Donald H. Taylor Jr. on Raising Taxes vs. Health Spending Restraint

by Reihan Salam

In light of our recent post on the tax gap — that is, the gap between what President Obama seems to want the federal government to spend over the long-term and the tax levels he is willing to defend — I strongly recommend a recent post by Donald H. Taylor Jr., which makes a number of important points, e.g.:

[B]ecause 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.

And so Taylor concludes that the Bowles-Simpson spending target of keeping federal expenditures at roughly 21% of GDP “is plausible, but aggressive.” Achieving balance at a higher share of GDP is, in Taylor’s view, a more realistic goal, as it is easier to raise taxes to 22.5% of GDP than to contain health expenditures aggressively enough to keep federal spending at 19-20% of GDP. Taylor is careful to say that it is technically easier to raise taxes, implicitly acknowledging the political challenges involved in dramatically increasing the federal tax burden, and perhaps also the potential impact on growth. 

Why do I say dramatically? Taylor’s post begins by referencing Keith Hennessey’s recent post on tax levels, which notes the following:

Going from 19% of GDP to 20% of GDP means a total increase of all federal taxes of just more than 5% (20-19 / 19 = 5.26%)

Going from 19% of GDP to 22.5% of GDP means a total increase of roughly 18.4%. Much depends, of course, on how taxes are increased. This is why a number of policy thinkers have been touting the VAT. In his article in the latest issue of National Review, Hennessey cites Sen. Orrin Hatch’s warnings on this front: 

We know their income-tax proposals do not add up to much in terms of revenue. Even if they let the entirety of the current tax relief expire . . . there probably is not enough money to be found in the income tax to pay for the coming explosion in entitlement spending. . . . But no serious person believes that the Obama administration’s government can be financed simply by going after the wealthy. The only way to do it is by going after all Americans and raising taxes on all citizens. That is the silent plan that the president will not discuss on the campaign trail. That is the Democrats’ phantom budget. . . . Without significant reductions in spending or reforms to our entitlement system — neither of which we can expect from this president or the Democrats currently in Congress — there is just not enough money to be found in traditional revenue streams to cover the president’s spending bill. A [value-added tax] — or some other euphemized form of a VAT — appears to be the only option left to our friends on the other side of the aisle if they want to continue spending at current projections.

It is also true, however, that a number of conservatives have proposed replacing the corporate income tax with a business consumption tax, which is to say a VAT — an idea I consider entirely reasonable, provided the VAT, or BCT or whatever we wind up calling it, is very transparent. 

Regardless, Sen. Hatch’s larger point is well-taken, as is Taylor’s. Restraining the growth of entitlement spending is hard, as both the Romney-Ryan campaign and the Obama-Biden campaign have reminded us in recent weeks.