The US is dead broke and the tax bill does nothing to help matters

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The tax bill has passed. It will likely expand the economy and real wages by up to 5 percent. That’s not 5 percent per year. That’s 5 percent in total over time. But even 5 percent is important. The economy’s response will, my co-authored research suggests, likely keep pace with the bill’s additional deficits, leaving the debt-to-GDP ratio no higher, or not much higher, than would otherwise be the case.

That’s the good news. The bad news is the tax bill did nothing to control the projected — by the Congressional Budget Office (CBO) — explosion of debt relative to GDP, from 77 percent of GDP now to 150 percent in 2050. Doubling debt to GDP over three decades is certainly better than doubling it over one (which we’ve just done), but it still augurs economic doom.

Thus, our long, acrimonious debate about the size of the extra deficit associated with the tax bill missed the point. Given the projections, we didn’t need a tax bill that was revenue neutral, at best, or one that grew the economy as fast as the debt, at worst. We needed a tax bill that raised federal revenues dramatically — by roughly 60 percent!

Yes, you read that right. Unless we want to sharply cut Social Security, Medicare, Medicaid and all other government spending, we have no option but to raise taxes. 

Why so much? The answer, in large part, is the need to pay retirement and healthcare benefits to the massive Baby Boomer generation. Ten thousand of my fellow Baby Boomers are retiring every day. When we Boomers retire, we head straight for the local Social Security office to start collecting our monthly checks and sign up for Medicare. If we need expensive nursing, we sign up for Medicaid once our savings are exhausted.

Unfortunately, most Baby Boomers haven’t saved enough and are sorely dependent on Uncle Sam’s old-age support. This isn’t entirely our fault. We’ve had to fork over roughly 15 percent of our pay to cover benefits promised to our parents.

That’s the nature of our decades-long “take-as-you-go” Ponzi scheme. Each older generation takes money from the young that they’d otherwise be able save, telling them they should follow suit and take from their children when they get old. This serial generational expropriation is all nicely organized and kept out of sight by Uncle Sam.

Yes, Uncle Sam can avoid permanently raising all federal taxes by almost 60 percent. But this means reneging on his spending promises. But even if he cuts all forms of spending (defense spending, entitlement spending, infrastructure spending, gassing up Air Force One, you name it), the needed permanent percentage cut is 47 percent!

A 60-percent permanent tax hike or a 47-percent permanent spending cut? These are our options the day after the (“magnificent” to some) tax bill was passed? How can things possibly be this bad? 

Here’s how: Successive Congresses and administrations have been systematically lying about our fiscal condition. They spent the past six decades accumulating massive liabilities that they kept off the books via clever use of language.

Rather than take $X from workers and promise to pay them $Y when they retire, using the words “official borrowing” for X and “promised repayment of borrowing” for Y, our leaders have called X “taxes” and Y “promised future transfer payments.”

Unlike future “repayment of borrowing,” “transfer payments” aren’t official obligations, so they don’t get counted as part of government debt. Yet, whether the government’s future payment promises are labeled “official” or “unofficial,” they are all real economic commitments. 

Take Social Security’s off-the-books net debt (the present value of its projected future benefits less the present value of its projected future taxes less the system’s trust fund). It’s $34.2 trillion! That net unfunded liability, intentionally buried deep in the appendix (table VIF1) of the 2017 Social Security Trustees Report, is over twice the CBO’s measure of official debt.

If we add it to official debt, our current debt-to-GDP ratio rises from 77 percent to 252 percent of GDP! Do this for all off-the-book net obligations, and we arrive at our nation’s $200-trillion fiscal gap, which is not 77 percent of GDP, but 1,025 percent of GDP! 

If you are getting queasy about our “official” debt numbers and what they are and aren’t telling us, you are in good company.

Over 1,500 economists, including 20 American Nobel laureates in economics, have endorsed The Inform Act, a bipartisan bill introduced by Sen. John Thune (R-S.D.) and Sen. Tim Kaine (D-Va.), which would require the CBO, Government Accountability Office and the Office of Management and Budget to put everything on the books by using the fiscal gap, not the intentionally rigged “official” debt, to gauge our fiscal condition.

Other countries have figured out that deficit accounting is a word game played by politicians to hide future bills. The EU now puts out the S2 indicator for its member states, which is the fiscal gap (the present value of all projected future outlays less all projected future receipts, no matter their labeling) divided by the present value of projected future GDP. 

The S2 indicator for the U.S. is 10 percent, i.e., Uncle Sam needs to raise taxes by 10 percent of each future year’s GDP or cut spending by 10 percent of each future year’s GDP to eliminate its fiscal gap. (Note, federal revenues are 17 percent of GDP, and 10 divided by 17 is close to 60 percent. Federal outlays are 21 percent of GDP, and 10 divided by 21 is close to 47 percent.)

In short, our country is dead broke. The tax bill did nothing to address this. It leaves a fiscal Sword of Damocles hanging over our children’s economic futures. 

Congratulations to the bill’s supporters. 

Laurence Kotlikoff is a Boston University economist and president of Economic Security Planning, Inc., which provides financial planning tools and calculation services to households and financial planners.

Tags Debt-to-GDP ratio Deficit reduction in the United States Fiscal gap Fiscal policy Government budget balance Government debt John Thune Macroeconomics Political debates about the United States federal budget Tim Kaine United States fiscal cliff

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