Saturday, January 01, 2005

Looking to the horizon

From David Wessel in the Wall Street Journal: "The president measures Social Security liabilities not over the actuaries' usual 75-year horizon but over eternity -- which generates a frightening $10 trillion in unfunded promises. But when he measures the cost to the Treasury of his tax cuts, he prefers the five-year horizon."
I agree with Bush's measurement stance on Social Security, which is that the infinite horizon offers the right perspective, subject only to the point that claims about our current intentions regarding future policy may be highly dubious. (Congress could play games with infinite horizon forecasting by pretending that totally unfeasible tax increases and spending cuts would take effect in the far future.) But people who reject the infinite horizon on the ground that we don't know what, e.g., the economy will look like in the future overlook the fact that our uncertainty may be symmetric. That is, if reputable independent forecasters reasonably deem X the median likely outcome, then presumably this means worse-than-X and better-than-X have equal weight as probabilities. It would thus be a silly error to assume that our uncertainty means we must act as if we are forecasting zero problem for the future.
It is certainly worth pointing out how phony and hypocritical Bush is being about the Social Security fiscal gap when it is small compared to the holes he has shot in the budget through tax cuts, current spending increases, and an unfunded $16.6 trillion Medicare prescription drug entitlement. But the problem isn't infinite horizon forecasting; it's inconsistent use thereof. Let's project everything on an infinite-horizon basis (though also with 5 year, 10 year, and 75 year estimates) and require that the forecasts ignore phony policy changes that are claimed for the future (such as officially sunsetting the Bush tax cuts) but that the enacters are not willing to forthrightly embrace as their intended policy.

14 comments:

bpkpa said...

what do you think would be the fiscal implications of the following tax policies?

1. eliminate 941 payroll taxes
2. require employers to pay to employees the repealed 941 taxes formerly paid by employers
3. institute national sales tax @ 13%. On 10 Trillion GDP, this would appear to produce 1.3 Trillion
4. have 2% of payrolls paid into private accounts
5. eliminate current personal income tax
6. replace with flat tax of 33% of adjusted gross income in excess of _______________ (fill in the blank-my starting point would be 200,000 for joint return-- the goal would be to create revenue of 7% of GDP)
7. eliminate corporate income tax
8. replace with corporate (trade or business) gross receipts tax of _________ (my starting point would be five percent. On 10 Trillion GDP, this would appear to produce 500 billion
9. The goal would be to produce revenue of 22% of GDP to fund the federal government other than excise taxes. Would this be enough to feed the monster?

Daniel Shaviro said...

This could indeed feed a reasonably sized monster but there would still be the issue of entitlements growth, especially in Medicare.

bpkpa said...

i agree that the entitlements would continue to grow. The question is, would they grow faster than the revenues produced by these tax plans that capture GDP growth without loopholes. Clearly, the cost of medical care is growing faster than GDP, and the medicare/medicaid entitlements are growing faster than GDP. They will continue to do so for so long as the baby boomers and recent immigrants (both legal and illegal) grow. But one percent of GDP would create over $100 B/yr, and in 10 years, probably over 150B. Would this be manageable?

In any event, we are discussing alternatives to the present tax structure. Is the present tax structure more likely to produce the required income than the proposal I have made?

josh narins said...

Well, the average daily deficit (10 trillion/infinity) seems manageable.

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