We'll Pay the Piper Later if our Leaders Keep our Taxes Low

Author: Charles Stein

Published: February 13, 2005

Budgets are tight in Washington and in Boston. President Bush's proposed $2.57 trillion budget calls for only a 3.6 percent increase in spending. Governor Romney's $23.2 billion budget plan envisions only a 2.4 percent spending rise.

The message from both men is similar: The money isn't there to be more generous.

There is an element of truth in that message. But what's left out is this: The money isn't there because both Bush and Romney insist on keeping taxes unnaturally low.

At the federal level, taxes last year amounted to 16.2 percent of the gross domestic product. Taxes were not that low when Ronald Reagan was in the White House. In fact, you have to go back to the presidency of Dwight Eisenhower, 1958 to be precise, to find a year when taxes were lower than they are now. In 1958, there was no Medicare or Medicaid. The Department of Education did not exist. Neither did the Environmental Protection Agency.

"Our problem right now is not excessive spending, but a lack of tax revenue," said Mark Zandi, chief economist at Economy.com, a Pennsylvania forecasting firm. Even after a heavy defense buildup in the past few years, federal spending last year amounted to about 20 percent of the GDP. That was a bit below the average of the past 35 years. The average tax bite over the same 35-year period was roughly 18.5 percent of GDP, far above today's level.

Much of the tax gap can be traced to the Bush tax cuts. Those cuts helped revive the economy, especially in 2003. But over time, those same cuts will create a huge drain on the Treasury. Over the next 10 years the cuts will cost the government more than $1 trillion. If they are extended permanently, they all but guarantee that tight budgets will be a permanent fixture of Washington life. "The tax and spending lines will never come together," said Zandi.

In a paper they wrote recently for the Brookings Institution, a pair of economists, William Gale and Peter Orszag, came to this conclusion: "The tax cuts are simply not affordable and therefore should be substantially scaled back or repealed altogether."

In Massachusetts, the numbers are smaller, but the theme of the story is much the same. Governor Romney wants to cut the income tax rate to 5 percent from its current 5.3 percent.

Romney argues that voters in 2000 approved a cut to 5 percent and it is time to honor that commitment. But is there really a case to be made that Massachusetts voters are taxing themselves too heavily?

In Massachusetts state and local taxes consume 9.6 percent of personal income. That is below the national average and ranks Massachusetts 38th among the states in tax burden. More important, that 9.6 percent is about the same share we paid in taxes in 1964 when Paul McCartney was young and hip. Like the Bush tax cuts, the Romney tax cut would start small and grow in the out years, ensuring an ongoing fiscal crunch.

To paraphase an old Beatles song, I am not trying to be the tax man. There are limits to how high taxes can go before they stunt the economy's growth. No one knows exactly where those limits lie, but the historical averages represent a reasonable boundary. If the US economy could grow smartly in the 1980s and 1990s with higher tax rates, there is no reason the economy in this century could not manage the same feat.

Even with somewhat higher taxes, government will have to make tough choices. The cost of healthcare rises relentlessly. A case in point: The Medicare drug benefit, whose 10-year price tag last week was upped to $720 billion from $534 billion. If we steadily raise taxes to pay for Medicare, Medicaid, and Social Security, we will spend ourselves into the poorhouse.

Our fiscal problems are real enough. We don't have to make them worse than they really are by pretending to be poorer than we really are. We can afford to pay more. We just need to get that message across to our political leaders.