Moving America Toward France

The Bush administration’s tax cuts have received an enormous amount of attention in recent weeks, with Democrats signaling they’ll try to let them expire in 2010. Taxpayers at the top might see bad news even sooner than that.If the House Ways and Means Committee chairman, Charles Rangel, has his way, the one million biggest taxpayers can expect to see an attempt to increase their payments as early as this year.Mr. Rangel recently discussed plans to fix the Alternative Minimum Tax, a levy originally targeted at the wealthy but which now threatens to ensnare millions of middle-income earners.He said in a television interview: “There are a million people that have enjoyed some $2 trillion in tax cuts. It would seem to me if you admit that 30 million people are paying taxes that they should not be paying, and 1 million are getting $1 trillion in taxes that they didn’t request, that you could rearrange the rates and come out without a tax increase and more equity in the system.”Yet the reversal of the Bush tax cuts would be just the tip of the iceberg. Looking to the coming decades, a perfect storm of events may be poised to fundamentally alter the character of the American economy.America has consistently outgrown its European allies for many years. There is little dispute among economists that America’s big advantage is its relatively small government. Federal government outlays take up about 20% of U.S. gross domestic product; in France, it’s almost 55%.The latest budgetary maneuverings in America have virtually guaranteed that a good bit of that advantage will disappear, at least if Democrats remain in power.The current laws, as written, have put America on the road to France. The primary culprit is our programs for retirees.According to the latest long-run outlook of the Congressional Budget Office, government spending may take up fully 50% of GDP by 2050.Yet revenue will increase tremendously over the same time period. Revenue relative to GDP, currently a smidgen more than 18%, will climb to 23.7% by 2050 and extrapolate out to a whopping 27.5% by 2075. A spending binge is coming, and a good chunk of the revenue needed to pay for it is coming as well.The bad news for fans of small government is this: Even if spending were reined in enough to keep it equal to revenue, the size of the government will increase by about 50% in the coming decades.Why the big climb in revenue? There are three reasons. First, current law calls for the expiration of the Bush tax cuts in 2010. Second, the Alternative Minimum Tax, which isn’t adjusted for inflation, sucks in more and more revenue over time. Finally, as the economy grows in real terms, more individuals get thrust into the top tax bracket.This is not “free money.” The government is increasing its take because individuals are seeing big tax increases. If we want to keep raising the same amount of revenue relative to our output each year, we are going to have to pass big tax reductions relative to the baseline.But the House of Representatives has now adopted “paygo” rules that make it virtually impossible to stop this revenue surge from happening, and the Senate may soon follow. Any attempt to reduce taxes relative to this inflating baseline must be offset by accompanying spending cuts.To stop the unprecedented growth of tax revenue relative to GDP, taxes need to be cut at some point.The cost of entitlements is skyrocketing. There is no question that the only feasible tactic to restrict their growth is to “starve the beast,” that is, force Congress to pass politically unpopular tax increases to finance the giveaways to seniors. Congress then would have to choose between raising taxes and slashing benefits.But the pressure to reduce benefits will abate significantly if the money from these stealthy tax increases is allowed to keep pouring in. You can bet that when it does, the cash will be diverted to “save” Social Security and Medicare.It is clear that nobody wrote the current law with the objective of increasing government’s share of GDP so dramatically over time. It’s also clear that paygo rules are an important part of the budget process. They would have been a great help in the past few years when Republicans spent irresponsibly huge sums on bridges to nowhere.But these rules also have long-run consequences. The biggest is that they make the current law baseline — the estimate of spending, revenue, and debt — a sacrosanct target, regardless of how irrational that baseline might be.If our political leaders wanted to, they could simply use paygo to block every new tax initiative for the next few decades, and watch while the current law gradually pushes America down the road to France.Mr. Hassett, a columnist for Bloomberg News, is director of economic-policy studies at the American Enterprise Institute.

Moving America Toward France

Moving America Toward France

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