, the Republican-appointed director of the Congressional Budget Office (CBO) from 2003 to 2005, who also served as the top economic adviser to John McCain's presidential campaign. "It's arithmetic."
Federal revenue today is 18.8% of GDP, and federal spending (not including 2008's extraordinary Fannie and Freddie bailouts and TARP) is 20%. Mr. Holtz-Eakin told me "the pressures are there" to lift spending and taxes to 23% or 24% of GDP by around 2020, and to as much as 27% if health costs remain out of control. Note that, in the context of a $14 trillion economy, he's predicting (at the low end) a $550 billion to $700 billion tax increase, per year, in today's dollars.
Over lunch one day during the recent presidential campaign, I spoke with Dan Crippen, another former CBO chief who was advising Sen. McCain. (Our ground rules were that I could not attribute these comments to Mr. Crippen until after the campaign, because a "straight talker" like Mr. McCain could not be seen to be advised by someone who actually talked straight on taxes!)
"Are taxes going up?" I asked.
"Yeah," Mr. Crippen said. "I think it is inevitable."
"If you were a betting man at this point, are taxes going be higher as a share of GDP in 2020?"
"How much higher?"
"I don't know."
"Twenty-two [percent of GDP]," he said. "But 2020 is still a little bit at the front end of the boomers. You can figure 24, 25 by 2030."
"Let's say we're at 22 in 2020, up from 18-ish today," I said. "Is that some disaster for the economy? Will it really make a big difference?"
"Probably not," he said. "Depends on how you do it, of course."
David Walker is a Republican turned independent who served as comptroller general of the U.S. from 1998 to 2008, when he left to run the Peter G. Peterson Foundation. As head of the Government Accountability Office, he was part of a national "Fiscal Wake-Up Tour" in recent years that called attention to our long-run budget woes, a campaign he is expanding in his new role. Mr. Walker told me when we spoke in his government office in 2007 that taxes would grow to 20% to 25% of GDP within 20 years, depending on how "radical" we get about spending cuts. Since we know serious spending cuts are unlikelyand that even reasonable success slowing the growth of entitlements will leave spending much higher as a share of GDP than it is todayit's fair to interpret Mr. Walker's conclusion as being closer to 25% of GDP than to 20%.
So, the consensus of two professional Republican budgeteers and the nation's pre-eminent fiscal worrywart is that taxes will rise by between 4% to 7% of GDP over the next 10 to 20 years, translating (in today's dollars) into $550 billion to $1 trillion more in new annual taxes. You heard it here first: The Republicans have a secret plan to raise taxes. So do the Democrats, of course, and well beyond the rollback of the Bush tax cuts for the top rates they felt safe discussing during the 2008 presidential campaign.
No taxpayer looks forward to paying more. But the inevitability of higher taxes offers an overdue chance to change the debate. Though it may seem hard to imagine now, the endless fights about whether taxes should go up will soon seem passe. The real question once this recession has passed will be: Given that taxes have to rise, how should we raise the revenue we need in ways that are best for the economy? The answer will involve lower taxes on payrolls and corporations, and higher taxes on dirty energy and consumption.
This adjustment will be hardest for the GOP, because the conservative mind is caught in the past. Republicans cherish the political triumphs their tax cut mantra has delivered, and naturally resist the idea that its time is passing. But, as Ronald Reagan often said, "Facts are stubborn things." Lowering the top marginal tax rate from 70% toward 30%, as the Republicans did under Reagan, was a major economic and political achievement. Going downward from the mid 30s, where the marginal rate stands today, wouldn't be nearly as big a deal, and the boomers' imminent retirement makes it a moot question anyway.
So why, I asked Mr. Holtz-Eakin, does tax-cutting mania persist among Republicansgiven that the impact can't be great at today's much lower tax rates, and that, as he himself explained to me, taxes will soon have to go up substantially in any event? "It's the brand," he said. "And you don't dilute the brand."
Yes, we still have a serious recession to get through. But the overarching challenge for Republicans in its aftermath will be to craft a new political identity that doesn't rely on a dead idea.
From the blog
Casey At The BatBernanke Edition
Bernanke gave an important speech in London the other day on the economic situation and the road ahead (NYT
on it here
, the speech itself here
). He said the emerging stimulus plan, while important, won't be enough to right the ship without doing more to fix the financial system. But there's another way to look at where we may be heading on Bernanke's watch this year, which I thought I'd lay out in a fun little poem - a form that is often underestimated as a mode of economic analysis. If you know the great American baseball ditty, Casey At The Bat
, you'll recognize the meter. Enjoy!
Bernanke at The Fed!
Things were looking down for GDP that fateful year
Retail sales had sunk, with the consumer crouched in fear
The S&P had cratered, while the banks their cash did hoard
But still there's hope, they said, with Ben Bernanke at the Board
George Bush had all but washed his handsObama hadn't started
Though Larry Summers thought big thoughts, the waters hadn't parted
Hank Paulson, who had tried his best, could not get out of bed
But don't despair, they told us, Ben Bernanke's at the Fed
Now Ben, from back in Princeton days, had studied doom and gloom
Though soft of voice his brain was oft the biggest in the room
Unlike the vanquished Greenspan he was no Rand devotee
And when he went to bed, Ben didn't sleep with NBC
To fight the dip Bernanke had hurled thunderbolts galore
He lowered rates and bought up debt from here to Bangalore
He rallied global central banks who feared his vengeful sting
Though shove had come to push, big Ben still pushed his mighty string
But now Ben had to face grim factswith interest rates at zero
The standard cures had failed and Ben Bernanke was no hero
Jobless claims were soaring and the TARP had all run dry
From sea to wailing sea came forth a deep collective sigh
And so Bernanke pulled the final arrow from his quiver
A tool so blunt and fearsome that it made his colleagues shiver
"The lesser of two evils!" cried Bernanke to his board
And then Ben flipped the switchand then the printing presses roared...
O somewhere in this fruited plain the Chinese plan to poach
Obama's talking fireside; Nardelli's flying coach
AIG is RIPand Britney's a sensation
But there is no joy on Wall Streetthanks to Big Ben's Big Inflation