Wednesday, July 12, 2006

A feasible amendment?

I'd really like to believe the this nice little graph and the implication that eventually our government's overpromising of future retirement benefits will force massive spending cuts rather than massive tax increases. Alas, I'm not convinced; I really have no idea which of tax increases or spending cuts ultimately will be chosen over the other. (A near-tie is also possible.)

How might we really ensure federal spending doesn't explode in the long term? The most feasible idea that has occured to me is a constitutional amendment limiting federal taxation to defense spending plus 20% of GDP. Right now, nondefense federal outlays are under 17% of GDP; hence, anyone opposing the amendment would automatically be a supporter of a tax hike of over $300 billion more than what is needed to balance the budget. The gap between 17% and 20% also turns the "pass the buck" phenomenon into a force for smaller government. Today's politicians can look good by protecting us from big tax increases; their successors can handle unpopular entitlement reforms.

Moreover, 20% is a nice, round number to campaign with. "After defense is payed for, why should Washington ever need more than a fifth of our money?" One might seriously reply, "What about an epidemic, another Great Depression, or an asteroid impact?" However, deficit spending is not forbidden. Thus, the federal government would still be able to spend amply in response to national emergencies, military or not.

There are some minor technicalities that need to be ironed out, but they really are minor. For example, we should specify that the limit on taxation is with respect to each year. Moreover, since our forecasts of future GDP are imperfect, there has to be some remedy if the government accidentally overtaxes. A simple remedy is to require tax refunds next year. Alternatively, each year's taxation could be restricted to defense spending plus 20% of the GDP of the previous year. If GDP grew 5% in a year, then this would make the limit on taxation approximately 19% of GDP plus defense spending.

Is my idea feasible? Why or why not?


Blogger Kent said...

Were your plan to go into effect, we would suddenly discover that inner-city sports programs are a vital component of national defense. Exempting defense spending is too big a loophole.

On the other question, I think it more likely that spending will drop. If we promise more than the economy can deliver, then what we promised simply won't be delivered. That sounds more like spending cuts than tax increases.

Though there is a third alternative you missed: The entitlements could be inflated away. This might look more like a tax increase than a spending cut.

7/13/2006 10:57 AM  
Blogger Dave Milovich said...

1) I can see how a lot of small abuses of the defense clause could occur, but I don't think they would add up to much compared to the cost of the big entitlement programs. If I'm wrong on this point, then is there a way to kill this loophole while still allowing for the contigency of a long, expensive war?

2) Interesting take. I believe the economy could deliver promised future benefit levels or close to them; it's just that it would require much higher taxes. Bruce Bartlett is so pessimistic that he advocates a VAT as the least harmful way to increase taxes. I'm somewhere between his view and yours, with a strong skepticism towards long-term forecasts of political opinion about entitlements.

3) Anyway I look at it, inflating away entitlements is a (sneaky) spending cut, and one that will eventually lead to a backlash. I can't forecast politics well enough to have any idea whether it would to a repeat of 2000, when both Bush and Gore supported Medicare drug coverage, or if anti-tax sentiment would prove stronger.

7/13/2006 3:53 PM  
Blogger Kent said...

1. Two words: Commerce Clause.

2. The estimates I've seen are that just two workers will be supporting each retiree by the middle of the century. Given the open-ended Medicaire commitment to those retirees; the increase in life span; and the even greater increase in the cost of maintining that life span, I'm not at all sure those two workers will be able to support that retiree at the benefit level presently promised.

3. On reflection, you're correct. If entitlements are inflated away, this means they will take less of the national product, which looks more like a spending cut than a tax increase.

It will be interesting to see what the backlash looks like. I'm told that today's elderly are already the most liberal, most wealthy, and most activist voting demographic. (Who'da thunk it?) This can only become even more true when they are also boomers. So the retirees will have a disproportionate say in what is done. My guess then is tax increases aimed at propping up the benefits, followed by socialized medicine as a form of stealth rationing when it is discovered that an open-ended health benefit is simply unaffordable.

7/14/2006 9:32 AM  

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