Fabius Maximus notes that, as a consequence of sharply declining revenues, the “inflection point” at which Social Security becomes a net drag on the federal budget rather than a source of revenue that can be spent on other things, has already arrived, years ahead of schedule:
See the trend! The year-over-year change in the surplus was -$15.3B in the first four months of 2009, and -$21.5B in the second four months. Cash in was down 15%; cash out was up 3%. The latest forecasts were for the system to go cash-flow negative in 2016 (Medicare went into the red in 2004). August looks esp ugly, as Bruce Krasting warned us at his blog on 8 September 2009.
I agree with his prescriptions, too: we need to means-test entitlements and whether we like it or not we’re going to increase taxes and reduce other government spending. Military spending is a likely but not the only candidate.
There really is no other way. Avoiding this particular budget crunch painlessly through economic growth would require two things, neither of which I believe is going to happen. First, it would require federal policies re-aligned towards growth. Elimination of or at least reform in the corporate income tax. Incentives for entrepeneurialism. Real moves towards solidifying the financial system rather than feel-good policies. Regulatory reform. Second, it would require a spike in growth to a rate that is genuinely unimagineable, the result of some breakthrough or technological revolution. As I’ve said before, I don’t believe in the prevailing narrative on the dot com boom, i.e. that it came from nowhere. I think it was the result of decades of capital investment which were largely without return for most of that period. That’s just not happening.
Hat tip: Glenn Reynolds
Dave,
I honestly don’t really understand the corporate income tax or why lower it would be preferable to lowering some other kind of tax. If you could do a post on this, or point me to a good primer, I’d really appreciate it!
Businesses create jobs, value, and wealth. Lowering the corporate income tax incentivizes business. We’ve got the highest corporate income tax of any OECD country.
There are other possibilities e.g. lower the taxes on capital gains.
Have you sent this to Bernard?
There is also the issue of deadweight loss as well.
You know, I think this concept needs to be tatooed on people’s foreheads in reverse lettering so they see it every morning in the mirror.
Note this is somewhat different than the incentive argument in that deadweight losses are losses that simply disappear from the economy due to taxes. Reducing the taxes can reduce that loss.
We don’t have the highest effective corporate tax rate in the OECD. Additionally, lowering corporate taxes doesn’t spur ENTREPENEURSHIP, because something on the order of 70% of small businesseses are not incorporated or are incorporated as LLCs at the individual rather than corporate tax rate.
I’m open to other suggestions, Alex. Lowering corporate taxes, lowering taxes on capital gains, and regulatory reform are just what I came up with off the top of my ahead. As I suggested in the body of the post I think we’re likely to need to increase personal income tax rates as FM points out.
We’re not going to stimulate the economy via the government picking winners and losers. That will just increase deadweight loss.
Capital gains cuts and corporate tax cuts benefit large, incorporated companies, not small, entrepeneurial businesses. They tend to lock people into employment, rather than encouraging them to start their own business because they create an unlevel playing field.
If it were up to me, I would cut tax rates on all income that reported on Schedule C of the 1040. Maybe even grant a holiday for the next few years. THAT would spur entrepeneurship–not tax breaks for already well established, large businesses that grant them tax advantages that potential competitors don’t.
Doesn’t having the highest marginal rate lower than the corporate rate hurt entrepreneurship? Why start your own biz to pay more tax (on top of your own health care)?
“Have you sent this to Bernard?”
LOL
“Capital gains cuts and corporate tax cuts benefit large, incorporated companies, not small, entrepeneurial businesses.”
That is just empirically false, Alex. I live in the private equity world of $30MM to $250MM revenue businesses. That’s alot of entrepreneurialism and job creation. And the owners of these businesses, and the buyers/investors of these businesses are very sensitive to cap gains tax rates.
I share your general disdain for large corporate, but you miss the boat here.
Last point. Verdon gets it right. The major probrem with the corporarate income tax is the dead weight loss. You could eliminate it and let the real incidence sort itself out, pre and post a corporate income tax.