My latest Bloomberg Opinion column concerns the federal government’s large budget deficit, and what’s wrong with the new tolerance a lot of people are expressing for it. Among the commentators whose views I counter are the distinguished Democratic economists Jason Furman and Lawrence Summers.
Here I want to make brief comments about a portion of their argument in Foreign Affairs that we should raise taxes rather than cut spending on entitlement programs.
They write that tax revenue as a share of GDP has fallen, when it “should” have risen.
If tax policy is left unchanged, government revenue should rise as a share of GDP. In part, this is because of what economists call “real bracket creep.” Society has decided that it is fair to tax people making, say, $1 million at a higher rate than those making, say, $50,000. Over time, economic growth means more people earn higher incomes, adjusted for inflation, and so more people pay higher tax rates.
Real bracket creep is not, however, an inevitable consequence of a progressive structure of tax rates. If you adjusted the brackets every year to account for real wage growth as well as for inflation, you would prevent it from happening. I don’t think it is sensible to say that society has decided anything in particular about whether the government should reap a disproportionate share of the benefits of economic growth. But to the extent that the tax cuts of the last twenty years — the ones that Furman and Summers lament because they have reduced revenue as a share of GDP — reflect a decision by society, the decision has been to keep average tax rates from rising on auto-pilot.
Furman and Summers also write, “Entitlement costs have risen not because the programs have become more generous but largely because the population as a whole has aged, a fact that is mostly the result of falling birthrates.” Later, they write, “One program the federal government should not cut is Social Security. The gap in life expectancy between the rich and the poor is growing, and reducing benefits to retirees could exacerbate that trend.” (They make an additional macroeconomic argument against cuts; I don’t agree with it at all, but I’ll leave it aside now.)
Social Security has become more generous: The average benefit has risen even after inflation, because the law governing the program is written so that it will (so long as wages rise faster than prices). We could cut future expenses from the program by slowing the growth of benefits for the middle class and the rich. A concern about inequality should militate in favor of that policy, not against it.
Furman and Summers are judging policy against a baseline in which spending and taxes keep going up. They’re not providing much reason to accept that baseline.