Abstract
The United States faces a long-run fiscal imbalance because of rapid projected growth in Social Security, Medicare, and Medicaid spending. The policy response to the imbalance will be shaped by four long-term fiscal realities. First, revenue will rise as a share of GDP. Second, entitlement spending will be reduced, relative to current policies. Third, the middle class, broadly defined, will bear much of the burden of addressing the fiscal imbalance. Fourth, consumption taxation is likely to become a significant part of the federal tax system, probably through the partial replacement of the income tax by a value added tax.
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Notes
All numbers are taken from CBO's alternative fiscal scenario. The agency's extended baseline scenario shows a somewhat smaller imbalance, but relies on unrealistic assumptions, including the complete expiration of the Bush tax cuts and the unchecked spread of the alternative minimum tax.
Rosen and Gayer [2008, pp. 468–471] provide a good textbook discussion of the effects of government debt.
I discussed these realities, in much less detail, in Viard [2008, pp. 329–331].
For example, President Obama's fiscal 2010 budget outline projects significant reductions in health-care costs by improving efficiency and promoting preventive care, Office of Management and Budget [2009, pp. 9–10, 25–29].
For 2006, CBO [2009] classifies a one-person household as being in the middle 60 percent if its income lies between $18,900 and $71,200, with corresponding income values twice as large for four-person households.
The poll results are taken from Pew Research Center [2008, p. 10] and Fox News/Opinion Dynamics [2007, p. 4].
The shares were computed by the author from the dollar values listed in CBO [2008, Table 5].
For mathematically inclined readers, this statement assumes that the upper tail of the income distribution follows a Pareto distribution with parameter 2. As noted by Saez [2001, p. 211] and others, this is a good approximation.
Of course, a full comparison of the two tax systems is complex. As Bankman and Weisbach [2006] discuss at length, however, the superiority of consumption taxation holds under a relatively broad set of assumptions.
For a description of tax-preferred accounts, see President's Advisory Panel [2005, pp. 91–92].
For descriptions of the VAT, see President's Advisory Panel [2005, pp. 37–38], Rosen and Gayer [2008, pp. 487–488], and Gruber [2007, pp. 747–748].
For a description of the flat tax and the X tax, see President's Advisory Panel [2005, pp. 39–40]. Bradford (2004) provides a thorough description of the X tax and how it could be implemented in the international context.
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Acknowledgements
The author thanks Jason L. Saving for helpful comments and Amy Roden for research assistance. The views expressed in this paper are solely his own and do not reflect the views of any other person or any institution.
Additional information
*Alan D. Viard is a resident scholar at the American Enterprise Institute, where he researches tax and budget policy issues. Before joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also worked for the Treasury Department's Office of Tax Analysis, the White House's Council of Economic Advisers and the Joint Committee on Taxation of the US Congress. He is a member of the board of directors of the National Tax Association. He received a B.A. in Economics from Yale University and an M.A. and Ph.D. in Economics from Harvard University.
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Viard, A. Four Long-Term Fiscal Realities. Bus Econ 44, 143–149 (2009). https://doi.org/10.1057/be.2009.13
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DOI: https://doi.org/10.1057/be.2009.13