Lifetime Tax Rates and the Spend-Now, Tax-Later Orgy

By Nasar, Sylvia | THE JOURNAL RECORD, January 15, 1993 | Go to article overview

Lifetime Tax Rates and the Spend-Now, Tax-Later Orgy


Nasar, Sylvia, THE JOURNAL RECORD


By Sylvia Nasar

N.Y. Times News Service

The disciples of John Maynard Keynes have long been urging President-elect Bill Clinton to adopt a policy of benign neglect toward the federal deficit. The national debt, they say, was far bigger relative to the economy during the early years of the postwar economic boom than it is today. So, this thinking goes, the mounting debt should not keep the new administration from spending its way to a more robust economic recovery or bankrolling more public investment.

But a powerful new tool for analyzing how tax burdens are spread across different generations _ called generational accounting _ shows that this sanguine view is shortsighted at best. Learning to live with the deficit amounts to forwarding the bills for today's spending orgy to the nation's children and grandchildren.

If you're a baby boomer born, say, in 1950, your average lifetime tax rate is about a third higher than that of your parents, 31 percent vs. 24 percent.

In dollars and cents, you can expect to pay $200,000 more in taxes than you collect in benefits over your lifetime.

The truly terrible news, according to new calculations by two economists: if current tax and spending policies continue, your grandchildren could end up paying 71 percent of their incomes to the government.

Most Americans understand that doubling taxes on future generations to pay for today's spending would be immoral, as well as infeasible. But traditional budget accounting _ estimating revenues and expenditures year by year _ says little about the long-term effects of fiscal policy and nothing at all about who ultimately picks up the tab.

"Any sustainable policy has to stabilize the future tax rate," said Laurence Kotlikoff, an economist at Boston University, one of the co-inventors of generational accounting and author of a recent book by that title. "The real constraint on fiscal policy is that you can't take more than 100 percent of future income."

He added, "Rising taxes rates on future generations _ not the debt per se _ show us that we're in a mess."

The notion of quantifying myopic fiscal policies is the brainchild of Kotlikoff and Alan Auerbach at the University of Pennsylvania. Their ideas are just beginning to attract attention outside academia. This year, the Bush administration's last budget report and the Economic Report of the President included a set of generational accounts.

Here's how they work: The economists add up all the taxes _ federal, state and local _ paid over an individual's lifetime. …

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