If Deficits Are Totally Harmless, Why Have Any Taxes?

This post is part of our forum on Michael Kinsley's October cover story exploring the legacy of the Baby Boomers and what they owe the country. Follow the debate here.

Jamie Galbraith will be happy to know that his resubmitted draft of this reply--which, believe it or not, is considerably less nasty than the one I had already responded to--has forced me to rewrite my reply, leaving out a variety of devastating rejoinders to insults that no longer appear, and taking far too much time for a lazy person such as myself. Now he seems to at least accept the legitimacy of the Congressional Budget Office. The CBO may be wrong (I haven't read Galbraith's case about this--far too lazy) but it is a professional, politically neutral organization whose assumptions surely are not obviously ridiculous.

When I described these assumptions as "reasonable," this was shorthand for a long, somewhat boring explanation I was hoping to avoid. CBO budget projections ordinarily start with a "baseline" that assumes current spending programs will remain the same, except for safely predictable demographic changes. (For example, Social Security's benefit formulas won't change, but costs will increase due to an aging population.) Several policies today, however, are unlikely to continue unchanged. So the CBO produced a second projection incorporating the expected changes. These include extension of most of George W. Bush's supposedly "temporary" tax cuts and modification of the "alternative minimum tax," which happens every year.  What I meant by "reasonable" was that I used the second set of projection. When everything is so uncertain, I don't see what is so obviously ridiculous about projecting 2 percent inflation and 5 percent interest rates, as the CBO does. That would make real interest rates of 3 percent.
Can the Boomers Save America?
Yes, the national debt was higher as a percent of GDP at the end of World War II. But it was going down. Ours today is going up, and soon will equal the postwar figure of 109 percent, headed to 185 percent in 2036. At the end of World War II, furthermore, there was a huge reservoir of private savings to be tapped since big-ticket items like cars had been unavailable for several years. Hardly the case today. This is all very well known, even to people whose fathers did not run the economy during the war.

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Here is the key point: If deficits of any size are harmless, why do we bother to have taxes at all?  Why not let the government spend as much as it wants and borrow the whole amount? Deficits are larger than we could have imagined even a few years ago. If there is some limit, what is that limit if we're not near it now? I'm not against another job-creating stimulus if my economic betters like Jamie Galbraith think it's necessary. I would just like to hear some sort of acknowledgment that it isn't free: that we are digging a hole that someday soon we will have to fill.

Actually, snot-nose, I do know the difference between a median and a mean. My point was that Boomers will be inheriting a lot of money from their parents--money that could be used to reduce the debt we are handing to our children. Since the issue is really the total amount, using the mean (average) figure seems at least as valid as using the median.

Galbraith says the "actual and proper" purpose of the current estate tax is to encourage charitable contributions by the very rich by permitting these contributions to be deducted. That may be what he likes about it, but where is his evidence that this was actually its "purpose" when enacted? And even if so, why should this purpose be limited to the very, very rich? Why shouldn't the merely affluent benefit from this moral bullying as well? And does this purpose--imposing a tax to encourage behavior that will qualify for a deduction-- make sense? Right now, of course, there is no estate tax. But if the top estate tax rate were 55 percent, as it once was, it would cost a wealthy individual 45 cents to give a dollar to some charity and cost the government 55 cents in lost revenue.  That may be desirable, or at least tolerable, as a side effect of designing an estate tax. But I'm surprised to hear Galbraith say--approvingly--that this is the very purpose of an estate tax, since the effect is to give wealthy donors and their minions substantial power to decide how that dollar is spent, rather than leaving the decision to the citizens deciding democratically.

The real contribution Boomers can make, Galbraith says, is to quit their jobs and get out of the way. Easy to say for a man with tenure. Should we assume that the Lloyd M. Bentsen Chair in Government/Business Relations at the University of Texas at Austin will soon be available to the next generation?

The debate continues here.