Bruce Bartlett had another great Forbes column last week, explaining what the latest Trustees’ reports on Social Security and Medicare imply about the tax increases required to cover the currently projected gaps between the spending in these programs and the revenues dedicated to funding these programs. His answer is prominently highlighted in the title of the column: “The 81% Tax Increase.” Pretty shocking, mainly because when you hear “81%” right next to the word “tax,” what comes into your mind is maybe an 81% tax rate–or maybe even an 81% tax rate levied in addition to whatever effective tax rate you’re already paying. But let’s look at how Bruce comes up with this 81% tax increase:
[T]he personal income tax [will raise] about 10% of GDP in coming years, according to the Congressional Budget Office… [and] taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.
The math is correct: if federal personal income taxes start at around 10% of GDP, and an additional 8.1% of GDP is needed to fill the gaps, then if the gaps in Social Security and Medicare are to be filled entirely by an increase in federal personal income taxes, they would have to be increased by 8.1/10.0 = 81%. But the psychological framing that goes on in one’s mind which may lead one to envision an 81% tax rate is way overblown, because the bottom line is that even if we did fill all of the Social Security and Medicare gaps (going out over the “infinite horizon” by the way) with an increase in the personal income tax only, the overall effective personal income tax rate would be 10 + 8.1 = 18.1% of GDP–or an overall effective personal tax rate of 18.1%, which is far less scary (and much smaller) than 81%. Also, when you consider that all federal taxes currently add up to about 20% of GDP, the increment to the overall effective federal tax rate would be just over 40 percent of the 20% rate, rather than 81 percent of a 10% rate. So adding 8.1% of GDP to federal taxes overall would imply raising the level of taxation from 20% of GDP to, yes, closer to 30% of GDP (20% + 8.1% = 28.1% tax rate)–but nowhere near something as scary-sounding as an “81% tax increase” (which sounds like an 81% tax rate).
I love Bruce’s straight-forward math and his bottom-line point that people have to start facing the reality that either we’ll have to be willing to see benefits pared back at least somewhat or else we’ll have to put up with this level of tax increases:
The reality, which absolutely no one in either party wishes to face, is that benefits are never going to be cut enough to prevent the necessity of a massive tax increase in the not-too-distant future. Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.
But I just worry that emphasizing a figure like “The 81% Tax Increase” just keeps those anti-tax, tea-party-loving folks–and maybe even the bulk of more open-minded Americans–resistant to the idea of any solution involving any part of the tax side of the equation. I mean, wouldn’t it evoke a much different reaction if Bruce had titled his column something like “The 28% Tax Rate to Keep Our Current Commitments to Social Security and Medicare”?