* Wayne Perry Professor of Taxation, New York University School of Law.
1 See, e.g., Cong. Budget Office, The Budget and Economic Outlook: Fiscal Years 2005 to 2014, at 1 tbl.1-1 (2004) [hereinafter Budget and Economic Outlook] (projecting a $477 billion deficit for 2004); Cong. Budget Office, The Long-Term Budget Outlook 129 tbl.F-1 (2003) [hereinafter Long-Term Budget Outlook] (noting that the United States had a budget surplus of $236.4 billion in 2000).
2 All references to “Bush” or “the Bush administration” refer to George W. Bush unless otherwise noted.
3 See infra notes 137–153 and accompanying text.
4 See infra notes 154–155 and accompanying text.
5 See Bds. of Trs., Fed. Hosp. Ins. & Fed. Supplementary Med. Ins. Trust Funds, 2004 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds 100 (2004) [hereinafter 2004 Medicare Trustees Report] (describing Medicare Part D, which was enacted in December 2003 to provide prescription drug discount cards (beginning in 2004) and subsidized access to drug insurance coverage (beginning in 2006)), available at http://www.
cms.hhs.gov/publications/trusteesreport/2004/tr.pdf.
6 See infra notes 85–133 and accompanying text.
7 See infra notes 85–133 and accompanying text.
8 See infra notes 85–133 and accompanying text.
9 1 George Santayana, Introduction and Reason in Common Sense, in The Life of Reason or the Phases of Human Progress 13 (1906).
10 See infra notes 13–84 and accompanying text.
11 See infra notes 85–133 and accompanying text.
12 See infra notes 134–156 and accompanying text.
13 See Daniel Shaviro, Do Deficits Matter? 17–27 (1997).
14 See id. at 256.
15 For information on the shift by congressional Republicans such as House Majority Leader Tom DeLay, see David Firestone, Conservatives Now See Deficits as a Tool to Fight Spending, N.Y. Times, Feb. 11, 2003, at A24.
16 Shaviro supra note 13, at 25.
17 Id. at 15–16.
18 See generally id.
19 See id. at 151–85.
20 Id. at 66–70.
21 See Shaviro supra note 13, at 71–78.
22 See id. at 53–55.
23 See id. 186–220.
24 See id. at 147.
25 See id. at 147–50.
26 See Shaviro supra note 13, at 147–50.
27 See id. at 144.
28 Laurence J. Kotlikoff, Generational Accounting 22 (1992).
29 See id. at 18–19.
30 Id. at 172.
31 Id.
32 See Shaviro, supra note 13, at 205–11.
33 See Kotlikoff, supra note 28, at 32–33.
34 See id. at 33.
35 President William J. Clinton proposed a “stimulus plan” in 1993, but it was not enacted, and in any event, was accompanied, unlike traditional Keynesian stimulus, by proposed tax increases that were enacted.
36 See Shaviro, supra note 13, at 207–11.
37 Alan J. Auerbach, Is There a Role for Discretionary Fiscal Policy?, in Rethinking Stabilization Policy 109, 110 (2002) (offering commentary during symposium sponsored by the Federal Reserve Bank of Kansas City), available at http://www.kc.frb.org/PUBLICAT /SYMPOS/2002/pdf/S02auerbach.pdf.
38 Id. (discussing the Job Creation and Worker Assistance Act of 2002, Pub. L. No. 107-147, 116 Stat. 21).
39 “Size of government” itself is a slippery concept, as discussed infra notes 85–133 and accompanying text.
40 William G. Gale & Brennan Kelly, Brookings Inst. & Tax Policy Ctr., The “No New Taxes” Pledge 7–9 (2004), available at http://www.brook.edu/views/papers/gale/
20040604.pdf.
41 In 1975, 24.9 million Americans were enrolled in a Medicare program; by 2004, that number had increased to 41.7 million. Ctrs. for Medicare & Medicaid Servs., 2003 Data Compendium: Medicare Enrollees, Selected Years (Nov. 2003), available at http://www.
cms.hhs.gov/researchers/pubs/datacompendium/2003/03pg30.pdf (last modified Aug. 25, 2004). Medicare benefit payments grew from $3.2 billion in 1967 to $252.6 billion in 2002. See Ctrs. for Medicare & Medicaid Servs., 2003 Data Compendium: Administrative/
Operating, available at http://www.cms.hhs.gov/researchers/pubs/datacompendium/2003/
03pg19.pdf (last modified Aug. 25, 2004). Similarly, benefit payments for Medicare Part D are projected to increase by 9.7% annually from 2006 to 2013, and Part D outlays are estimated to grow from 0.7% of gross domestic product (“GDP”) in 2006 to 3.4% in 2078. 2004 Medicare Trustees Report, supra note 5, at 2.
42 See Budget and Economic Outlook, supra note 1, at xiv (projecting that Social Security, Medicare, and Medicaid spending will grow from more than 8% of GDP in 2004 to over 14% of GDP in 2030).
43 See generally 2004 Medicare Trustees Report, supra note 5; Bd. of Trs., Fed. Old-Age & Survivors Ins. & Disability Ins. Trust Funds, The 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (2004) [hereinafter 2004 OASDI Trustees Report], available at http://www.ssa.gov/OACT/TR/TR04/tr04.pdf (updated Mar. 23, 2004).
44 An example is Congress’s decision in 1997 to shift certain home health agency care from Part A to Part B of Medicare. Because of differences between the Part A and Part B trust funds, this shift “permit[ted] the government to pretend that Medicare’s financing had improved by the entire amount shifted.” Daniel Shaviro, Who Should Pay for Medicare? 13 (2004).
45 Jagadeesh Gokhale & Kent Smetters, Fiscal and Generational Imbalances: New Budget Measures for New Budget Priorities 17 (2003).
46 Kotlikoff, supra note 28, at 22.
47 See id. at 26–28.
48 See id.
49 Laurence J. Kotlikoff, The Coming Generational Storm 22 (2001), available at http://econ.bu.edu/kotlikoff/GenerationalStorm.pdf.
50 See id.
51 Id.
52 See H.R. Rep. No. 104-575, at 34 (1995) (“The President’s fiscal year 1995 budget contained an entire chapter on generational accounting. . . . The President’s budget submission this year excludes the chapter on generational accounting, probably because the outlook has worsened.”).
53 Kotlikoff, supra note 49, at 28.
54 Cf. Gokhale & Smetters, supra note 45, at 11. Jagadeesh Gokhale and Kent Smetters propose using a measure of “generational imbalance,” which they define as the present value of remaining outlays to current generations minus the present value of remaining taxes to be paid by current generations (along with government assets). They state that, although generational imbalance can be computed for programs such as Social Security and Medicare, that provide cash to or on behalf of specific beneficiaries, it cannot be computed for government policy as a whole because “the benefits of outlays (such as spending on national defense or public infrastructure) cannot easily be allocated to different generations. . . . Only the revenue side of the rest-of-government’s budget may be so attributed.” Id. at 13. This strikes me as a bit over-scrupulous. So long as we understand the limitations to what we are doing, there is nothing wrong with a purely fiscal measure that overlooks the value of in-kind benefits.
55 See id. at 26–27 tbl.2.
56 See id.
57 See id.
58 See id.
59 See Shaviro, supra note 13, at 4–5.
60 Alan J. Auerbach et al., The Budget Outlook and Options for Fiscal Policy, 95 Tax Notes 1639, 1648 (2002). The fiscal gap was first described in Alan J. Auerbach, The U.S. Fiscal Problem: Where We Are, How We Got Here, and Where We’re Going, in 9 NBER Macroeconomics Annual 1994, at 141, 166–73 (Stanley Fischer & Julio Rotemberg eds., 1994).
61 Daniel N. Shaviro, The Growing U.S. Fiscal Gap, World Econ. J., Oct.–Dec. 2002, at 2.
62 See Auerbach et al., supra note 60, at 1644 tbl.4.
63 Shaviro, supra note 61, at 2–3.
64 See supra notes 65–69 and accompanying text.
65 2004 OASDI Trustees Report, supra note 43, at 59 tbl.IV.B.7.
66 2004 Medicare Trustees Report, supra note 5, at 60 tbl.II.B11.
67 Id. at 99 tbl.II.C16.
68 Id. at 109 tbl.II.C23.
69 See Gokhale & Smetters, supra note 45, at 26–27 tbl.2. Using President Bush’s 2003 budget as the baseline for future policy, Jagadeesh Gokhale and Kent Smetters estimated in 2002 that the total fiscal gap as of 2004 would be “only” $46.9 trillion. See id. This lower estimate reflected, among other things, an assumption that the prescription drug enactment would cost “only” $7 to $12 trillion. See The Cost of Adding a Prescription-Drug Benefit to Medicare: Hearing Before the Subcomm. on Human Rights and Wellness, House Comm. on Government Reform, 108th Cong. 4 (2003) (statement of Joseph R. Antos & Jagadeesh Gokhale, American Enterprise Institute), available at http://reform.house.gov/UploadedFiles/F031.07.16%20Testi-
mony%20of%20Joseph%20Antos%20-%20AEI1.pdf.
70 See William G. Gale & Peter R. Orszag, Sunsets in the Tax Code, 99 Tax Notes 1553, 1554 (2003).
71 See id. at 1553.
72 Cong. Budget Office, The Alternative Minimum Tax 1 (Apr. 15, 2004), available at www.cbo.gov/ftpdocs/53xx/doc5386/04-15-AMT.pdf.
73 Id. at 2.
74 See id. at 2–4.
75 Leonard E. Burman et al., Urban-Brookings Tax Policy Ctr., Key Points on the Alternative Minimum Tax, at http://www.brookings.edu/views/op-ed/gale/
20040121amt.htm (Jan. 21, 2004).
76 Id.
77 See William G. Gale & Peter R. Orszag, Should the President’s Tax Cuts Be Made Permanent?, 102 Tax Notes 1277, 1284 tbl.3 (2004).
78 See Alan J. Auerbach & Kevin Hassett, Uncertainty and the Design of Long-Run Fiscal Policy, in Demographic Change and Fiscal Policy 73, 91 (Alan J. Auerbach & Ronald D. Lee eds., 2001).
79 For information on rising life expectancy, see Ronald Lee & Ryan Edwards, The Fiscal Effects of Population Aging in the U.S.: Assessing the Uncertainties, in 16 Tax Policy and the Economy 141, 171–74 (James M. Poterba ed., 2002). For information on the expected continued rise in healthcare expenditure relative to GDP, see Victor R. Fuchs, Provide, Provide: The Economics of Aging 4–5 (Nat’l Bureau of Econ. Research, Working Paper No. 6642, 1998).
80 See Shaviro, supra note 13, at 20–21, 32.
81 See Gokhale & Smetters, supra note 45, at 38–40.
82 Shaviro, supra note 44, at 87 (citing Sherry Glied, Chronic Condition: Why Health Reform Fails 91 (1997)).
83 Id. at 27–30.
84 Id. at 19–20.
85 See, e.g., President Ronald W. Reagan, Radio Address to the Nation on Economic Growth and Budget Reform, 2 Pub. Papers 1626, 1626 (Dec. 13, 1986), available at http://www.reagan.utexas.edu/resource/speeches/1986/121386a.htm (last visited Oct. 15, 2004).
86 See Budget and Economic Outlook, supra note 1, at xiv (observing that Social Security, Medicare, and Medicaid spending currently account for more than 8% of GDP and projecting that, even under moderate assumptions, spending will increase to over 14% of GDP in 2030).
87 See 2004 Medicare Trustees Report, supra note 5, at 109 tbl.II.C23.
88 Robert Dreyfuss, Grover Norquist: “Field Marshal” of the Bush Tax Plan, The Nation, May 14, 2001, at 12 (quoting Grover Norquist).
89 Saki, The Unbearable Bassington 15 (Oxford Univ. Press 1982) (1912).
90 See, e.g., Richard A. Epstein, Takings: Private Property and the Power of Eminent Domain 3–4 (1985); Robert Nozick, Anarchy, State, and Utopia 26 (1974).
91 Liam Murphy & Thomas Nagel, The Myth of Ownership: Taxes and Justice 16 (2002).
92 Stephen Holmes & Cass R. Sunstein, The Cost of Rights: Why Liberty Depends on Taxes 59 (1999).
93 Murphy & Nagel, supra note 91, at 16–17.
94 John Locke, Two Treatises of Government 6 (Henry Regnery Co. 1955) (1690).
95 See Barbara H. Fried, The Puzzling Case for Proportionate Taxation, 2 Chap. L. Rev. 157, 176–77 (1999). Barbara Fried notes, for example, “the enormous gains society bestows on those whose natural talents have little use value on [a] Crusoeian island,” as in the case of “Wayne Gretzky alone on a desert island, thinking of inventing a game called hockey if he could ever find ice, eleven other players, and an audience to pay to watch,” thus permitting him (as in the actual late twentieth century United States) to earn $20 million per year. Id.
96 See Murphy & Nagel, supra note 91, at 16.
97 See David F. Bradford, Reforming Budgetary Language 15–17 (Ctr. for Econ. Studies & Ifo Inst. for Econ. Research, Working Paper No. 619, 2001), available at http://www.cesifo.de/pls/guestci/download/F5648/619.PDF.
98 See Daniel Shaviro, Making Sense of Social Security Reform 86, 131–32 (2000).
99 See, e.g., James R. Hines Jr., What Is Benefit Taxation?, 75 J. Pub. Econ. 483, 483–84 (2000); Louis Kaplow, Public Goods and the Distribution of Income 8–9 (Nat’l Bureau of Econ. Research, Working Paper No. 9842, 2003).
100 Richard A. Epstein, Taxation in a Lockean World, in Philosophy and Law 49, 70 (Jules Coleman & Ellen Frankel Paul eds., 1987).
101 See Fried, supra note 95 at 173–79.
102 See supra note 88 and accompanying text.
103 Payments of interest on government bonds, but not repayments of bond principal, are treated as spending in official government measures such as that of the annual budget deficit or surplus.
104 See, e.g., Epstein, supra note 90, at 99–100.
105 Gokhale & Smetters, supra note 45, at 2. I henceforth will use the terms fiscal imbalance (“FI”) and fiscal gap interchangeably.
106 See id. at 36 tbl.4.
107 Given the preexisting FI, one or both of these changes would have been necessary even without the 2001–2003 tax cuts, but the tax cuts increase their necessary magnitude.
108 See Shaviro, supra note 44, at 148.
109 See Harvey S. Rosen, Public Finance 294 (5th ed. 1999).
110 Id.
111 See supra notes 46–53 and accompanying text.
112 See Shaviro, supra note 44, at 76–91, for a fuller comparison of Social Security and Medicare financing to a Ponzi scheme. In general, Social Security and Medicare have a less “exploding” character than the classic Ponzi scheme, but they are subject to demographic and technological shocks.
113 Examples of cuts to Social Security and Medicare that might be politically feasible at some point include raising eligibility ages, not fully indexing Social Security benefits to inflation, and squeezing healthcare providers on their Medicare reimbursements even if this causes many of them to drop out of the program.
114 See 2004 Medicare Trustees Report, supra note 5, at 3, tbl.I.C1 (stating that total Medicare expenditures at the end of 2002 were $280.8 billion); 2004 OASDI Trustees Report, supra note 43, at 4 tbl.II.B1 (providing that total Social Security expenditures in 2003 were $479.1 billion).
115 Laurence J. Kotlikoff & Jeffrey Sachs, It’s High Time to Privatize, Brookings Rev., Summer 1997, at 16, 18.
116 In addition, because one does not earn additional Medicare benefits at the margin by working more (once one has become eligible, as nearly everyone who reaches retirement age does), the taxes that pay for the benefits would deter work at the margin even if people correctly understood the entire program.
117 See Shaviro, supra note 44, at 26–33.
118 See id.
119 See id. at 29–30 (discussing the RAND Corporation study of general cost consciousness in healthcare).
120 See id. at 29–32.
121 Medicare does not, however, result in significant, if any, progressive redistribution. See id. at 34–36.
122 See Budget and Economic Outlook, supra note 1, at 129–30 tbls.F-1, F-2.
123 See id. at 135 tbl.F-7.
124 See 2004 Medicare Trustees Report, supra note 5, at 109 tbl.II.C23.
125 See supra note 88 and accompanying text.
126 An example is provided by Stephen Moore, the President of the Club for Growth, an influential private campaign organization that, according to its website, seeks to elect candidates who “support the Reagan vision of limited government and lower taxes.” See The Club for Growth, About Us, at http://www.clubforgrowth.org/about.php (last visited Oct. 15, 2004). A recent New York Times Magazine profile of Stephen Moore notes, “As Moore readily admits, spending has multiplied like a virus in Washington under Bush and the Republican Congress, but while the club gleefully goes after . . . moderates on taxes, it has yet to take aim at a single conservative for going soft on spending.” Matt Bai, Fight Club, N.Y. Times, Aug. 10, 2003, � 6 (Magazine), at 26.
127 It seems not to have occurred to anyone taking this view that, in this state of affairs, the government also might be unable to afford costly foreign military interventions.
128 See infra notes 134–156 and accompanying text.
129 See Shaviro, supra note 13, at 102.
130 See id. (observing that, by mandating billions of dollars of private expenditures to provide building access and job opportunities to the disabled, the Americans with Disabilities Act expanded the federal government’s reach in a manner not reflected in direct government expenditures).
131 In both 2001 and 2003, still larger tax cuts would have been enacted but for political resistance in the Senate.
132 See Gale & Orszag, supra note 70, at 1553.
133 See id.
134 See supra notes 13–84 and accompanying text.
135 See supra notes 85–133 and accompanying text.
136 See infra notes 137–156 and accompanying text.
137 See Shaviro, supra note 61, at 5.
138 See id.
139 Laurence J. Kotlikoff & Scott Burns, The Coming Generational Storm 94–100, 122 (2004).
140 Id. at 94–100.
141 Id. at 95.
142 See id. at 92–94, 122.
143 Printing money offers three short-term benefits to governments: from seignorage (they can actually get value for the paper they print), from devaluing both the official debt, and from devaluing other spending commitments to the extent not indexed to inflation. Id. at 125.
144 Id. at 122. This is simply a loss to taxpayers (and presumably on balance to Brazilians) insofar as Brazil really is not going to default but cannot persuade lenders of this.
145 Kotlikoff & Burns, supra note 139, at 136–37.
146 Id. at 140.
147 See id.
148 See supra notes 65–69 and accompanying text for an explanation of the $73 trillion fiscal gap.
149 Among the countries with larger fiscal gaps relative to GDP than the United States are Austria, Finland, France, Germany, Italy, Japan, Spain, and Sweden. Kotlikoff & Burns, supra note 139, at 137.
150 See Gokhale & Smetters, supra note 45, at 27 tbl.2.
151 See John W. Sloan, The Reagan Effect 152–65 (1999). Then-Senate Majority leader and fellow Republican Howard Baker called President Ronald Reagan’s Economic and Recovery Tax Act of 1981 (“ERTA”), which reduced individual income tax rates for all taxpayers and provided $350 billion of tax relief for business (the largest tax cut in American history), a “riverboat gamble.” Id. at 140, 156. Due to concerns about budget deficits and Social Security savings, however, Congress passed tax increases in 1982, 1983, and 1984, all of which President Reagan signed into law. Id. at 157. The most significant of these was the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), which was intended to raise $98.3 billion over three years and regain 25% of the 1981 tax benefits. Id.
152 See id. at 85, 90.
153 See, e.g., Richard Himelfarb, Catastrophic Politics: The Rise and Fall of the Medicare Catastrophic Coverage Act of 1988, at 33–34 (1995). Opposition by seniors to the requirement that they collectively pay for their coverage led to repeal of the benefit in 1989, during (but over the opposition of) the administration of the first President Bush. See id. at 91–92.
154 See generally Shaviro, supra note 98; Shaviro, supra note 44.
155 See generally Shaviro, supra note 98; Shaviro, supra note 44.
156 See U.S. Census Bureau, Statistical Abstract of the United States: 2003, at 419 tbl.633 (2003), available at www.census.gov/prod/2004pubs/03statab/labor.pdf; U.S. Census Bureau, Mini-Historical Statistics, in Statistical Abstract of the United States: 2003, 62 tbl.HS-33 (2003), available at http://www.census.gov/statab/hist/HS-33.pdf.
157 See generally Shaviro, supra note 98; Shaviro, supra note 44.