Scott Lilly, a Senior Fellow at the Center for American Progress, has an Op Ed column in yesterday’s Fiscal Times, “The Choice Congress Won’t Face Up To”. Mr. Lilly admits that we have at least a long-term deficit problem, namely exploding entitlement spending driven by the aging of the U.S. population. The Congressional Budget Office predicts that federal outlays, including entitlements, will be 22.8% of GDP in 2023 while revenues will equal only about 19.3% of GDP, a huge gap. And outlays will continue to rise, because of entitlement spending, reaching 25% of GDP by 2040. This means that the public debt, on which we pay interest, would rise from 73% of GDP today, to 99% of GDP by 2040. As interest rates inevitably return to their historical average of 5%, interest payments on this massive debt will become an increasing burden on the economy.
Mr. Lilly asks the question: How are we going to cut back on entitlement spending when the average Social Security monthly check is $1268 out of which about $350 goes to out-of-pocket medical expenses not covered by Medicare? Congressman Ryan has proposed limiting the growth of Medicare to the increase of inflation + 1%. But the cost of healthcare is increasing much faster than this. And many seniors are living close to the edge.
Thus we reach “the choice which Congress won’t face up to.” According to Mr. Lilly, either we have to make big cuts in entitlement spending or else raise taxes dramatically so that federal revenue increases to about 24% of GDP by 2040. Mr. Lilly makes the far-fetched claim, based on flimsy evidence, that such a large tax increase will not retard economic growth. But let’s set this issue aside for now.
Is there any alternative to increasing taxes so dramatically in order to avoid making big cuts in entitlements? The answer is yes. The above discussion assumes that the cost of healthcare in general will keep on increasing at the current rapid rate, much faster than the increase in inflation. This is the main driver of entitlement costs. The U.S. currently spends 18% of GDP on healthcare which is double the amount spent by any other country. This is what must change. We should abolish, not just postpone, the employer mandate in Obama Care. But even more fundamentally, the tax exemption for employer provided healthcare should be removed (and offset with a rate reduction). This would make consumers far more aware of the cost of healthcare and therefore drive down these costs.
Only after serious attempts are made, such as above, to control costs should any consideration be given to raising taxes.