The poor budget outlook may impel the administration to follow up health-care legislation with an effort to fix Social Security. The shortfall in Social Security's trust funds -- which adds to the long-term deficit -- is much smaller than the companion problem in Medicare funding. Public anxiety over deficits may make this fix possible now even though it has been elusive for years. If this could be done, confidence in Washington's capacity to address its debt challenge would rise.
But even with a Social Security fix the medium-term deficit outlook will be poor. Sometime soon, perhaps in 2010, Main Street and financial markets will exert irresistible pressure to reduce the deficit.
The problem is the deficit's sheer size, which goes way beyond potential savings from cuts in discretionary spending or defense. It's entirely possible that Medicare and Social Security will already have been addressed, and thus taken off the table. In short we'll have to raise taxes.
Today, the U.S. ranks next to last among the 28 Organization for Economic Cooperation and Development nations in total federal revenue as a share of GDP. Our federal revenues represent 18% of national output, down from 20% just 10 years ago. That makes the mismatch between our spending and our revenue very large, producing the huge deficits we face.
We all know the recent and bitter history of tax struggles in Washington, let alone Mr. Obama's pledge to exempt those earning less than $250,000 from higher income taxes. This suggests that, possibly next year, Congress will seriously consider a value-added tax (VAT). A bipartisan deficit reduction commission, structured like the one on Social Security headed by Alan Greenspan in 1982, may be necessary to create sufficient support for a VAT or other new taxes. |