Citizens for Tax Justice — Could Cut the Deficit by Long-Term Budget Deficit

The American Prospect Summer 1994 The False Messiah Pete Peterson’s Revelations Are Not Gospel

By Robert S. McIntyre

eter G. Peterson, as he cheerfully admits, is not Republican John Danforth, who want both big cuts in a member of the middle class. He’s a rich federal transfer payments and major tax changes that Republican Wall Street investment banker. But encourage savings and investment. in his crusade against deficits and entitle- The 67-year-old Peterson, who served Richard Pments, he adroitly poses as a champion of the middle Nixon as a White House staffer and then Secretary of class. Commerce, has emerged as perhaps the leading Given his circumstances, it’s not entirely surprising spokesman for what remains of the anti-deficit wing of that Peterson is an outspoken opponent of the federal the Republican Party. For example, Peterson is the government’s two most progressive (and successful) founding president of the nominally bipartisan programs: the graduated income tax and Social Concord Coalition, chaired by former Senators Warren Security. What is odd is that his pose as a friend of the Rudman and Paul Tsongas. Senator Tsongas, who common American succeeds; that he publishes in began his electoral career as a Republican, declared in liberal journals like the Atlantic and the New York 1992, “Of all the Democratic candidates, I have the Review; and that he enjoys a largely uncritical press. strongest appeal among Republicans.” The Coalition Even odder is the fact that Bill Clinton, after wants to eliminate the deficit by the year 2000 by presiding over the most progressive tax reform in two cutting entitlements and raising consumption taxes. decades, would name Peterson as one of his ten ap- Peterson has helped fund “Lead . . . or Leave,” a group pointments to the newly formed Bipartisan Com- with a similar entitlement-bashing agenda that claims mission on Entitlement and Tax Reform. Peterson is at to represent Generation Xers. He and his staff have the epicenter of a growing network dedicated to written a number of books and articles, most recently demonizing entitlements. Facing Up (1993), excerpted in the Atlantic under the In order to squeeze his 1993 budget plan through same title and adapted in a New York Review article the Senate last year, Clinton had to appease Nebraska called “Entitlement Reform: The Way to Eliminate the Democrat Bob Kerrey, who in an emotional, late-night Deficit.” speech on the Senate floor complained bitterly that the Kerrey and Danforth apparently hope their plan was not tough enough on the middle class. To Entitlements Commission will provide a quasi-official secure Kerrey’s reluctant vote, Clinton agreed to form endorsement for the Peterson program. Most GOP a commission to study possible cuts in entitlement leaders fear that calling directly for entitlement cuts, programs and new taxes. Congress was awarded 22 of namely in Social Security, is political suicide; they have the 32 seats on the commission, 12 Senators and 10 instead stuck with vague recommendations for less Representatives, each split evenly between Democrats “wasteful spending.” Likewise, while they may favor and Republicans. The remaining 10 choices were lowering taxes on the wealthy, they are reluctant to call reserved for the President. directly for higher taxes on middle- and low-income But when it came time to make appointments, families to replace the lost revenue. Peterson is more House Republicans, led by GOP Whip Newt Gingrich, forthright. Along with tax cuts for the rich, he explicitly refused to fill their five designated positions unless endorses tax increases for the poor and the middle class Clinton conceded some of his slots as well. After as well as sharp reductions in what average families months of delay and with his promise to Kerrey on the receive from the government. line, Clinton caved in and named several Republicans, But because Peterson cloaks his goals in the rhetoric including Pete Peterson. Although Peterson’s views are of progressivity, the press has fawned over him. The antithetical to much of the Clinton agenda, he will fit in misleading notions that entitlements are running up well with several other members of the commission, the deficit, stealing from future generations, and including the two co-chairmen, Senators Kerrey and maintaining the elderly in affluence while young people suffer, have become received wisdom for many. amount to only about 4 percent of its $200,000-plus Much like Tsongas, Peterson has cultivated a reputa- average income. tion as someone who is above politics and willing to But Peterson continues his populist rhetoric. face the hard truth. “Middle-class Americans today feel hard pressed and beleaguered — and they are.” Peterson promises to Seductive Rhetoric wring revenue from the “genuine upper class” through higher tax rates, lower tax subsidies, and greatly re- s outlined in his 1993 book, Facing Up, Peterson duced entitlement benefits. would tinker with various federal spending Alas, having piqued middle-class interest, Peterson A programs from defense to welfare, with little switches his message. Stripping the big fish of federal net change in the total spent. The heart of his agenda is benefits won’t do much for the budget, he asserts, the following: because the rich don’t really get much in the way of • Cut Social Security and Medicare by $135 billion a government subsidies: year by the year 2000 — a reduction of 21 percent that As for direct entitlement benefits, . . . not much help year and more thereafter. Both the Concord Coalition is available from the rich. The maximum entitlement and “Lead . . . or Leave” endorse similar proposals. savings obtainable from the 1 percent of households • Enact vast new federal taxes on consumption. enjoying incomes of more than $200,000 are . . . about Initially, Peterson would generate $220 billion in $5 billion if we took away all their benefits (something additional annual revenue (in the year 2000) by that even Bill Clinton . . . has never dreamed of imposing a national sales tax and a stiff tax on suggesting). employee health benefits, as well as tripling or qua- Nor, he claims, can we get much from eliminating drupling selected federal excise taxes. He would use the tax breaks of the rich. “For all the subtle subsidies part of the money to pay for $30 billion or so in new that help the wealthy borrow huge sums for home loopholes for corporations and the wealthy. Eventually, mortgages and take unlimited health-care deductions,” he hopes to raise about a trillion dollars in new he says, “just 7 percent go to the Americans whom the consumption taxes, so that he can eliminate personal President calls `rich.’ ” and corporate income taxes entirely. The Concord In truth, the wealthy get far more in tax breaks than Coalition endorses the same plan. Peterson admits. Hence, the bait-and-switch. Despite Peterson’s bottom line is that the middle class gets his rhetoric, Peterson apparently doesn’t want the too much from government and pays too little for it, wealthy to relinquish anything. On the contrary, he while corporations and the rich deserve a break. would have the middle class suffer and the rich get tax Curiously, that’s not how he sells his program. cuts to more than offset any reductions in their direct Peterson frames his case by contending that well- federal benefits. off people get too much from government. “Counting both direct benefits and the value of entitlements Rich Ironies conveyed through the tax code, the aggregate amounts received by people above the national median are nlike some of my Wall Street colleagues,” simply staggering,” he complains. “In 1991 nearly half Peterson wrote in the October 1993 Atlan- of all entitlements went to households with incomes “U tic, “I see absolutely nothing wrong with over $30,000. One quarter went to households with imposing higher tax burdens on the wealthiest in our incomes over $50,000.” Peterson takes into account all society.” That may be, but Peterson’s tax program is direct-benefit outlays and tax expenditures, then about the most pro-rich approach imaginable. concludes that “On average, a household with an Peterson harps on the “shocking” regressivity of income under $10,000 collected roughly $5,700 in 1991. various federal income tax breaks that he says provide On average, a household with an income over $100,000 an unfair advantage to the wealthy. Yet his ultimate collected $9,300. This distribution of benefits by income goal is to repeal all personal and corporate income . . . clearly . . . has nothing to do with economic taxes. He is enamored of the so-called “progressive equality.” consumption tax,” which would be levied on incomes To be a bit churlish, these figures don’t necessarily after a deduction for money saved. By definition, seem all that bad. By Peterson’s arithmetic, the lowest corporations would pay no tax at all. income group he cites gets almost its entire $6,000 Since rich people can save a far higher share of their average income from government assistance, while the income than average families, a tax limited to spending high-income group’s “benefits,” mainly tax breaks, would require extraordinarily high rates at the top to avoid providing huge tax cuts to the wealthy. Indeed, Well, suppose that tomorrow the price of everything only consumption tax rates of more than 100 percent you buy went up by 5 percent but your income for the very highest earners could approximate the remained the same. It’s unlikely that your first reaction progressivity of the current system. Enacting such rates would be to eat less, drive less, and move to a cheaper would, of course, be impossible; as a result, Peterson’s apartment so that you could save more. If anything, consumption tax would almost certainly cut taxes for you’d cut back on your savings so you could consume the rich and raise taxes for most others. just as before. Because a progressive consumption tax has Alternatively, suppose you are trying to save unsolvable technical problems, Peterson offers a more money for retirement, a new car, or whatever. And practical, albeit hugely regressive, alternative: a 5 suppose that the rate of return on your savings goes percent national retail sales tax, a 50-cent-a-gallon up, perhaps because the government gives savings a gasoline tax hike, sharply increased taxes on alcohol tax break. Would you rush to save more? Or, now that and tobacco, and a stiff tax on employee health you could put less money aside and still meet your benefits. Together, these taxes are supposed to raise saving goal, would you choose to save less? $220 billion a year by the year 2000. As a matter of economic theory there’s no way to Distributionally, the Peterson tax package would tell for sure, but the experience during the Reagan take about five times as large a share of income from administration suggests Peterson is indeed wrong. In median income families as from the rich, and an even Reagan’s 1981 tax act, new tax breaks were showered higher percentage from the poor. But that’s not all. It on savings, through deductible IRAs, capital gains tax would also give corporations new tax breaks and the breaks, a 30 percent cut in the top personal tax rate on wealthy a capital gains loophole. So, far from “higher investment income and a plethora of new corporate burdens on the wealthiest in our society,” Peterson loopholes. Yet thereafter, savings plummeted. Con- would grant himself and his high-rent neighbors a tax versely, when Congress repealed many of the tax cut. breaks in 1986, savings eventually rebounded. Most To be fair, Peterson does offer a rationale for so experts who study these issues find no correlation be- tilting the tax code. In his book, he says, “By taxing tween taxes on savings and savings rates, either in the consumption (as opposed to income), we of course United States or among the major countries of the create incentives that favor household savings.” In world. addition, he argues that “Every other major industrial In 1992 when Peterson and I served on a “capital country relies more heavily — typically, much more formation” subgroup of a Presidential commission heavily — on consumption taxes than the United States exploring these issues, the assembled experts over- does. Not coincidentally, these other countries have whelmingly concluded that the relative level of taxa- higher rates of private saving than we do.” tion on savings versus consumption has little or no The underlying premise of these contentions — that effect on saving behavior. That experience may help higher savings would be an unmitigated boon for our explain Peterson’s reluctance to cite serious evidence economy — can be debated. But even conceding that for his assertions that consumption taxes would in- point, Peterson’s assertions simply do not hold up crease savings. But it does not excuse his clinging to the under scrutiny. notion of regressive, unfair taxes at the core of his Start with Peterson’s contention that “every other deficit reduction program. One wonders whether he major industrial country” relies more on consumption isn’t pushing consumption taxes precisely because they taxes. Yes, most do — but not all. In fact, Japan, our are so regressive. biggest competitor, relies considerably less on consumption taxes and far more on income taxes than Is Social Security Unfair? we do. And Japan leads the world in savings. he other half of Peterson’s program — the part Moreover, the rest of the industrial world does not that carries the most weight in public debate — agree that higher consumption taxes are the key to Tis the notion that excessive federal “entitle- economic growth. On the contrary, 19 out of the 23 ments” are at the root of our deficit problem. Entitle- OECD countries have reduced their relative reliance on ments are federal programs not subject to annual ap- consumption taxes in recent years. propriations. They are simply paid to whomever quali- But why isn’t it simply common sense that tax fies. Entitlements are expected to cost more than $800 breaks for saving — or tax penalties for consumption billion in the upcoming fiscal year — more than half — must lead to increased saving and less spending? the entire federal budget. Just under a quarter of mandatory spending goes ments. In 1977 and then in 1983, Congress increased for low-income programs such as Medicaid, food payroll taxes and cut benefits to address the problem. stamps, and welfare. Another sixth represents veterans Last year, Congress again effectively reduced benefits benefits, federal employee retirement pensions, unem- by making a larger portion subject to personal income ployment compensation, and several smaller items. taxes for better-off retirees (in the case of couples, (Farm price supports are less than 1 percent of total primarily affecting those making more than $60,000). entitlements.) That leaves Social Security and Medicare, As a result, after peaking at 5.1 percent of GDP in 1983, which currently account for about 60 percent of total Social Security retirement benefits have declined to entitlements. about 4.6 percent of the GDP. They are expected to re- To Peterson, the Concord Coalition, “Lead . . . or main at that level for at least the next two decades. Leave,” and others, Social Security is an expensive Meanwhile, the increased payroll taxes have pro- scandal. “We will no longer be able to afford a system duced a large investment fund for the Social Security that equates the last third or more of one’s adult life system, a fund that is now growing by $70 billion a with a publicly subsidized vacation,” Peterson wrote in year. By the decade’s end, it will be growing by $100 the Atlantic, hyperbolically implying that the average billion a year. This investment fund has been lent to the Social Security recipient lives to be 100. “Unfair and Treasury, thereby reducing the apparent budget deficit unsound . . . Social Security is a generational scam,” Jon by corresponding amounts. In other words, far from Cowan and Rob Nelson of “Lead . . . or Leave” wrote contributing to the budget deficit, the Social Security last year in the New York Times. “The Concord Coalition system’s surplus has been reducing the government’s believes that reducing [Social Security] payments to consolidated deficit for the past decade, and should do people with mid-level and higher incomes is not only so for at least the next 15 years. fair but also the only realistic way to get control of the Peterson acknowledges as much, but says he is deficit.” concerned that the surplus will evaporate once baby Is any of this true? Well, no. boomers retire in large numbers — a scenario that is Sure, Medicare is out of control — just like the rest quite likely. After 2013, Social Security expenditures are of the health care system. But the only solution is projected to increase. By 2015, they should return to comprehensive health care reform. Clinton’s program, their 1983 level of 5.1 percent of GDP. Ten years later, for example, seeks to stabilize outlays for Medicare’s they are expected to exceed 6 percent of GDP, after hospital insurance program as a share of GDP, cutting which they should stabilize. In other words, 30 years them by 20 percent below current projections by the from now, Social Security may cost 1 percent more of year 2000, a goal the generally skeptical Congressional the GDP than it did in 1983. That’s not a problem to be Budget Office says the Clinton plan could achieve. In sniffed at; 1 percent of the GDP is a lot of money. But to the past Congress has tried to trim Medicare without put that in perspective, health care outlays have been broader reform. But the main effect was that hospitals growing by one percent of GDP every 35 months since and other health providers shifted costs to other 1980. patients in order to make up the difference. That’s why As time goes by, it probably will be necessary to we need a more comprehensive approach such as adjust Social Security benefits and taxes to keep the Clinton proposes. Peterson agrees that health costs system working. But it’s disingenuous for those who ought to be cut, but says he is “more than a bit focus on budget-balance by the year 2000 to complain skeptical” about the possibility of doing so. about the problems of Social Security two generations What about the Social Security retirement system? in the future. Social Security is the one government “It’s an outrage,” Ross Perot liked to say in 1992, “that program (besides the IRS budget) that makes the somebody like me is entitled to Social Security benefits current deficit smaller than it otherwise would be. from the government.” Well actually, Ross, there aren’t But shouldn’t the rich still forfeit most or all of their many billionaires like you. More to the point, Social Social Security benefits, merely on principle? The Con- Security is not a windfall to the wealthy, it is not out of cord Coalition has gotten a lot of mileage out of its control, and it is not contributing to the deficit. revelation that in 1990 retired people with annual in- From the mid-1970s to the early 1980s, Social Secur- comes of more than $100,000 got $8 billion in gross ity benefits were growing rapidly as a share of the Social Security benefits. It may sound like a lot, but gross domestic product, due in large part to an error in after taxes (under current tax law) that amounts to less the benefits calculation formula that was double- than $6 billion annually — about 2 percent of total counting inflation in making cost-of-living adjust- benefits. In fact, the number is so small it cannot provide the the average retiree benefits are close to a flat $8,000 a revenue Peterson says is needed. To slash Social Se- year (after-tax), regardless of income group. But put the curity and Medicare by a fifth to a quarter, as Peterson two aspects together and you find a progressive proposes, benefit reductions would affect more than retirement system that’s lasted for more than half a just the affluent. Under the Peterson plan, benefit cuts century, and has dramatically reduced poverty among would affect elderly couples making as little as $12,200 the elderly. FDR was right: structuring Social Security a year and elderly singles making just $7,100. on a quasi-pension model has ensured its political To be sure, under the Peterson plan those seniors longevity. making the most money would lose the largest per- No doubt we could imagine a Social Security centage of their Social Security and Medicare benefits. system that’s even more progressive. If Social Security The richest retirees would see their benefits cut by as were like welfare, then the best-off fifth would pay much as 85 percent. But since benefits are a declining about two-thirds of the taxes, but get none of the direct share of total income, rich retirees would lose a smaller benefits. But would such an aggressively means-tested share of total income than middle-income elderly system really work? The poor political fortunes of wel- people. Over the past decade, Congress has already fare over the years suggest otherwise. reduced Social Security benefits by about a fifth for the In theory we could take wealthier people out of the wealthiest 10 percent of retirees, and by a third for Social Security system entirely, on the ground that they those with the very highest retirement incomes. don’t need the government’s help to plan for retire- But Congress made these changes primarily to ment. That would satisfy people like the Concord assure the long-term financial viability of the Social Coalition who are scandalized that better-off retirees Security system. It’s a different story to propose benefit get Social Security checks. But Social Security would be cuts to pay for general spending. The only reason the in big trouble if it lost the wealthy’s tax payments as a public tolerates a payroll tax capped at $60,600 in trade-off for cutting their benefits. Indeed, Social wages is that Social Security is rather like a pension Security would be running far in the red, rather than plan. What people get out of the system is loosely enjoying a surplus. Were that the case, Peterson, Kins- based on what they put in (although unlike private ley et al. could more reasonably blame Social Security pensions, Social Security gives a much better return to for our budget deficit problem. Until then, we should lower-income workers than to those who contribute at respect Social Security as the very progressive retire- the maximum.) Absent a need to shore up the Social ment system that it is. If we want the wealthy to pay Security system, any reduction in benefits should logic- their fair share, there is a far better remedy than under- ally and morally be accompanied by a reduction in mining Social Security. We can simply increase the payroll taxes. progressivity of the tax system. In an Oct. 25, 1993 New Republic column praising parts of the Peterson plan, the usually estimable Beyond Regressive Reform Michael Kinsley, echoing economist Milton Friedman, criticized Social Security for “transferring money from nlike some of my friends, I don’t begrudge poorer people to richer ones.” That’s a harsh indict- Peterson’s expression of concern about escal- ment, if true. But it’s not. Despite the cap on taxable U ating budget deficits. As a matter of macro- wages, the best-off fifth of all families (incomes above economics, one can debate what level of deficits and $55,000) pays almost half the Social Security taxes. But the ratio of debt to GDP are sustainable. With the 1993 the best-off fifth of Social Security recipients (incomes budget accord, that ratio, which rose steadily during above $39,000) gets only about 20 percent of the after- the Reagan-Bush years, is starting to come down. But tax benefits. In other words, taxes paid by the better off the deficit is a problem because chronic structural cover not only retirement benefits for higher-income deficits threaten the ability of the government to do its people but a large share of the benefits that go to job. Devoting an ever larger percentage of the budget lower-income people as well. That hardly looks like to debt service, as we saw over in the Reagan-Bush “redistributing income upward.” years, means less money to build roads, educate child- Pundits such as Kinsley like to point out that if one ren, protect the poor, and all the other important tasks analyzes the Social Security tax and the Social Security that only government can undertake well. President retirement benefit structure in isolation from one Clinton now finds there is little revenue available to another, each seems bad. The financing of Social Se- spend on genuine public needs because of the deferred curity — a capped payroll tax — is indeed regressive; task of deficit reduction. Those who complain about the supposed stagger- Future efforts to improve tax fairness should focus ing growth of “entitlements” usually target Social on closing loopholes that allow some corporations and Security simply because it’s big. Shame on them. As high-income people to avoid paying their fair share, noted, Social Security has actually declined as a share while harmfully distorting investment decisions. These of GDP over the past decade; it is expected to remain are precisely the loopholes that Peterson either ignores stable for the next 15 years. Our real problem with or would expand in his proposed program. entitlement spending, the one major area that has been Numerous economically sound, fair, and needed growing rapidly, is health care. There, the solution is tax reforms are available. They range from restructur- not to restrict entitlements, but to reform the system ing the way we tax the profits of multinational cor- once and for all by joining a new entitlement — porations, to clamping down on corporate buying and universal health coverage — with comprehensive cost selling of tax breaks, to closing loopholes for capital containment. gains (rather than expanding them, as Peterson pro- Whatever happens with health care, tax reform poses). Changes such as these — a long list is available remains the most promising strategy of reducing the from Citizens for Tax Justice — could cut the deficit by long-term budget deficit. With total U.S. taxes now the huge amounts without crippling Social Security or lowest in the industrialized world, certainly there is loading new burdens on those least able to pay. room for higher taxes here. But whose taxes? Deficits do matter, both to the economy and to the Rather than repeating the “trickle-down” approach government’s ability to respond to the needs of the of the early 1980s, as Peterson proposes, we could nation. But “entitlements” are the wrong demon, and increase revenues through further progressive tax regressive solutions like Pete Peterson’s fail the test of reforms. Clinton’s 1993 budget act took back about 43 both fairness and economic soundness. He and his percent of the tax cuts granted the wealthiest Ameri- allies should stop pretending otherwise. • cans in the late 1970s and early 1980s. It did so pri- marily by increasing the top marginal personal income Robert S. McIntyre is director of Citizens for Tax Justice and tax rate to 39.6 percent. But there is still more to do. a contributing editor for The American Prospect.

Pete Peterson’s reply & Robert McIntyre’s rebuttal in the fall 1994 issue of The American Prospect follow. The American Prospect Fall 1994

Pete Peterson replies: everyone understands their real crats. These include Senators Bob agenda lies elsewhere. Prominent Kerrey and David Boren, and Rep- What I Really Say among them are certain “supply- resentatives Tim Penny, Charles about Balancing the side” dogmatists who would gladly Stenholm, Nathan Deal, Eric Finger- mortgage America’s future to hut, Jim Bacchus, Lin Schenk, and Budget pursue their libertarian fantasies. Marjorie Margolies-Mezvinsky. Prominent also are certain “progres- Their concern is not just the deficit. owever you look at it, sive” crusaders whose egalitarian They are also worried that endless America is failing to passions blind them to any issue growth in federal payments to an prepare for its economic that cuts across well-worn stereo- “entitled” cross-section of American future. Each decade our types. A good example of the latter households threatens to drain gov- Hsavings performance worsens, and is Robert McIntyre, at least insofar ernment budgets of all future-ori- each decade so do our prospects for as his views are reflected in an essay ented spending. Robert Shapiro, higher living standards. During the that recently appeared in this journ- economist for the Progressive Policy 1960s, U.S. net national savings al. (“The False Messiah: Pete Peter- Institute, recently challenged fellow averaged 8.1 percent of GDP. Dur- son’s Revelations Are Not Gospel,” Democrats to come up with a “cut ing the 1980s, that rate fell by half Summer 1994.) and invest” strategy — where his (to 3.9 percent). Thus far in the There is also emphatic consensus “cut” was an explicit reference to 1990s, it has fallen by half again (to that cutting the federal deficit is entitlements flowing to Americans 1.7 percent) and today it amounts to critical to improving our national who don’t really need them. Pre- a mere fraction of the rate of any savings and investment perform- sident Clinton, who in 1992 warned other industrial country, large or ance. A gradual reduction in the that America needs “more empow- small. deficit will, over time, generate erment, less entitlement,” has ap- The decline in U.S. domestic something close to a dollar-for- pointed a commission to study business investment has been equal- dollar increase in national savings. ways of controlling future entitle- ly dramatic, except to the extent we We cannot eliminate the deficit ment outlays. By a vote of 30-to-1, have borrowed from foreign credit- — nor even reduce it very much for this bipartisan commission (on ors. Public investment is also flag- very long — unless we slow the which I serve) recently agreed that ging. Of every nondefense dollar growth in federal benefits to indi- “the government must act now” to the federal government spends, viduals, known in Washington- reform a system that is “not sustain- only about 5 cents now go to build speak as “entitlements.” Entitle- able.” any tangible thing that remains ments now amount to 54 percent of In an effort to bring these con- standing after the fiscal year is over. the federal budget — or 12.1 percent cerns to a wider audience, I wrote a Commissions, task forces, and of GDP. Along with interest on the book (Facing Up) and have assisted public figures are nearly unanimous national debt, they are projected to grass-roots efforts (such as those of on our need to change course — and account for all real growth in federal the Concord Coalition) to initiate a soon. This is not just a Republican spending over the next decade. national debate about deficits, gen- concern. Governor Mario Cuomo Within ten years, rising entitlement erational justice, and our collective says that our savings and invest- costs will add 2 percent of GDP to future. I laid out a plan to balance ment decline is “the nation’s basic federal spending; within twenty the budget by the year 2000 while at problem.” Senator Bill Bradley calls years, they will add 3.9 percent; the same time increasing net federal it “a crisis.” President Bill Clinton within forty years, 8.7 percent. assistance to low-income Americans warns that it is “condemning our The need to confront entitlements and allocating one full extra percent children and our children’s children has been articulated by a rapidly of GDP toward federal investment to a lesser life than we enjoy.” growing number of leaders who are in infrastructure, basic research, Few disagree with this consen- not only — nor again, even primari- worker training, and early-child- sus. But there are some vocal com- ly — members of the Republican hood education and health. mentators who, if they don’t openly Party. Indeed, the most aggressive The cornerstone of my plan is dissent, carry with them such cost-cutting proposals are coming entitlement reform. Its components weighty ideological baggage that from a rising generation of Demo- include a strategy to establish a real public-sector “budget” for health serve a break.” Suggesting that proposal that corporations receive benefits; a phased-in three-year hike greed makes me “enamored of the three small productivity-oriented in the Social Security full-benefit so-called progressive consumption investment incentives, mainly to en- retirement age; limitations on tax,” he acknowledges none of the courage R&D and worker training. regressive “tax expenditures” (such extensive and bipartisan interest in But the revenue cost of these in- as those for home mortgage interest the idea. As for the current debate centives is so modest — $14 billion and employer-paid health insur- over the cost of entitlements, his by the year 2000, not the “$30 bil- ance); and, most importantly, a gloss is weirdly conspiratorial — at lion” figure McIntyre invents — that comprehensive “affluence test” for times implying that if it weren’t for it couldn’t possibly affect the overall recipients of all federal benefits, me and perhaps Senator Kerrey, no distributional impact of my plan. from Social Security and Medicare one would be talking about it. Another possibility is suggested to farm aid and federal pensions. Some of McIntyre’s mistakes are by a cryptic chain of logic that sur- This affluence test would not take merely annoying. For example, he faces midway through McIntyre’s away any benefit from any house- ridicules as a wild exaggeration my essay. McIntyre apparently believes hold beneath the U.S. median in- statement that Social Security sub- that a “progressive consumed in- come; above the median, it would sidizes Americans for the last third come tax” can neither include a employ a progressive sliding-scale of their adult life. My calculation is corporate tax nor be as progressive that would ultimately cut benefits based on three simple facts: adult- as our current income tax. He infers, by as much as 85 percent for house- hood begins at age 21, the median therefore, that my hidden agenda holds with incomes of over $185,000 age of Social Security retirement is must be to gut the corporate tax and (in 1993 dollars). 62, and the average life expectancy enrich my Wall Street buddies. In Facing Up, I acknowledged the at age 62 is 19.3 years. (I’ll let the McIntyre is wrong on both of his necessity of higher tax rates and readers of this journal do their own premises. In fact, a cash-flow corpo- some new taxes. I endorsed the arithmetic.) What really concerns rate tax is a standard feature in higher income and corporate tax me, however, is how McIntyre many consumption tax proposals — rates proposed by President Clinton seems bent on misconstruing the big and could easily be added to the before they were enacted. I also picture and falsifying my reform others. Although many economists advocated phasing in a higher (50- plan beyond recognition. McIntyre’s question the need for a separate cor- cent) tax on motor gasoline and en- most absurd charge, repeated sever- porate tax, I have never advocated acting a 5 percent value added tax al times in various ways, is that abolishing it. If McIntyre wants to with exemptions for food, housing, “Peterson apparently doesn’t want keep it, he can. According to the and education. I further pointed out the rich to relinquish anything.” Congressional Budget Office (CBO), that my plan could be made more This is preposterous — on both the moreover, a consumed-income sys- progressive (as well as more benefit and the tax side of ledger. In tem can be made as progressive as efficient and easier to administer) by the year 2000, in fact, my plan our current straight-income system substituting a single “consumed in- would cost an average of $3,700 for at tax rates not much higher than come” tax for our current patch- a household in the $75,000-$100,000 those we have today. Yes, for the work of direct and indirect taxes. bracket, $5,600 for a household in super-rich we might need consump- My message has been greeted by the $100,000-$200,000 bracket, and tion tax rates of well over 100 per- diverse reactions. None, however, $23,300 for a household in the cent. McIntyre says this can’t be has been so factually erroneous and $200,000-plus bracket. Yet at in- done. But why not? thematically misguided as Robert comes under $20,000, the typical As another illustration of my McIntyre’s aforementioned essay. household would be a net gainer. supposed subterfuge, McIntyre cites According to his account, I am a All of this is spelled out in detail in the conclusion of experts assembled “rich Republican” who plays “bait my book (in passages that have by a “capital formation” subcom- and switch” by “demonizing” earned me the fury of many right- mittee (which I chaired) of the entitlements while secretly con- wing supply siders). McIntyre never Competitiveness Policy Council. spiring to “have the middle class says why or if he disagrees with my They “overwhelmingly concluded,” suffer and the rich get tax cuts.” My numbers. He simply ignores them. he says, “that the relative level of supposed “bottom line” is that “the I don’t know how McIntyre taxation on savings versus con- middle class gets too much . . . misinformed himself. One possibili- sumption has little or no effect on while corporations and the rich de- ty is that he was scandalized by my saving behavior.” Actually, what they concluded was that the out- This I oppose on two grounds. mists would surely rank Social come is theoretically indeterminate. First, it is immoral to fund our Security as one of our least progres- Many of them thought that the em- own late-in-life consumption by sive social programs, and a fair pirical evidence supports the claim subjecting future generations to tax number believe it’s not progressive that shifting to a consumption tax rates we ourselves would never tol- at all. would boost savings. The CBO erate. According to official forecasts, McIntyre, again focusing on (hardly a Wall Street outfit) believes for example, the cost of Social Se- Social Security, also tries to divert such a shift would raise the private curity alone is due to rise by 50 to 84 attention from the brute numbers by savings rate by two percentage percent as a share of every worker’s noting that this largest of entitle- points of GDP — a very dramatic taxable payroll by the year 2035; ments is currently in “surplus” and response indeed. Noting that the meanwhile, the cost of Medicare therefore does not contribute to the supersaving Japanese don’t lean Hospital Insurance is due to rise by deficit. First of all, this claim is tech- heavily on VATs, McIntyre further 183 to 434 percent by the same nically inaccurate. If, as McIntyre says that international comparisons measure. If McIntyre wants these opines, “Social Security is rather like fail to support my view. He is cor- FICA-funded programs to remain a pension plan,” then he knows that rect about Japan and VATs, al- both untouched and self-financing, what really matters is the system’s though the Japanese, worried about he had better prepare his readers for long-term actuarial balance. Social their own long-term entitlement enormous future tax hikes on the Security now has unfunded liabili- problem, are increasing their con- middle class and the working poor. ties of over $7 trillion (more than sumption tax to pay for it. Japan has Second, such tax hikes are also 100 times the total unfunded liabili- always allowed huge tax exclusions unnecessary, since so many who ex- ties of all private pension plans) — for savings income, such as zero pect to receive benefits are and will an amount that is growing yearly. If taxes on many kinds of capital be better off than so many who are a corporate treasurer declared such gains, particularly appreciated se- slated to pay taxes. Why use gov- a system to be in “surplus,” he curities (a “loophole” which, if I had ernment as a directionless revolving would be committing a career-end- proposed it, no doubt would have door for a growing share of national ing felony. McIntyre also fails to made McIntyre go ballistic). In any income? Why not modify entitle- mention that this year’s modest ex- case, McIntyre entirely misses the ment programs so that they better cess of Social Security tax revenues explicit purpose of my brief aside on serve some identifiable public pur- over outlays ($22 billion) will, just the consumed-income tax — which pose — such as supporting the 25 years from now, turn into a was to observe that there may be needy — at a less explosive cost? massive annual deficit of over $450 ways to shift the tax base toward McIntyre’s reaction to this billion; 40 years from now, the an- consumption while increasing over- suggestion is predictably negative. nual deficit is projected to exceed $1 all progressivity. He deliberately He tries to minimize (though he trillion. stands my discussion on its head. does not dispute) the CBO data I More to the point, the size of to- ow let me turn to long-term cite showing that a large share of day’s “trust-fund” balance (consist- fiscal policy, where McIn- federal benefits go to relatively ing of nothing more than an inflow N tyre and I seem to share at affluent Americans. When told that of Treasury IOUs) is of zero eco- least some common ground. He in 1991 the more well-to-do half of nomic significance. The truth is: does concede that deficit reduction all U.S. households received at least Any program contributes to the (if not budget balance) is a worthy $372 billion in entitlement outlays deficit when spending more on it national objective. Beyond there, and tax benefits, he holds his pas- raises the deficit and spending less however, we diverge. While I am sion for progressivity in curious on it lowers the deficit. willing to consider some new taxes abeyance, noting “These figures But here McIntyre begs to differ. or higher tax rates, I maintain that it don’t necessarily seem all that bad.” You cannot change Social Security is absolutely essential to act now to Instead, he tries to counter my benefits, he argues, without being reduce the long-term cost growth in numbers with mere assertions — “logically and morally” compelled both direct and “tax expenditure” such as his statement that Social to change payroll taxes in the same entitlements. The only alternative is Security (along with the income tax) direction. This pay-as-you-go im- to raise tax rates repeatedly — about ranks as our “most progressive” perative makes no sense at all. one Clinton-size tax hike every four social program. This is a mind- Taken literally, McIntyre’s argu- years — for the next half century. boggling claim, since most econo- ment that benefits must always match taxes seems to rule out the fits remain so resistant to cost con- over the next forty years, it would very existence of the cash-flow trol, it behooves us to economize require a fifty-percent cut in each “surplus” he now regards as a boon. wherever possible. This is especially federal beneficiary’s health-care Perhaps McIntyre is alluding to a true since most health-care outlays consumption as a share of GDP. more meaningful issue: the balance are a transfer from and to the same Such benefit cuts would be far more of taxes paid and benefits received two groups (the young and the old) draconian than any I have ever over the lifecycle of each generation. as most other large entitlements. thought possible or desirable. But if such is his standard, it is one McIntyre loves to seal different From this I can draw only one of that Social Security has never parts of the budget into separate two conclusions. Either McIntyre followed. Congress has frequently accounts, as though money bor- really wants to ration seniors out of altered the balance, nearly always to rowed for one purpose won’t bank- dialysis, ICUs, and nursing homes reward the earlier-born at the direct rupt us just as quickly as money (while fighting any reductions in expense of the later-born. borrowed for another. their Social Security checks). Or he I raise the question of genera- To be sure, the exploding cost of is just looking for an easy debating tional equity because it is so con- health benefits is a very serious score. The latter is suggested by the spicuously absent from McIntyre’s problem. One might suppose a breezy way he leaves the issue analysis. According to the House champion of progressivity like Mc- (“Whatever happens with health Ways and Means Committee, a Intyre would have endorsed at least care . . . “). Maybe he doesn’t care typical 30-year-old couple with a one component of my cost-contain- much, after all, whether cost control child and an adjusted gross income ment strategy: a cap on the tax ex- succeeds or fails. But let’s be gen- of $30,000 paid eight times more in clusion for employer-paid health erous. Let’s assume that McIntyre’s federal taxes in 1993 ($7,103) than a care. After all, this open-ended sub- ambiguous approach to health-care typical 70-year-old couple with no sidy is worth most to Americans in reform will be as successful in con- child and the same income ($855). the highest income brackets — and trolling costs as my concrete pro- Unless we reform entitlements, the gives nothing to those who work for posals. And let’s also allow him his tax gap between old and young can minimum wages or who have no in- Orwellian spin: He can call his cuts only rise much higher in years to surance to begin with. But McIntyre “a new entitlement” and condemn come. Yet such inequities don’t mentions my proposal only to dis- mine as “sharp reductions in what seem to interest this crusader for miss it — as a “stiff tax” on the mid- average families receive from gov- “tax justice.” Amazingly, McIntyre dle class. ernment.” Nonetheless, absent any is much more concerned about McIntyre’s fondness for labels other spending cuts, he still faces a reassuring the rich that they will and gimmicks points to the basic future of yawning structural deficits someday get benefits that are difference between our approaches — as much as 10 percent of GDP by “loosely” related to their contri- to health-care reform. I acknow- the time today’s third-grader butions. In order to justify a federal ledge up front that even modest reaches his age. The gap is even spending program, McIntyre actu- cuts in cost growth will require wider if he favors more public-sec- ally fusses over the tender sen- some pain — that (in Henry Aaron’s tor investment. How is he going to sibilities of Wall Street tycoons. words) “sustained reductions in the find such vast resources? cIntyre’s final ploy is to growth of health-care spending can At this point, McIntyre unveils blame everything on be achieved only if some beneficial his deus ex machina — further pro- Mhealth care — which, he care is denied to some people.” gressive tax hikes on the rich that says, is the “one major area that has McIntyre acknowledges nothing. In- leave the middle class untouched. been growing rapidly.” Correction: deed, though he is vague about how There’s just one problem with this All major benefit programs are he would achieve cost-control (his strategy. It can’t possibly raise more growing rapidly; health-care pro- only concrete proposal is a “new than a small fraction of what he grams are just the main ones that entitlement”), he implies that pain- needs. To illustrate, let’s consider a are currently growing much faster less reform can succeed in freezing few changes we might make in all than the economy. In any case, federal health-care spending as a three of the highest federal income McIntyre’s observation hardly jus- share of GDP. If such a freeze is his tax brackets. Currently, these brack- tifies exempting other entitlements goal, he should understand its con- ets are set at 31, 36, and 39.6 percent from cuts. The problem is total out- sequences. Given the dramatic — with the first applying at $53,500 lays — and so long as health bene- aging of the American population in taxable income for a single person and $89,150 for a joint return. Now you can raise a lot of revenue, but reality tempts us to reverse the last let’s imagine that we shift them all you can’t do both. This is one reason two pronouns in Shaw’s epigram. upward — to 50, 60, and 70 percent. why (to McIntyre’s mystification) Middle-class sacrifice has become Combined with state taxes, this re- the largest public sectors in the the true “third rail” of American form would give us the highest world rely so heavily on flat-rate politics. Everyone is at pains to marginal income tax rates in the consumption and payroll taxes. avoid touching it. Many industrial world. But how much When they need to raise big bucks, conservatives like to scapegoat the revenue would it raise? According they do what Willie Sutton did. poor. Many liberals like to scape- to the CBO, only about 1.3 percent They go where the money is — and goat the rich. Both sides like to of GDP — much less than what that means the middle class. wave their hands rhetorically, as McIntyre needs. And this is a static ll this leads me to a larger McIntyre does, without spelling out analysis that assumes — implaus- point — which applies to just how all the numbers will add ibly, of course — that the rich do A public outlays no less than up. nothing over time to reduce their to public revenues. Early on, McIn- But the blunt truth is unless the tax exposure. tyre says that Peterson “adroitly broad middle class participates in I do not belittle McIntyre’s deep poses as a champion of the middle our national renewal, there can be concern about “tax fairness.” If class.” But here he flatters me. In no balancing of the budget, no taxes must be raised, I believe that fact, while I do champion the long- return to a high-investment econo- the extra burden borne by the term interests of America’s middle my, and no renaissance of the wealthy should be at least propor- class, I have always dissented from American Dream. Dietrich tional to their lifetime income. But the popular cant about middle-class Bonhoeffer once said that “the we also need to do our math — and victimization — which is just anoth- ultimate test of a moral society is the acknowledge that the middle class, er way of excusing most of us from kind of world it leaves to its child- collectively, earns far more aggre- taking responsibility for our nation- ren.” We will all have to sacrifice gate income than the “rich.” It is a al direction. Long ago, George something — according to our simple truth known to finance min- Bernard Shaw wrote: “I have to live means and at least temporarily — to isters around the world: You can for others and not for myself. That is reclaim the future for ourselves and have a very progressive tax code or middle class morality.” Today, for those who will live beyond us.• Robert McIntyre rebuts: billion a year including your capital a tax rate of over 100 percent, please gains tax cut — you also set as your let me know. Heck, I’ll even settle Wrong long-term goal complete abolition of for a Democrat like Sam Nunn. Again the personal and corporate income Until then, I believe that you have taxes, in favor of a “progressive conceded my point: your “progres- h, Pete, for goodness consumed income tax.” sive” consumption tax would end sake. Because your book “I have never advocated abolish- up far less distributionally fair than and articles are full of ing [the corporate income tax],” you current law. figures, charts and speci- intone. But if you think that a In any event, the whole notion of Ofic suggestions, I thought we were corporate income tax is “a standard a “progressive consumption tax” is supposed to take the substance of feature in many consumption tax a non-starter, because it’s impos- your plan seriously. But now you proposals,” you are sadly misin- sible to solve the transition dilem- tell us that we should look only to formed. The famous 1976 Ford mas. Generally, consumed-income your rhetoric, not your actual pro- Treasury Department brief for a tax schemes start with total income posals. Well, sorry. The major point consumption tax (which you and then give people deductions for of my piece was to expose the wide apparently mistakenly attribute to money saved and debts repaid (and gap between your Perot-like the Congressional Budget Office) add in money borrowed). The ques- “shared-sacrifice” posturing and the points out that under any compre- tion then becomes: what do we do program you actually advocate. hensive consumption-tax replace- about existing savings and debts? If Let’s start with taxes. You say ment for the income tax, “the paying off old debts and “resaving” that my “most absurd charge” was corporate income tax is eliminated.” old savings are deductible — and to fault you for not asking any Perhaps you were thinking of the it’s hard to imagine how they added taxes from the rich. You consumption tax variant proposed wouldn’t be — then the system will assert that big tax increases on in 1983 by Hoover Institute econo- be unworkable for many years. A wealthy people are “spelled out in mists Robert Hall and Alvin Ra- plethora of studies following Trea- detail” in your book, and that I bushka and recently disinterred by sury’s 1976 report have concluded “simply ignore[d] them.” Alas, Rep. Richard Armey (R-Texas). That that there is no satisfactory answer however, the oversight wasn’t mine, “flat tax” plan purports to include a to these overwhelming transition but yours. There are, in fact, no corporate-level tax, but in fact the problems. significant tax increases on the rich plan is merely a national sales tax, hat brings us back to your advanced in either your book or or value-added tax — except that remaining tax proposals: a your articles; instead, there are the wage portion of value-added Tnational sales tax, sharply mainly tax cuts, such as your pro- would be taxed at the personal level higher excise taxes, and other taxes posed capital gains tax reduction. (with exemptions). Corporations targeted on particular kinds of To be sure, you do rather weirdly would collect sales taxes and add spending. My complaint about your propose reenactment of the 1993 them to final prices under the Hall- approach is that it is extremely re- income tax hikes that were adopted Rabushka plan, but as the authors gressive and that most Americans months before your book was admit, there would be absolutely no would be much better off if we published last fall. Or more tax on corporate profits. raised taxes through progressive precisely, you include those tax More globally, you seem to agree income tax reforms. Your response, hikes in your list of revenue-raisers, with me that a consumed-income in essence, is that consumption on the theory that you endorsed tax can’t be as progressive as the taxes are preferable, whatever their them before they became law. But, current income tax absent extra- regressivity, because of their pur- Pete, reenacting existing law would ordinarily high tax rates: “Yes, for ported economic benefits. raise exactly nothing in added the super-rich we might need But as I noted, and as you par- revenues. That’s zero, zilch, nada — consumption tax rates of well over tially acknowledge, there is little or not “$23,300 for a household in the 100 percent,” you admit. But you’re no theory or evidence to back up $200,000-plus bracket.” more than a bit cavalier in your your claim. Economic theory, you Actually, when it comes to taxing “why not?” response to my doubts admit, offers “indeterminate” con- the rich, your plan is worse than about the technical and political clusions. As for evidence, well, you zero. Not only do you propose new feasibility of such high rates. When retract your statement in your book tax breaks for corporations and the you can deliver even one Repub- that “every other major industrial wealthy — amounting to about $30 lican vote in the House or Senate for country” relies more on consump- tion taxes than we do. You concede the GDP. I don’t know how you which loopholes we want to close. that the “supersaving Japanese came up with that big figure. In fact, To me, a tax loophole, in the don’t lean heavily on” consumption in 1992 CBO analyzed the economic invidious sense, is a tax break that taxes. In fact, Japanese consumption merits of replacing part of the favors a few well-off people at the taxes as a share of gross domestic income tax with a value-added tax expense of the rest of us. Thus, product (GDP) are considerably and concluded that a shift to a VAT CTJ’s long list of needed reforms lower than ours, and despite the would have “only minor effects on targets things like capital gains tax Japanese tax break for stock market [the] economy.” breaks, multinational corporate tax capital gains, virtually everyone Specifically, CBO’s computer avoidance, excessive business de- agrees that Japan’s overall taxes on simulations estimated that, at best, preciation write-offs, and so forth. capital income — most notably its long-term national savings might be In contrast, your short list of loop- high corporate taxes — are much 0.4 percent higher as a share of GDP holes focuses on mortgage interest heavier than ours. under the VAT alternative. Since deductions and exemptions for You claim that “many” of the CBO’s hypothetical VAT was twice workers’ health insurance — items experts at our “capital formation as large as yours, that would trans- that as a share of income are actual- subcommittee” thought that shifting late into a possible savings boost of ly far more beneficial to the middle to a consumption tax might boost only 0.2 percent of GDP under your class than to the rich. While a savings. Well, I took notes. At our plan. Thus, your 2 percent figure perfect tax code might well forego June 1992 meeting, we heard from a appears to be off by a factor of ten. these middle-class breaks in favor of representative of the corporate- and CBO went on to note that any lower tax rates, tens of millions of foundation-backed Committee for small potential VAT benefits “might families have made important finan- Economic Development, who re- well be offset by the VAT’s failure cial decisions in reliance on them, ported that there is scant evidence to shift as much of its burden to for- the political chances of dramatically that private savings incentives eigners as [the income tax] does” changing them are minimal, and the work. Then, in July, former assistant and by “the added costs of admin- distributional gains from their cur- Treasury Secretary Emily Sunley istering and complying with a tailment would be slight, if any. (then with Deloitte and Touche, VAT.” Thus, overall, CBO found The most striking distinction now with the International Mone- that substituting a VAT for part of between our approaches to “tax ex- tary Fund) presented a paper con- the income tax “would not neces- penditures” is that the kinds of cluding that there was no evidence sarily improve overall domestic loopholes that I most want to close that a value-added tax would in- well-being.” you actually want to expand. You crease savings (compared to any Much more important for most call for new corporate tax breaks, a other tax hike that cut the deficit) families than a speculative gain of a capital gains tax cut, and in your and that a VAT definitely would not few tenths of a point in the long- dreams, the ultimate high-income help trade. At that same meeting, term GDP is the difference of 3 or 4 loophole: complete tax exemption MIT economist James Poterba re- percentage points in effective tax for money saved or invested. ported that savings incentives or rates between progressive income et’s move on to spending higher consumption taxes would do tax changes and your proposed programs. As a result of last little or nothing to increase national VAT. L year’s budget act, federal savings. In response to your re- In my original article, I suggested spending in the upcoming fiscal peated questioning, there was abso- that your support for a VAT was not year will be at its lowest share of the lutely no disagreement among the despite its regressivity, but precisely GDP since before Ronald Reagan assembled group with those general because of it. Your response fails to took office. Social Security, in par- propositions. In other words, no one persuade me otherwise. ticular, has fallen sharply as a share in our group was willing to argue In your discussion of “tax expen- of GDP since 1983, and is expected that shifting toward consumption ditures,” you strongly imply that I to remain stable for the next 15 taxes would significantly augment want to raise tax rates to strato- years or so. Yet you maintain that to national saving. spheric levels, while you want to meet your goal of a balanced budget That leaves you with a citation to close loopholes. That’s entirely false. by the year 2000, major reductions the Congressional Budget Office for In fact, Citizens for Tax Justice’s in Social Security and Medicare — the proposition that shifting to a reform program concentrates almost on the order of 25 percent — are consumption tax would raise the entirely on plugging loopholes. The imperative. Although you claim to private savings rate by 2 percent of real difference between us is in target only above-average retirees, some of your proposed benefit cuts worry more. But do I think those enough money from progressive tax would affect elderly couples making tycoons should pay more of the cost reform to make a serious dent in the as little as $12,200 a year and elderly of government? Yes again, but not deficit. Well, let’s see. According to singles making just $7,100. by slashing their Social Security — CBO’s most recent count, the richest In the year 2000, the Social rather, by making the overall tax 1 percent has more total income Security trust funds are expected to code more progressive. than the bottom 40 percent and the show a surplus of revenues over Of course, not all is rosy in the top 5 percent makes more than the expenditures of more than $100 entitlements area, as my article bottom 60 percent (the top fifth billion. Because that money is lent noted. In both the short-term and makes more than everyone else directly to the Treasury, the consoli- the long-term, public (and private) combined). So the well-off do get dated budget deficit in the year 2000 health care costs are rising far too quite a large share of total income. will be that much smaller because of rapidly to be sustainable. One of the That’s why, contrary to your asser- the trust funds. major reasons we need compre- tion, progressive taxes raise more So why go after Social Security? hensive health reform — which money at any given top tax rate — Because, you say, Social Security is sadly is looking ever less likely — is with lower taxes on most families — a very big program and “[a]ny to put a lid on excessive health cost than do regressive taxes. program contributes to the deficit increases. According to your book, you when . . . spending less on it lowers You raise the specter that health want to raise about $200 billion a the deficit.” Thus, you reject the insurance reform would lead to year in taxes by the year 2000 from notion that we should respect the sharp reductions in beneficial care. your various consumption taxes linkage between Social Security But a second central goal of health plus limits on mortgage interest de- taxes and Social Security benefits. reform should be to make needed ductions and employee health in- That linkage, however, has been care available at appropriate times surance exclusions. CTJ’s working the key to Social Security’s political and circumstances. The idea that a list of income tax reforms could longevity. The quasi-pension nature reformed health insurance system raise at least as much. To illustrate, of the system has, at least so far, can be both better and cheaper is look only at corporate taxes: if U.S. persuaded the best-off fifth of the not pie in the sky. No other indus- corporate income taxes in the year population to pay for almost half trialized nation in the world spends 2000 were brought back to the same the cost of the program in exchange as much as we do on health care, yet share of the GDP as they were in the for only about 20 percent of the our results in terms of the health of 1960s, the corporate tax would gen- promised benefits. Although you our population lag behind. erate $200 billion more in revenue in claim that it is “mind-boggling” to The Social Security retirement 2000 than is currently projected. Not call this situation progressive, I system also faces long-term pro- every penny of that would ulti- think you’re flat wrong. Social Se- blems that will have to be ad- mately come from high-income curity has succeeded in lifting mil- dressed. Twenty years from now, as people, but because the corporate lions of elderly people out of pover- baby boomers begin to retire in tax is very progressive, most of it ty in a dignified and sustainable large numbers, taxes and benefits would. If our corporate income way — very unlike our degrading will have to be significantly ad- taxes were as high a share of GDP and declining welfare system. It has justed if current guesses about the as Japan’s, the added revenue in the made retirement years much hap- future economy prove to be correct. year 2000 would be about $500 pier and less worrisome for millions As I noted in my article, it would be billion. That ought to be enough to more middle-income retirees. And it imprudent not to plan ahead for satisfy even the most rabid deficit- has achieved these impressive these events. But you only confuse reduction hawk. results precisely because its contri- the debate when you insist on citing So, in conclusion, Pete, it’s time butory, “entitlement” nature has Social Security’s long-term financial to face up. Your “we will all have to assured its political viability. problems as a reason why Social sacrifice something — according to So do I worry about “the tender Security benefits should be immedi- our means” rhetoric simply doesn’t sensibilities of Wall Street tycoons,” ately slashed in order to balance the match your program, which asks as you charge? When it comes to budget by the year 2000. less than nothing from those most sustaining their support for Social Your final point on tax and bud- able to pay. You really should have Security, the answer is yes — and if get policy is to claim that the share to choose between the two. Which your disdain for Social Security is of total income received by the rich will it be? • any indication, perhaps I need to is so low that it’s impossible to raise