America's Fundamental Problem, in a Sentence
CBO chief Doug Elmendorf's one-sentence diagnosis of America's Big Problem is making the rounds, so I thought I'd share it, along with a few thoughts.
The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.
Ezra Klein blames political cowardice and says our representatives have become an incoherent mob who are failing to express the hard decisions we face. Maybe. I blame psychology.
People are fiscally conservative with their money. They've also got short memories. Combine those factors and you get a natural resistance to see your tax rate rise dramatically. In the aggregate, that's created a downward pressure on overall effective tax rates in the last quarter century. As this spreadsheet from the CBO shows, total effective tax rates for the entire population have mostly slow-motion descended for the last few decades.
But something else has happened over the last decade that might have seemed invisible to most taxpayers. The Baby Boomer generation got older and entitlement costs dramatically inflated for Social Security, and especially for Medicare and Medicaid. Entitlement inflation is the unstoppable force colliding with the public's immovable resistance to sudden tax increases. Throw in the revenue squeeze of the worst recession in a half-century, and you've got a financial quagmire. Taxpayers who have been trained to expect a slow descent of their ETR are suddenly made aware that their taxes aren't nearly enough to pay for services we have every right to expect.