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What's the Number?

Matt Miller has a new column in Fortune, which I don't usually read, so I'm a little late on this, but it takes up a topic that we're likely to hear more about in the future: Just what percentage of GDP do we need in taxes, over the long term, to pay for what we expect from government?

The column is available to the un-Fortuneate here.

Miller puts the issue in rather starkly political terms:

The challenge for Democrats, and for anyone else seeking a coherent view of political economy in the era ahead, is this: How do we propose to make the health and pension programs for seniors sustainable while also paying for needed nonelderly initiatives? And how do we do all that while keeping overall taxes as a share of GDP at levels that don't hurt economic growth (without pushing taxes beyond levels Americans are likely to support)?

"I don't think that conversation has yet taken place in the heads of most Democratic economists," says Robert Litan, a former Clinton aide who heads up policy research at the Kauffman Foundation. Many who urge tax hikes to fix Social Security assume we can also raise taxes later to achieve those other goals. But they've never laid out a macro budget that adds this all up. Still, there has to be number locked inside their heads that captures how high taxes as a share of GDP should go to cover the full progressive monty. Think of it as the Democrats' secret number.

So what is it? Triangulating from chats with economists, plus a glimpse of a coming book edited by Isabel Sawhill and Alice Rivlin of Brookings that will (finally) frame these issues explicitly, I'd say the number is somewhere around 28% of GDP.

Well! Federal taxes today are at 16.3 % of GDP, historical lows not seen since the 1950s. At the end of Clinton's tenure, taxes reached nearly 21% of GDP, a historical high. As the boomers retire, everyone knows taxes are going up. Newt Gingrich recently told me so himself. But 28% of GDP? Yikes.

Revenues as a percentage of gross domestic product is a very strange, abstract concept to base policy around. Outside of the extremes (Kim Jong Il=100%/Grover Norquist, foraging for nuts and berries=0%), it's hard to know how to argue for one alternative over another. I found myself in a debate the other day which degenerated into shouting out percentages, and finally settling on X.5%. (The X is priveleged insider information, but it's not "28," trust me.) It's a very weird experience -- what are you really discussing?

But we're going to be discussing it a lot. It's the sum of all the promises we've made and all their implications. Matt's is a very good way to put it. And to see how far Democrats are from acknowledging it, consider, for example, that the Center for American Progress, where Miller himself hangs his hat, recently put out a tax plan, which pointed with pride to the fact that it would raise revenues to only 17.2% of GDP on average over the next ten years. (Miller's time horizon is presumably much longer, though.)

I think it's a little unfair of Miller to call this "the Democrats' secret number." It's the number of anyone who doesn't want to cut existing programs and who believes that eventually we will have to deal with health care. What's the Republican secret number? Who knows? And what's the gap between the Republican secret number on spending and the Republican secret number on what they think revenues should be?

In short, what Miller is saying is that even if we didn't need to recover the 5% of GDP lost to the Bush tax cuts, even if we stop the giveaway of trillions more, even if we dealt in some reasonable way with the modest long-term Social Security funding problems, the years ahead are going to be a long ugly slog of compromises and cuts. That's exactly what reasonable economists were warning about in 2000, and we should have heeded the warning then.

Posted by Mark Schmitt on March 11, 2005 | Permalink


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It's an interesting piece, but it's too bad that Miller elides the issue of "keeping overall taxes as a share of GDP at levels that don't hurt economic growth" with the issue of "without pushing taxes beyond levels Americans are likely to support." The levels Americans are likely to support is, of course, a variable that Matt Miller has a small share of influence over. The level at which the tax burden starts crushing economic growth is another matter. When Miller responds to 28 percent of GDP with "yikes!" but no analysis of why that's such an objectionable number, he merely contributes to the continuation of the status quo where we need to have serious controversy over whether 21 percent of GDP will somehow strangle the economy.And, of course, one also needs to keep state and local taxation in mind, since right now total public sector revenues are at 31.2 percent of GDP, which is a lot higher than 16.3. Assuming no change at the state and local level, raising federal taxes to 28 percent would bring the total to 42.9 percent.Plenty of countries with reasonably strong economic growth have higher tax burdens than that. Some countries -- like France at 50.7 percent of GDP -- have way higher tax burdens. But perhaps we think French economic performance is not-so-great. Still, we look at Germany with total taxes of 43.9 and see that it's not doing any better despite the substantially lower tax burden. Iceland is at 46.0 and posted 5.9 percent real GDP growth in 2004 following 4.1 percent real GDP growth in 2003. The low tax USA was 3.0 percent and 4.4 percent respectively. Poland, at 42.3 percent grew 3.8 percent and 5.4 percent.So I don't see any real reason to think Miller's "Yikes!" number is actually some sort of impossible policy nightmare that we must fight at all costs. The trick is convincing people of that fact.

Posted by: Matthew Yglesias | Mar 11, 2005 4:56:33 PM

But say 28% is an offending number. Wouldn't that seem to leave us with a choice of:

1) Guns, or
2) Butter, or
3) Inflation (because of the deficits)?

I could see where people would be willing to sacrifice some butter in order to enjoy the excellence of our military, but I could also see more people starting to bitch about butter rationing.

Posted by: Delicious Pundit | Mar 11, 2005 6:44:46 PM

The key is healthcare. If we can convince people that a "public" (whether single payer or Bradley FEHB-style), fully portable system is a better deal for everybody but the super-rich, then I don't think that number is such a huge problem.

I think that we ought to reframe the cost of health insurance premiums as a tax. If we add up the cost of employer-provided benefits, what percentage of GDP would that amount to? I bet that if we add it up and combine it with current Federal expenditures, it would be more than 30%. So let's say that we can provide better healthcare for everyone with Federal spending at 29% of GDP. Overall, we're saving money.

Posted by: Abby Vigneron | Mar 11, 2005 7:09:57 PM

I find these discussions and playing spin-the-scenario quite fascinating. What would certainly make the exercises more meaningful is we had two things:

1. Some accurate comparative data on tax levels in other countries. Matthew obviously has some access to those figures. (From where, Matthew?) And if would be even more meaningful if we knew the sources of the tax revenues (VAT, personal income, corporate, etc.) and a breakdownof expenditures. Does this stuff exist in a single site? If not, then I would suggest compiling this info would be a valuable effort for one of the policy shops.

2. With such data in hand we need a site that allows us wonk wannabes to explore and debate different scenarios. Again, does such a critter already exist? If not, I'd suggest creating one.

Posted by: Roger Karraker | Mar 12, 2005 1:58:04 AM

More comments later, time permitting, but two for now on numbers and the realities behind them.

First, Miller reflates the "Clinton maxxed taxes" canard. True, on his watch federal revenues hit a recent peak as a share of GDP, but this was an artifact of
1) a peak in taxing to cover federal spending, vs borrowing to cover it. If some figure of merit has a meaningful "Yikes" threshold in terms of stultifying growth, it is more likely "spending" than "revenue".
2) a peak in (numerator) tax receipts on recognized capital gains, which never appear -- now or later -- in (denominator) GDP. In the real world, things appreciate and depreciate, with or without being transacted, and these changes add up to a huge share of the aggregate "how we doin'?".

Second, a huge share of government expenditures are not expenditures in an economic sense ... they are transfer payments, which "expend" no consumable resources. Government can take $1000 from my pocket (in payroll taxes, say) and put it in Grandma Millie's pocket (in Social Security), and NO REAL ECONOMIC RESOURCES HAVE BEEN DEPLETED IN ANY WAY. Transfers may have second-order effects, and we can debate these endlessly, but any serious discussion of the economic Yikes threshold must net out transfers before it starts yammering about hurting the economy. (The national accounts -- GDP stuff -- do a pretty fair job of this, and the GDP subcategory detailing government consumption and investment is much smaller than government's tax-apparent fraction of GDP.)

The political Yikes level, as you note, is another game altogether.

Posted by: RonK, Seattle | Mar 12, 2005 11:39:54 AM

I assume Miller is inspired by Osborne/Hutchinson "Price of Government" theory, capsulized here:

"There's some variation in the accepted cost of government -- it's higher in a New York or Minnesota, lower in a Texas or Tennessee, for example. But generally, we learn, people are willing to pay 20 cents to 23 cents on each dollar of their income for federal government services, 7.3 cents to 8.3 cents for state services, and 6 cents to 6.6 cents for local services. The overall figures have changed little since World War II ..."

Posted by: RonK, Seattle | Mar 12, 2005 5:17:59 PM

"1. Some accurate comparative data on tax levels in other countries. Matthew obviously has some access to those figures. (From where, Matthew?) And if would be even more meaningful if we knew the sources of the tax revenues (VAT, personal income, corporate, etc.) and a breakdownof expenditures. Does this stuff exist in a single site?"

Here. (and also here)

Posted by: Emmanuel | Mar 12, 2005 6:40:36 PM

Emmanuel, thanks for the links. That's the kind of data I'm looking for. Now let's see if I can find a good English-language explanation of France's tax revenues and expenditures.

Posted by: Roger Karraker | Mar 13, 2005 10:41:27 PM