Raise Taxes on the Middle Class Before It's Too Late

(Bloomberg Opinion) -- Elizabeth Warren “has a plan for that.” Except, that is, for financing Medicare for All.

The Democratic presidential candidate has been taking heat for refusing to say whether she would raise taxes on the middle class to pay for her health-care ambitions. But we don’t have to wait to know the bottom line: Overall, the middle class will have to pay more. 

Indeed, even without any of the new programs Warren or her Democratic rivals would put in place, the broad middle class — households that aren’t in poverty but that also aren’t in, say, the top 1 or 2 percent — will likely be on the hook for a higher tax bill.

To see why, let’s look at some budget projections. As currently configured, spending on Social Security and major health programs — Medicare, Medicaid, the Children’s Health Insurance Program and Obamacare insurance subsidies — will total $2.3 trillion in 2019, or 10.2% of gross domestic product. The nonpartisan Congressional Budget Office projects that in 2049, this combined spending will grow to 15.5% of U.S. GDP.

Interest payments on the national debt are also expected to increase over the next 30 years. Meanwhile, all other federal spending — on the military and national defense, education, transportation, research, international affairs, the federal statistical system, the FBI, space exploration, safety net programs and more — is projected to decrease as a share of national output.

Overall, federal spending is expected to increase substantially, from 20.8% of GDP this year to 28.2% in 2049. Under the current tax code, revenue will grow much more slowly, rising by 3.2% of national output. The 2019 deficit is $984 billion, or about 4.7 percent of GDP. The deficit will double over the next three decades, growing to 8.7% of annual output.

To address this situation, federal revenue could be kept constant, and spending could be cut. Yet spending on all programs other than Social Security and health (and on interest payments) is already set to decline. And to keep the deficit where it is today, spending on these entitlements would have to be cut by one-third from the level projected under current law.

Americans will likely not tolerate such vast reductions in their old-age retirement and medical benefits, and politicians, reluctant to reduce their generosity by even modest amounts, won’t be eager to take a cleaver to them. President Donald Trump and his Democratic rivals have pledged not to cut Medicare and Social Security spending.

To keep the deficit stable without cutting either program, the U.S. could try to reduce the social safety net. The problem is Medicaid and the Children’s Health Insurance Program are expected to grow by less than 1% of GDP over this period, and the remaining safety-net spending is projected to shrink.

There isn’t enough money here to solve the problem. And it would be a moral outrage to try to balance the budget on the backs of the poor. Any solution to the fiscal challenge should make the safety net’s role in providing economic security and opportunity to those who need it most a top priority.

Another possibility would be to keep taxes where they are for the broad middle class, and attempt to get the needed revenue from the very rich. But there isn’t enough money here either. Revenue would have to increase by around $2.7 trillion in 2049 to keep the deficit at its 2019 share of GDP. To see the scale of what is needed, consider that Warren’s economic advisers estimated that her wealth tax would have brought in less than one-tenth that amount in 2019. And as I noted in a recent column, their estimates are quite rosy. Even a full repeal of the Trump tax cuts — which I wouldn’t support — would increase revenue by less than $300 billion per year.

The final option would be to allow the deficit to continue to grow. While this idea is popular in some circles — for example, so-called modern monetary theory — it is not a real solution. Over the next several decades, the national debt cannot grow at its projected rate without risking slowing economic output, decreasing national income relative to what the U.S. produces, increasing borrowing costs, potentially heightening inflation expectations, and risking at least a marginal loss of confidence in international markets.

So all this leaves raising taxes on the broad middle class to fill the gap.

This would not be outside historical experience. Since 1965, federal revenue as a share of annual economic output has fluctuated between 14.6% and 20%, and has averaged 17.4%. In 2018, revenue was 16.5% of GDP. Federal revenue has room to grow.

To be clear, I am not arguing against spending cuts. The best way to deal with U.S. budget problems is to rely heavily on slimming down Social Security and Medicare. These reductions should be designed to cut benefits the most for well-off seniors, and to increase competition and quality while bringing down health-care prices. It’s hard to see how even significant cuts could avoid the need to collect more revenue from the broad middle class. (Exactly how to collect that revenue is contentious, and a subject for another column.)

Which brings us back to Senator Warren. Add in her plans, and the burden would grow considerably.

Sure, Warren may come up with Medicare for All financing that claims not to raise taxes on the middle class.  Regardless of the fuzzy math she might offer for that specific program, her voracious agenda of government expansion — universal child care, cancellation of student loan debt, free public college and universal health care, just to take a few — is going to cost some serious money.

Middle-class households: Take note.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

©2019 Bloomberg L.P.

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