The Ghost of Tax Day Future

April 17, 2006

An editorial in this morning’s Wall Street Journal by Dr. Glenn Hubbard, Dean of Columbia Business School, discusses how the budget situation facing the federal government may give us a glimpse of future Tax Freedom Days possibly being as late as June. From WSJ Online:

(W)hat should keep us all up at night is the image of a Dickensian Ghost of Tax Day Future showing us the shadows of what might but need not be. Imagine the nightmare of a tax burden 50% higher — not so farfetched as it sounds.

Economists’ thoughts about “taxes” quickly turn to thoughts about “government spending.” The important first question we decide through our elected officials is the size of government — the level of spending on defense and homeland security and the rest. These decisions raise the question of how we pay for all that: taxes today or taxes tomorrow (deficits today)? Then we get to the question of how we structure those taxes: What should be taxed? At what rates? How important is economic growth? Fairness?

The Congressional Budget Office regularly quantifies these shadows of the Ghost of Tax Day Future. Their forecasts are not sanguine. A generation from now, absent any changes, increases in Social Security and Medicare spending alone are projected to consume 10 more percentage points of national GDP than they do today. (This growth could be greater still if the pace of health-care cost increases is not mitigated.)

It is difficult to believe that the present size of the federal government (about 20% of GDP) would be maintained in the presence of this entitlement spending surge. What other component of spending would give? After all, we spend only 4% of GDP on national defense. And we spend at the federal level only 3.1% of GDP on all current programs outside national defense, Social Security, Medicare, other health programs, income security and net interest. Would America play the same role in the world with a shrunken commitment to national defense? Will we be able to make the investments in education and basic research that are essential to competitiveness? Could it be that this is the grim budget arithmetic withering the global standing and domestic health of continental European democracies?

If we set aside the possibility of a government simply devoted to entitlement programs, a rise in federal government spending of 10 percentage points of GDP from its present level of 20% means increased taxes; from an economic and political perspective, decisions are about spending and taxes, not deficits per se. To frame that path, it is useful to highlight the Tax Foundation’s popular “Tax Freedom Day” concept. The day this year that taxpayers on average stop working to pay their tax obligations and begin earning for their own spending and saving plans is April 26. And the foundation cheerily notes that this is earlier than in 2000 (May 3), when higher tax rates and real bracket creep were at work. But the variation between April 26 and May 3 loses our interest if we start to contemplate a Tax Freedom Day in, say, mid-June. (Full Story, Subscription Required)

Hubbard’s basic view of tax policy is one members of Congress should emulate. That is, they should determine the necessary level of government spending and then impose a tax system that funds that spending level in a manner that imposes the least economic distortion.

For more on Tax Freedom Day 2006, check out this press release from last week’s announcement.


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