Obama's inaugural address defines domestic policy debate
聽鈥淲e must make the hard choices to reduce the cost of health care and the size of our deficit. 聽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.鈥�
With those words in his聽, 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鈥檚 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鈥檚 Gross Domestic Product in federal, state, and local tax revenues. That鈥檚 the Obama vision of government.聽
That is very different from one that shifts much of the burden of health costs onto the elderly themselves and largely turns over聽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鈥檚 the聽. 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.
Within a decade after that, every dime of expected federal revenue will be spent on these programs. Every dime.
That鈥檚 clearly unsustainable. It is indeed, the very definition of Stein鈥檚 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, 鈥淚f present trends can鈥檛 continue, they won鈥檛.鈥�
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. 聽
And, as my Tax Policy Center colleague Gene Steuerle often聽, 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. 聽聽
Thus, the issue Obama raised so clearly: Do we slow the growth of health spending (something we really don鈥檛 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鈥攁 government that helps those who truly need it but scales back its support for those who don鈥檛, 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.聽
