Tuesday, January 13, 2009

Take It From McCain's Advisers: The GOP Would Raise Taxes

By MATT MILLER, WSJ, 1/12/09

Though Barack Obama is offering record tax cuts this year as part of a new stimulus package, make no mistake -- taxes will rise substantially in the next decade. The reason is simple: As 76 million baby boomers hit their rocking chairs, we're poised to double the number of seniors on Social Security and Medicare.

We've already got $50 trillion in unfunded liabilities in these and related programs. There's no way to make the math work at current levels of taxation.

Don't take my word for it. Listen to some of today's pre-eminent Republican budget analysts, who've told me that taxes are going up no matter who is in power. Like every Republican who aspires to serve in a public role, they've been schooled by the party's antitax police to avoid saying things too definitively, or to leave themselves an "if we only got tough on spending" escape hatch. We know this spending talk is a charade, though, because Republicans balked at trimming a few teensy billion from the next trillion in planned Medicaid outlays when they controlled every corner of Washington a few years ago. So there's no mistaking what these folks are saying.

"If you do nothing on the spending side, you're going to raise taxes whether you're a Republican, a Democrat, or a Martian," says Douglas Holtz-Eakin, the Republican-appointed director of the Congressional Budget Office (CBO) from 2003 to 2005, who also served as the top economic adviser to John McCain's presidential campaign. "It's arithmetic."

Federal revenue today is 18.8% of GDP, and federal spending (not including 2008's extraordinary Fannie and Freddie bailouts and TARP) is 20%. Mr. Holtz-Eakin told me "the pressures are there" to lift spending and taxes to 23% or 24% of GDP by around 2020, and to as much as 27% if health costs remain out of control. Note that, in the context of a $14 trillion economy, he's predicting (at the low end) a $550 billion to $700 billion tax increase, per year, in today's dollars.

Over lunch one day during the recent presidential campaign, I spoke with Dan Crippen, another former CBO chief who was advising Sen. McCain. (Our ground rules were that I could not attribute these comments to Mr. Crippen until after the campaign, because a "straight talker" like Mr. McCain could not be seen to be advised by someone who actually talked straight on taxes!)

Are taxes going up? I asked.

"Yeah," Mr. Crippen said. "I think it is inevitable."

"If you were a betting man at this point, are taxes going be higher as a share of GDP in 2020?


"How much higher?

"I don't know."


"Twenty-two [percent of GDP]," he said. "But 2020 is still a little bit at the front end of the boomers. You can figure 24, 25 by 2030."

"Let's say we're at 22 in 2020, up from 18-ish today," I said. "Is that some disaster for the economy? Will it really make a big difference?"

"Probably not," he said. "Depends on how you do it, of course."

David Walker is a Republican turned independent who served as comptroller general of the U.S. from 1998 to 2008, when he left to run the Peter G. Peterson Foundation. As head of the Government Accountability Office, he was part of a national "Fiscal Wake-Up Tour" in recent years that called attention to our long-run budget woes, a campaign he is expanding in his new role. Mr. Walker told me when we spoke in his government office in 2007 that taxes would grow to 20% to 25% of GDP within 20 years, depending on how "radical" we get about spending cuts. Since we know serious spending cuts are unlikely -- and that even reasonable success slowing the growth of entitlements will leave spending much higher as a share of GDP than it is today -- it's fair to interpret Mr. Walker's conclusion as being closer to 25% of GDP than to 20%.

So, the consensus of two professional Republican budgeteers and the nation's pre-eminent fiscal worrywart is that taxes will rise by between 4% to 7% of GDP over the next 10 to 20 years, translating (in today's dollars) into $550 billion to $1 trillion more in new annual taxes. You heard it here first: The Republicans have a secret plan to raise taxes. So do the Democrats, of course, and well beyond the rollback of the Bush tax cuts for the top rates they felt safe discussing during the 2008 presidential campaign.

No taxpayer looks forward to paying more. But the inevitability of higher taxes offers an overdue chance to change the debate. Though it may seem hard to imagine now, the endless fights about whether taxes should go up will soon seem passé. The real question once this recession has passed will be: Given that taxes have to rise, how should we raise the revenue we need in ways that are best for the economy? The answer will involve lower taxes on payrolls and corporations, and higher taxes on dirty energy and consumption.

This adjustment will be hardest for the GOP, because the conservative mind is caught in the past. Republicans cherish the political triumphs their tax cut mantra has delivered, and naturally resist the idea that its time is passing. But, as Ronald Reagan often said, "Facts are stubborn things." Lowering the top marginal tax rate from 70% toward 30%, as the Republicans did under Reagan, was a major economic and political achievement. Going downward from the mid 30s, where the marginal rate stands today, wouldn't be nearly as big a deal, and the boomers' imminent retirement makes it a moot question anyway.

So why, I asked Mr. Holtz-Eakin, does tax-cutting mania persist among Republicans -- given that the impact can't be great at today's much lower tax rates, and that, as he himself explained to me, taxes will soon have to go up substantially in any event? "It's the brand," he said. "And you don't dilute the brand."

Yes, we still have a serious recession to get through. But the overarching challenge for Republicans in its aftermath will be to craft a new political identity that doesn't rely on a dead idea.

Mr. Miller is the author of "The Tyranny of Dead Ideas," published this week by Times Books, and blogs at mattmilleronline.com.

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