Tax Alternative


Alan Greenspan's appearance before Congress early this month
provoked plenty of criticism. And rightly so. The longtime chairman
of the Federal Reserve had been asked to comment on the
government's failure to control budget deficits and the economic
danger those deficits pose. But Greenspan was no innocent bystander
to this act of gross fiscal negligence. In 2001, back when the
budget was still in surplus, Greenspan urged Congress to enact
President Bush's proposed tax cuts; two years later, even after
those surpluses were gone, Greenspan endorsed yet another round of
Bush tax reductions. Given that the latest projections show the
government running budget deficits for the foreseeable
future--thanks in no small part to those tax cuts--Greenspan owed
Congress an explanation, if not an outright apology. Instead, he
just bemoaned how "the brief emergence of surpluses in the late
1990s eroded the will to adhere to" balanced budget rules--as if he
had nothing to do with it. Even Los Angeles Times columnist Ron
Brownstein, perhaps Washington's most congenial pundit, had to ask,
"Is he kidding?"But the most unfortunate part of Greenspan's testimony wasn't what
he said about the past. It was what he said about the future. As
discussion turned to the retirement of the baby-boomer generation
and the financial strain they will place on Social Security,
Medicare, and Medicaid, Greenspan urged Congress to take preemptive
action by cutting those entitlement programs down to size. "I fear
that we may have already committed more physical resources to the
baby- boom generation in its retirement years than our economy has
the capacity to deliver," Greenspan explained. The government's
goal, he said, should be to "close the fiscal gap primarily, if not
wholly, from the outlay side"--in other words, by drastically
reducing the money those programs spend on their beneficiaries.

Nobody seemed to find this part of the testimony particularly
controversial-- perhaps because, around Washington, it's not
controversial to insist that preparing for the baby-boom generation
should consist largely of reductions of the entitlement programs on
which they will rely. But, unless Republicans have somehow managed
to repeal the laws of mathematics (hey, you never know, they're
pretty resourceful), there's another way to balance the federal
government's books. Rather than concentrate primarily on reducing
the money we take from the federal treasury, we could try putting
more money into it. In other words, we could actually raise taxes.

Although it is politically taboo today, there was a time when
government didn't flinch from raising taxes, just so long as there
was a legitimate need to finance new spending. This would seem to
be just such an occasion, thanks to three increasingly urgent
claims on federal money: protecting Americans from terrorists,
providing the aging population with retirement benefits, and
patching up (or replacing) the employer-based health insurance
system. These are all vital public needs that only the government
is in a position to meet, either because they require collective,
coordinated action (like maintaining an army) or because they
provide a service that the free market won't (like giving the
elderly health insurance). Clearly, modest reductions in some
programs or services should be part of any long-term budget
strategy. But, overall, there's a compelling case for the
government spending a great deal more money than it does now. And,
while a robust economy can increase tax receipts all by itself,
raising more revenue would inevitably involve raising at least some
tax rates.

One reason this option doesn't get the attention it deserves is that
most of the Washington establishment thinks it would, as Greenspan
put it, "pose significant risks to economic growth." It's certainly
true that, if taxes become too high, they can slow an economy by,
among other things, reducing incentives to work or interfering with
the market's ability to allocate goods and services efficiently.
But the United States is far from that point. Thanks to the Bush
tax cuts, our relative tax burden is far lower than it was in 2000.
In fact, it hasn't been this low in half a century. Simply repealing
the Bush tax cuts would cover the long-term shortfall in Social
Security while leaving some extra money for other purposes. And,
far from imperiling the economy, it would merely restore tax rates
to what they were late in the Clinton era, a time when the economy
was doing extraordinarily well.

Taxes would probably have to go higher still in order to finance
major new spending on homeland security and sustain relatively
generous retirement benefits and cover vast expansions of
government-provided health insurance. But there may be room for
some of that, too. The relative U.S. tax burden--measured, again,
as a percentage of the overall economy--is the lowest in the
developed world. And, while high taxes in Europe have sometimes
choked economies there, there is an enormous middle ground between
the United States, where taxes are 25 percent of gross domestic
product, and Sweden, where taxes are 50 percent of gross domestic
product. (Besides, Sweden's economy has actually been performing
pretty well lately.)

Most voters would undoubtedly prefer lower taxes and higher
benefits, a fantasy the Republican majority has indulged by passing
huge tax cuts without offsetting spending cuts. But, sooner or
later, the voters will have to confront real trade-offs, if only
because the financial markets won't let excessive deficits continue
forever. And the early signs suggest that Americans might be more
hospitable to tax increases than everybody has long assumed.
Skittishness over benefit cuts obviously has a lot to do with the
sinking support for Bush's Social Security privatization plan;
among the options for improving Social Security's finances, by far
the most popular solution is raising the limit on taxable income.
And, as a recent Washington Monthly article by Daniel Franklin and
A.G. Newmyer III points out, even Republican governors like former
Bush administration budget director Mitch Daniels (now the governor
of Indiana) have recently backed tax increases for their states in
order to avoid cuts in services. Greenspan would surely argue that
raising taxes in this way invites economic calamity. But, given the
maestro's recent track record, maybe that means it's the right

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