The long-term U.S. Fiscal gap: Is the main problem generational inequity?

George Washington Law Review

Volumn 77, Issue 5-6, 2009, Pages 1298-1357

  Shaviro, Daniel ^a  

^a Loyola Los Angeles ^*  (United States)

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EID: 70449122589     PISSN: 00168076     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (135)

1. See Alan J. Auerbach, Jason Furman & William G. Gale, Facing the Music: The Fiscal Outlook at the End of the Bush Years, 119 TAX NOTES 981 (2008).
2. Herbert Stein, Herb Stein's Unfamiliar Quotations, SLATE, May 16, 1997, http://www.slate.com/id/2561/.
3. See Auerbach, Furman & Gale, supra note 1, at 988 (infinite horizon fiscal gap estimate under the Congressional Budget Office's official baseline assumptions).
4. Posting of Len Burman & Greg Leiserson to Tax Policy Center Blog, http://taxvox.taxpolicycenter.org/blog/-archives/2008/4/17/3644448.html (Apr. 17, 2008, 9:26 EDT).
5. See Ryan J. Donmoyer & Indira Lakshmanan, McCain's $3.3 Trillion Tax Cut, Budget Plan at Odds, BLOOMBERG.COM, Apr. 18 2008, http://www.bloomberg.com/apps/news7pids20601070&sid=a72L7-AJ5P9c&refer= home.
6. See Roberton Williams & Howard Gleckman, An Updated Analysis of the 2008 Presidential Candidates' Tax Plans (Sept. 15, 2008), http://www. taxpolicycenter.org/UploadedPDF/411750-updated-candidates-summary.pdf (suggesting that then-Senator Obama's tax proposals, as described by campaign staff, would reduce federal revenues over a ten-year period by about $2.9 trillion (as compared to $4.2 trillion for Senator McCain), compared to his proposals as described in campaign speeches which would lose about $2.6 trillion (as compared to almost $7 trillion for Senator McCain)).
7. See Joann M. Weiner, Advice from the Presidential Campaign Advisers, 119 TAX NOTES 811, 811-12 (2008).
8. Thus, the Concord Coalition, perhaps the most prominent public advocacy group calling for a return to fiscally sustainable budget policies, describes itself on its webpage as a "nationwide, non-partisan, grassroots organization advocating generationally responsible fiscal policy," and introduces its "Fiscal Wake-Up Call" by stating: "It is often said that our political system only responds to a crisis. If that turns out to be true, our children and grandchildren are in big trouble." The Concord Coalition, A Fiscal Wake-Up Call, http://www.concordcoalition.org/act/fiscal- wake-tour/fiscal-wake-call (last visited July 1, 2009).
9. For a similar argument, see Michael Doran, Intergenerational Equity in Fiscal Policy Reform, 61 TAX L. REV. 241, 242 (2008).
10. The concept of tax smoothing was introduced in Robert J. Barro, On the Determination of the Public Debt, 87 J. PUB. ECON. 940 (1979), although Barro emphasized the claim that it described actual, as opposed to merely optimal, budget policy.
11. See Franco Modigliani & Richard Brumberg, Utility Analysis and the Consumption Function: An Interpretation of Cross-Section Data, in POST KEYNESIAN ECONOMICS 388, 429-31 (Kenneth K. Kurihara ed., 1954).
12. In July 2008, the Bush Administration forecast a 2009 deficit of $482 billion, but this number (1) grossly underestimated expected Iraq and Afghanistan war costs; (2) ignored recently enacted legislation reversing scheduled reductions in Medicare reimbursements of doctors; (3) ignored the costs of a massive housing bill that Congress had just enacted; and (4) used "rosy scenario" economic assumptions such as a sharp increase in the rate of economic growth.
13. See Jonathan Weisman, Record $482 Billion '09 Deficit Forecast, WASH. POST, July 29, 2008, at A4.
14. See Auerbach, Furman, & Gale, supra note 1, at 981 (noting that the 2008 deficit would rise by $260 billion (from $357 billion to $617 billion) if current surpluses in the above programs were ignored).
15. See Matthew Benjamin, Cost of U.S. Crisis Action Grows, Along With U.S. Debt, BLOOMBERO.COM, Oct. 10, 2008, http7/www.bloomberg.com/apps/news?pid= 20601103&sid=aXCtv.lAT08I&refer=us#.
16. Indeed, this is the title of a book of mine on the subject. DANIEL SHAVIRO, DO DEFICITS MATTER? (1997).
17. See id. at 3.
18. Long-term forecasts by the Social Security and Medicare Trustees use seventy-five-year projection windows. See Status of the Social Security and Medicare Programs, Social Security Online, http://www.ssa.gov/OACT/TRSUM/index. html (last visited July 1, 2009).
19. See SHAVIRO, supra note 15, at 4.
20. Id. at 307-09.
21. A further problem with the deficit as a measure, when used for certain common purposes such as measuring fiscal stimulus, is that it treats all current dollars the same, without regard to who gets or pays them and under what circumstances. Thus, giving $10 billion to consumers has the same effect on the deficit, but not on fiscal stimulus, whether the recipients' marginal propensity to consume is low or high. Likewise, tax breaks for businesses are measured the same way whether or not they reward and thereby encourage stimulative new investment.
22. In the literature, the fiscal gap differs from the fiscal imbalance for any period short of the infinite horizon, because the former treats a stable debt-to-GDP ratio as indefinitely sustainable while the latter includes even sustainable debt in the measure.
23. See Auerbach, Furman & Gale, supra note 1, at 986-88 (concerning the fiscal gap);
24. Jagadeesh Gokhale & Kent Smetters, Fiscal and Generational Imbalances: An Update 3, in 20 TAX POLICY AND THE ECONOMY (James M. Poterba ed., 2006) (concerning the fiscal imbalance). The two are equivalent over the infinite horizon, because paying interest on the debt forever (making it a perpetuity) is equivalent in present value terms to repaying it. Because the difference is so small, I will for convenience use the term "fiscal gap" but include even a sustainable debt level in the measure as under the fiscal imbalance.
25. This also includes the current level of public debt and the need to make interest payments.
26. See Auerbach, Furraan & Gale, supra note 1, at 983-84.
27. Id. at 987.
28. See id. at 986.
29. Id. at 988 (estimating the fiscal gap in present value dollars through 2082).
30. Id.
31. This number is based on a projected 2008 GDP of $14.6 trillion.
32. Auerbach, Furman & Gale, supra note 1, at 988.
33. CONGRESSIONAL BUDGET OFFICE ("CBO"), THE LONG-TERM BUDGET OUTLOOK 24-25 (2007), http://ww.cbo.gov/ftpdocs/88xx/doc8877/12-13-LTBO.pdf.
34. See DANIEL N. SHAVIRO, TAXES, SPENDING, AND THE U.S. GOVERNMENT'S MARCH TOWARD BANKRUPTCY 86 (2007).
35. See Auerbach, Furman & Gale, supra note 1, at 988.
36. See KEVIN HASSETT, BUBBLEOLOGY: THE NEW SCIENCE OF STOCK MARKET WINNERS AND LOSERS 74 (2002).
37. Id.
38. The government can also finance budgetary shortfalls by printing money.
39. Specifically, the GAO's alternative simulation "assume[s] that (1) all expiring tax provisions are extended through 2018.
40. and then revenues are brought to their historical level as a share of... [GDP] plus expected revenue from deferred taxes-(2) discretionary spending grows with the economy,
41. and (3) no structural changes are made to Social Security, Medicare, or Medicaid." U.S. GOV'T ACCOUNTABILITY OFFICE, FISCAL YEAR 2007 U.S. GOVERNMENT FINANCIAL STATEMENTS 18 (2008)
42. (statement of Gene L. Dodaro, Acting Comptroller General of the United States, before the Senate Subcommittee on Federal Financial Management, Government Information, Federal Services, & International Security, Committee on Homeland Security & Governmental Affairs), available at http://www.gao.gov/new.items/d08926t.pdf.
43. GAO, Long-Term Simulation Data, http://www.gao.gov/special.pubs/longterm/ 42008-baselineext.pdf.
44. and http://www.gao.gov/special.pubs/longterm/42008-altsimulation.pdf. 2008 GDP is assumed to be $14.3 trillion.
45. If discretionary spending grew solely at the inflation rate, and thus stayed fixed in real terms while the economy and population kept on growing, then by 2018 it will have shrunk by twenty-one percent relative to GDP and by fourteen percent in real per capita terms.
46. Auerbach, Furman & Gale, supra note 1, at 984.
47. See GAO, supra note 37.
48. GAO, supra note 36, at 21.
49. CBO, supra note 30, at 14.
50. Id.
51. See SHAVIRO, supra note 15, at 30;
52. SHAVIRO, supra note 31, at 77.
53. See, e.g., LAURENCE J. KOTLIKOFF & SCOTT BURNS, THE COMING GENERATIONAL STORM: WHAT YOU NEED TO KNOW ABOUT AMERICA'S ECONOMIC FUTURE 45 (2004).
54. Id.
55. For an informative though highly critical view of this practice,
56. see Michael J. Graetz, Paint-by-Numbers Tax Lawmaking, 95 COLUM. L. REV. 609, 613-14 (1995).
57. See SHAVIRO, supra note 31, at 34-35.
58. See Tax Policy Center ("TPC"), Urban Institute and Brookings Institution, How to Find Tables for TPC's Analysis of the Candidates' Tax Plans, http://www.taxpolicycenter.org/UploadedPDF/findtables-candidates.pdf.
59. Graetz, supra note 46, at 619.
60. See id. (quoting economist Carl Shoup).
61. Id. at 652.
62. Id. at 661. Regulations also can have substantial distributional effects that are off-budget. Id.
63. See LAURENCE J. KOTUKOFF & SCOTT BURNS, THE COMING GENERATIONAL STORM: WHAT YOU NEED TO KNOW ABOUT AMERICA'S ECONOMIC FUTURE 58 (2004).
64. On the problems with lifetime measures,
65. see Daniel Shaviro, Beyond the Pro-Consumption Tax Consensus, 60 STAN. L. REV. 745, 770-78 (2007).
66. The best-known such effort with respect to current generations is a 1993 study by Donald Fullerton and Diane Lim Rogers.
67. See DONALD FULLERTON & DIANE LIM ROGERS, WHO BEARS THE LIFETIME TAX BURDEN? (1993).
68. See Alan Auerbach, Jagadeesh Gokhale & Laurence J. Kotlikoff, Generational Accounts: A Meaningful Alternative to Deficit Accounting 2 (Nat'l Bureau of Econ. Research, Working Paper No. 3589,1991).
69. See SHAVIRO, supra note 31, at 99.
70. Id. at 8.
71. See Alan Auerbach, Jagadeesh Gokbale & Laurence J. Kotlikoff, Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy, 8 J. ECON. PERSP. 73, 81-82 (1994).
72. See id. at 93.
73. See SHAVIRO, supra note 31, at 98 (noting that the Clinton administration briefly used GA estimates, but abandoned them, because of embarrassing results).
74. GA consistently shows women facing lower lifetime net tax rates than men for two reasons. First, women tend to have lower lifetime earnings than men, and thus tend to fare better under progressive tax and transfer rules (along with Social Security and Medicare rules that provide spousal benefits to one-earner married couples). Second and more importantly, women live longer on average, and thus tend to receive more years of Social Security and Medicare benefits.
75. See SHAVIRO, supra note 15, at 125-26.
76. Jagadeesh Gokhale, Generational Accounting, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS (2d ed. 2008), available at http://www.cato.org/pubs/ articles/gokhale-generational-accounting.pdf.
77. See Daniel Shaviro, Rethinking Tax Expenditures and Fiscal Language, 57 TAX L. REV. 187, 188 (2004) (deriving the two categories from RICHARD A. MUSGRAVE, THE THEORY OF PUBLIC FINANCE, A STUDY IN PUBLIC ECONOMY 5 (1959)). In previous work, I have attempted a three- or four-part analysis of the issues, based on subdividing the allocative issues by type. See generally SHAVIRO, supra note 15 (describing issues of generational equity, macroeconomic effects, and the size of government);
78. SHAVIRO, supra note 31, at 86 (adding sustainability to the list). Other writers on these issues have also essayed tripartite classification.
79. See, e.g., Alan Auerbach, Long-Term Objectives for Government Debt 1-3 (2008), available at http://www.econ.berkeley.edu/-auerbach/long-term- objectives-govt-dept.pdf (referring to in-tergenerational equity, economic performance, and fiscal sustainability). For that matter, Mus-grave also had a third category: stabilization policy.
80. MUSORAVE, supra at 5. I have concluded, after multiple iterations of writing about long-term budgetary issues, that dividing the non-distributional (i.e., allocative) issues into multiple categories, though meant to add clarity by distinguishing them by type, in fact does more to confuse analysis and bring line-drawing questions to the fore than to clarify it.
81. Obviously, evaluating the political economy effects of a given structural feature of government policy, such as a fiscal rule pertaining to deficits or the fiscal gap, depends on its allocative and distributional effects.
82. See Gokhale, supra note 63.
83. See SHAVIRO, supra note 15, at 154. This presumably reflects the existence of overlapping generations, so that those alive today would never share the same end point even if life expectancies were fixed and uniform.
84. See, e.g., Joseph G. Altonji, Fumio Hayashi & Laurence J. Kotlikoff, Is the Extended Family Altruistically Linked?, 82 AM. ECON. REV. 1177, 1178 (1992) (finding that fiscal policy transfers between generations largely are not offset by changes in transfers within the household).
85. See, e.g., Daniel Shaviro, Households and the Fiscal System, 23 Soc. PHIL. & POLICY 185 (2006) (discussing the relevance of household structure to distribution policy).
86. See, e.g., Louis KAPLOW, THE THEORY OF TAXATION AND PUBLIC ECONOMICS 382-83 (2008).
87. Neil Buchanan, Social Security and Government Deficits: When Should We Worry?, 92 CORNELL L. REV. 257, 266 n. 57 (2007).
88. If all aspects of the forecast by Gokhale, supra note 63, are correct, however, the rise in LNTRs exceeds that supportable on the ground of equalizing lifetime consumption. Gokhale estimates that males born in 2004 will on average pay lifetime net taxes of $104,300 on lifetime earnings of $565,000, while those born in 2005 or thereafter will on average pay lifetime net taxes of $332,000 on lifetime earnings that will only have increased to $572,500. The younger group's higher taxes would therefore leave them with after-tax earnings of only $240,500, as compared to $460,700 for the older group. Gokhale, supra note 63.
89. CDC, NATIONAL VITAL STATISTICS REPORT, 3 tbl.A (June 11,2008), available at http:www.cdc.gov/nchs/data/nvsr/nvsr56/nvsr56-16.pdf.
90. See National Center for Health Statistics, Health, United States, 203 tbl.26 (2008) available at http://www.cdc.gov/nchs/data/hus/hus08.pdf.
91. See U.S. Social Security Admin., 2008 OASDI TRUSTEES REPORT, 86 tbl.V.A.4 (Cohort Life Expectancy), available at http://www.ssa.gov/OACT/TR/rR08/tr08.pdf
92. (forecasting that life expectancy at birth will rise from 78 years to 80.8 years between 2010 and 2085).
93. A ground apart from technological progress for believing that future generations might be more efficient consumers is that population growth implies that a greater number of people benefit from the provision of pure public goods, which by definition are non-rival and hence not subject to congestion or rising cost of provision.
94. See Louis Kaplow & Steven Shavell, Fairness Versus Welfare, 114 HARV. L. REV. 961, 1339 n.923 (2001) (noting and rebutting the non-utilitarian objection to transferring resources to individuals who derive high utility from receiving substantial resources by reason of their having developed expensive tastes).
95. MARVIN A. CHIRELSTEIN, FEDERAL INCOME TAXATION 440 (10th ed. 2005) (table showing that $1 in fifty years is worth 22.8 cents today, assuming a three percent discount rate).
96. Kaplow, supra note 70, at 383.
97. Tyler Cowen, Caring About the Distant Future: Why It Matters and What It Means, 74 U. CHI. L. REV. 5, 9 (2007).
98. See generally MILTON FRIEDMAN, A THEORY OF THE CONSUMPTION FUNCTION (1957) (describing permanent income hypothesis);
99. Modigliani & Brumberg, supra note 11, at 388-436 (describing the theory of lifetime consumption smoothing).
100. Cowen, supra note 80, at 9.
101. CHIRELSTEIN, supra note 78, at 441 (table showing that $1 grows to $4.38 over 50 years assuming a three percent annual return).
102. An example of a limiting factor is Frank Ramsey's positing "bliss," or the point at which a generation has reached the maximum achievable level of utility and thus will not benefit at all from further consumption.
103. See generally, Frank P. Ramsey, A Mathematical Theory of Saving, 38 ECON. J. 543 (1928).
104. On the problem of an absconding intermediate generation,
105. see, for example, Cass Sun-stein & Arden Rowell, On Discounting Regulatory Benefits: Risk, Money, and Intergenerational Equity, 74 U. CHI. L. REV. 171, 193-96 (2007).
106. A good example involves the so-called "Golden Rule" savings rate, defined in Robert Solow's influential growth model as the rate that would maximize steady-state consumption by all generations.
107. See generally, ROBERT M. SOLOW, GROWTH THEORY 71-84 (2000). Gregory Mankiw argues that sacrifice by current generations, in the form of extra saving to bring us up to the Golden Rule level, is clearly justified in utilitarian terms because, "[e]ven though current generations will consume less, an infinite number of future generations will benefit." N. GREGORY MANKIW, MACROECONOMICS 97 (4th ed. 2001);
108. See also Neil Buchanan, What Do We Owe Future Generations?, 11 GEO. WASH. L. REV. 1237, 1275-77 (2009) (noting that the Mankiw argument does not necessarily hold if future generations' welfare is discounted).
109. See FRANCIS FUKUYAMA, THE END OF HISTORY AND THE LAST MAN 42-51 (1992) (positing that history has an endpoint, involving the universal establishment of liberal capitalist democracy).
110. See Buchanan, supra note 86, at 1237-41.
111. See, e.g., KAPLOW, supra note 70, at 253-54.
112. For an argument in favor of counting other-regarding preferences in the social welfare function,
113. See id. at 362-66.
114. By changing for the worse, I do not mean that the new policies will necessarily be substantively inferior to the presently assumed policies, but that they will be less favorable in the sense of giving people less or requiring them to pay more.
115. Auerbach, Furman & Gale, supra note 1, at 988.
116. SHAVIRO, supra note 31, at 88 (noting survey evidence that people expect drastic Social Security benefit cuts).
117. Economic Growth and Tax Reconciliation Act of 2001, Pub. L. No. 107-16,115 Stat. 38.
118. Jobs and Growth Tax Relief Reconciliation Act of 2003, Pub. L. No. 108-27, 117 Stat. 752.
119. See CBO, The Alternative Minimum Tax (Apr. 15, 2007), http://www.cbo.gov/doc.cfm?index=5386&type=0.
120. Moreover, if actual expectations treat current political trends as pertinent adjustments to what would otherwise be projected future policy, the gap between it and actual future policy would likely be larger still. Thus, consider that budget policy changes over the last few years have generally greatly increased the fiscal gap and that President Obama seems to plan on continuing this trend.
121. See OFFICE OF MANAGEMENT AND BUDGET, BUDGET FOR U.S. GOVERNMENT FISCAL YEAR 2010, SUMMARY TABLES, available at http://www.whitehouse.gov/omb/assets/ fy2010-new-era/Summary-Tables2.pdf.
122. See SHAVIRO, supra note 31, at 87-88.
123. There is, however, a positive revenue externality if people work and save more to self-insure against the risk of a reduction in their retirement benefits, too
124. See SHAVIRO, supra note 31, at 137.
125. SHAVIRO, supra note 31, at 88.
126. Id.
127. See DANIEL SHAVIRO, MAKING SENSE OF SOCIAL SECURITY REFORM 29-30, 47 (2000).
128. SHAVIRO, supra note 31, at 88.
129. See supra Part III.A.
130. GAO, FISCAL YEAR 2007, supra note 36, at 21.
131. See GAO, Long-Term Simulation Data, supra note 37.
132. SHAVIRO, supra note 31, at 92.
133. CBO, The Long-Term Budget Outlook, supra note 30, at 14.
134. In contrast to the 2008 financial crisis, in which policymakers could hope to avoid a serious depression by using massive outlays to restore the flow of credit and/or consumer demand, in a fiscal crisis dollar-denominated outlays would by definition be unable to help, given the inflation problem. no Id. at 1.
135. See HASSETT, supra note 33, at 74.