How Obama’s Inaugural Address Frames the Policy Debate for the Next Decade

By :: January 22nd, 2013

 “We must make the hard choices to reduce the cost of health care and the size of our deficit.  But we reject the belief that America must choose between caring for the generation that built this country and investing in the generation that will build its future.”

With those words in his 2nd inaugural address, President Obama perfectly defined what will be the great domestic policy debate of not only the next four years but the next decade.

There is a simple answer to Obama’s core question: Can the U.S. pay for the health and retirement costs of its seniors while also supporting its children? Sure it can, but not without raising taxes or fundamentally changing the way it provides health and long-term care for the elderly.

This is much more than an argument about deficits. It is at the heart of a profound debate about the nature of government and its relationship to its citizens. Government that provides for nearly all medical care of seniors and low-income children, even as it invests heavily in education, technology, and infrastructure, is government that probably needs to collect at least 40 percent of the nation’s Gross Domestic Product in federal, state, and local tax revenues. That’s the Obama vision of government.

That is very different from one that shifts much of the burden of health costs onto the elderly themselves and largely turns over education, R&D, and infrastructure to private investors. Under that vision, government at all levels would probably need to collect perhaps one-third of Gross Domestic Product in taxes. That’s the Paul Ryan vision of government. And the difference can be measured in far more than in tax dollars.

The importance of health care in this debate is familiar to most Tax Vox readers. In its long-term fiscal forecast, the Congressional Budget Office figures that in 25 years, the federal government will be spending about 10.5 percent of GDP on Medicare, Medicaid, and the new health insurance subsidies created by the Affordable Care Act. It will spend another 6.2 percent on Social Security. Combined, those programs will eat up 90 percent of anticipated tax revenues.

CBO healrth table

Within a decade after that, every dime of expected federal revenue will be spent on these programs. Every dime.

That’s clearly unsustainable. It is indeed, the very definition of Stein’s Law, the aphorism of the economist Herb Stein who said that if something cannot go on forever, it will stop. Or, as Herb sometimes put it, “If present trends can’t continue, they won’t.”

The dominance of spending programs that grow automatically has other implications as well. For liberals, it means that, without big unpopular tax increases, government is deeply constrained in its ability to address new challenges.  

And, as my Tax Policy Center colleague Gene Steuerle often notes, putting so much of government on autopilot has important implications for democracy as well as budgets. We elect lawmakers who promise to change government. But we have seen how tough it is to adjust entitlement programs. As long as so much spending grows automatically, lawmakers have remarkably little control over its fiscal levers.     

Thus, the issue Obama raised so clearly: Do we slow the growth of health spending (something we really don’t know how to do but, it is worth noting, Obama endorsed yesterday)? Do we raise taxes? Or do we some of both?

There is a reasonable balance here—a government that helps those who truly need it but scales back its support for those who don’t, and that raises enough money in taxes to pay for whatever that costs. It would be wonderful if both Democrats and Republicans took this opportunity to find that sensible middle-ground.                  

 

7Comments

  1. Michael Bindner  ::  5:00 pm on January 22nd, 2013:

    A VAT-like net business receipts tax to fund Medicare, Medicaid and ACA subsidies, (or even single-payer or a public option) with offsets for employers who self cover by providing insurance or direct care would seem like a nice middle ground – if only TPC would score it. This could be paired with a solution to the demographic problem – a $6000 per year per child refundable tax subsidy for families paid with wages rather than refunds, also as an offset to a net business receipts tax, might just solve the demographic problem as well.

  2. Tax Roundup, 1/23/2013: PTIN Paralysis! And: pay Iowa taxes with a cell phone? « Roth & Company, P.C  ::  9:37 am on January 23rd, 2013:

    […] Gleckman,  How Obama’s Inaugural Address Frames the Policy Debate for the Next Decade (TaxVox).  I don’t think […]

  3. James Creskey  ::  11:42 am on January 23rd, 2013:

    “That is very different from one that shifts much of the burden of health costs onto the elderly themselves and largely turns over education, R&D, and infrastructure to private investors.”

    Actually, the GOP position is not to “shift hte burden of health costs onto the elderly themselves” but to provide subsidies for them to select coverage that best meets there needs, rather than a one-size federal Medicare policy that’s rampant with fraud and waste.

    And for education, restoring control to localities and states rather than Washington isn’t quite turing it over to the big, bad evil capitalist corporations. But then, you know that, don’t you.

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