Six Long-Run Tax and Budget Realities

This article outlines six realities that will likely shape the policy response to the long-run fiscal imbalance. First, defense spending will likely continue trending downward as a share of GDP over the long run because defense needs do not rise proportionately to income, and defense will likely be a tempting political target. Second, entitlement benefits will be restrained relative to the explosive growth projected under the current-law path because sustaining that growth would lead to intolerably high tax burdens. Third, revenue will rise as a share of GDP relative to its recent average because the degree of entitlement restraint required to avoid a revenue increase is politically impossible. Fourth, as revenue rises relative to GDP, the federal tax system will likely shift toward consumption taxation to some extent and in some form, to limit the economic and political damage inflicted by significantly increasing marginal income tax rates. Fifth, the middle class, as broadly defined by today's political debate, will bear much of the burden of addressing the fiscal imbalance through entitlement benefit cuts and tax increases. The long-run fiscal imbalance cannot be addressed solely by taxing the top 2 or 3 percent of the income distribution or by gutting safety net programs for the bottom 20 percent. Sixth, because it will be difficult for either party to make serious progress alone, the necessary combination of entitlement benefit cuts and tax increases will likely arise through a series of bipartisan agreements