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January 30, 2006

More on the Baby Boom

As follow-up to my last post, Here's The Heritage Foundation's predictions:

The baby-boom generation will begin to retire in about 10 years, and the fiscal consequences will be profound. The combined deficit from Social Security and Medicare will rapidly expand, climbing to 1 percent of GDP in 2015, 2 percent of GDP in 2020, and 3 percent of GDP in 2025. To put that figure in perspective, 3 percent of GDP today would be almost $344 billion, or more than $3,000 per household.

Yep, truly unprecedented increases in tax revenue. Let's go to the numbers:

In 2004, the OECD publication reveals, Sweden once again had the highest tax-to-GDP ratio among OECD countries, at 50.7% against 50.6% in 2003. Denmark came next at 49.6% (48.3%), followed by Belgium at 45.6% (45.4%). At the other end of the scale, Mexico had the lowest tax-to-GDP ratio, at 18.5%, against 19.0% in 2003. Korea had the second lowest, at 24.6% (25.3%), and the United States had the third, at 25.4% (25.6%) (See Table 2).

The average? 36.3%. By contrast, America's national tax rate ate up 28.4% of GDP during the dismal economy of 1999 (growth rate: 4.2%). 28.4%, happily, is 1% more than The Heritage Foundation thinks we'd need to cover the Boomers. And so there ya go, the solution to the unsolvable: raise taxes to the level they were at during the massive growth of the economy, create some smarter programs, and the Baby Boomers will make much less noise. And the sooner you do it, the smaller the hike could be.

Man. Pundits.

January 30, 2006 | Permalink

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3 percent of GDP today would be almost $344 billion, or more than $3,000 per household.

It appears that the cost of the Iraq Folly-War is more than 100 billion a year, so if we save that much starting in 2007, we get the first 13 years of Heritage's predicted shortfall paid by ending the war - up to 2020. While that isn't a serious suggestion, the costs involved here are not staggering, and some tax-increase tinkering can easily solve the problem.

Note also the these numbers from Heritage lump together Social Security and Medicare, which have very different aspects of cost and funding. The Heritage Foundation has created a heritage - a heritage of duplicity and wonkery gone amok.


Posted by: JimPortandOR | Jan 30, 2006 3:41:27 PM

I agree, Ezra. The only thing is that when the population demographics shift so a greater percentage is elderly, the (income) tax base shrinks. So taxes on a per-capita-taxable basis will have to be higher during the retirmement boom than they were in 1999, all else being equal.

Theoretically, if people have used back-loaded saving vehicles, like 401(k)s, their tax comes due during the retirement boom, compensating for the lower labour taxes during that time. But households aren't saving, or are saving mostly through holding durable goods like houses which are hard and emotionally painful to liquidate.

Nevertheless, I do agree that the retirement-boom isn't a crisis (demographically, it's going to be a worse problem in Canada). But you guys do need to get your drug prices under control!

Posted by: Laura | Jan 30, 2006 5:22:47 PM

Ezra, this aging baby boomer thanks you for your brillant analysis.

Posted by: Marv Toler | Jan 30, 2006 9:20:09 PM

All we need is another fake tech bubble to prop up a false segment of the economy (the convenient year of 1999 that you chose) and we're all set.

Sadly, reality soon sets in, shortly thereafter. But, hey, the tax rates (on other people) would be higher, which is priority numero uno.

Posted by: RW | Jan 31, 2006 8:27:53 AM

Makes sense to me. In 2015 we may have to raise taxes by 1% of GDP. In 2020 we might have to do another 1% and then a third increase in 2025.

Since we don't want to go above the 1999 level, as Ezra clearly demonstrated, that means we should not increase taxes until then.

Posted by: Dave Justus | Jan 31, 2006 2:22:58 PM

Um -- I want to go above the 1999 level...

Posted by: Ezra | Jan 31, 2006 3:04:28 PM

Why do you hold up the European states as a model, given that their economic growth rates are abysmal?

Taxes carry costs with them. Any discussion of taxes must include economic factors with it, to say nothing of the dangers brought on by an excessively powerful government. (You think the government tramples our liberties now? Just wait until their budget increases to 36.3% of the economy!)

Posted by: Mastiff | Jan 31, 2006 3:12:15 PM

But 1999 was the golden age. Everything was wonderful then.

Posted by: Dave Justus | Jan 31, 2006 3:26:05 PM

Mastiff now, as with the commenter in the previous thread who'd drunk the same kool-aid: 1) go read up on the scholarship beyond the GOP talking points, and 2) cf http://www.nytimes.com/2006/01/29/national/29rich.html?_r=2&pagewanted=print&oref=slogin

What good do increased growth rates do the 99% of us for whom "shares of corporate wealth have declined since 1991?"

Answer: nothing.

Even if US-level taxation were solely responsible for the GDP growth differential between Europe/Japan and the US (and here the editor in me reminds you to read the scholarship: it isn't, by a long shot), it benefits only one in one hundred Americans.

If you are in the top 1%, bully for you. Something tells me, however, that drunking the kool-aid doesn't magically defeat the law of large numbers.

So, let me bet: you make less than $250k a year, and yet you still think US GDP growth is a boon to you and yours.

Maroon.

Posted by: wcw | Jan 31, 2006 8:55:10 PM

"Um -- I want to go above the 1999 level..."

I didn't figure you to be the "do as I say, not as I do" type.....what's stopping you & the rest of the supporters from sending the money in? There's no barrier to you guys paying the Clinton rates. Other than......yourselves.

Posted by: RW | Jan 31, 2006 11:03:39 PM

WCW:

A rising tide lifts all boats. Some boats might be smaller than others, but they all benefit. Do you think that outsourcing would be LESS of a problem if our domestic economy was not growing? Do you thing that our unemployment rates would be LOWER?

Moreover, the wonderful technology that we all benefit from is a direct result of rich people having enough surplus capital to spend on "luxuries" that soon become necessities.

Practically all technological goodies begin as prestige items for the rich, and then become progressively cheaper and better as the manufacturing process matures. Remember back in 1985 or so, when a personal computer went for $5,000?

Posted by: Mastiff | Feb 1, 2006 5:28:47 PM

Your post about baby boomer is really brilliant.
Thank you

Posted by: steven davies | Aug 4, 2007 12:36:08 PM

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Posted by: judy | Sep 29, 2007 9:44:53 AM

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