The current debate about tax policy seems to be in a rut. Is the Bush administration’s current policy of lower tax rates good for us? The conservative, pro-Bush party line: “Yes it is—because it is pro-growth and healthy in the long run; therefore we should make the current tax rates permanent.” The liberal, anti-Bush party line: “No it isn’t—because it will cause a crushing debt burden; therefore we should increase tax rates.”
In short, this topic’s political debate has settled into a childish “yes-it-is-no-it-isn’t” standoff, and it isn’t helping me. I’d like to know what the debt burden is going to be down the road under various conditions. That will help me.
The National Debt Thermometer that I introduced two months ago is just a snapshot of today’s debt burden. But I have a granddaughter on the way; consequently I’m very interested in the future. What debt burden will we bequeath to her under various policy choices? (My strong preference is to bequeath a secure country, a healthy economy, and a manageable debt burden; that’s what my grandparents and their kids did for me, and it has worked out well—so well that the USA has become the strongest, wealthiest nation in history.)
So, to circumvent the current standoff in the political debate, I put together a small model that calculates what the reading on the National Debt Thermometer will be fifty years from now, under various hypothetical economic conditions.
Below is a graphic showing what would happen under a set of economic conditions closely resembling today’s. The red star is the resultant Debt Thermometer reading in the year 2055. [Side note for detail-oriented purists: The model assumes that the stated economic conditions occur year after year for fifty years; although that obviously won’t happen, it gives me a reasonable directional indicator for judging various policy choices.]
Click to enlarge:
This graphic is the result of just one combination of tax take rates, growth rates, inflation, and spending rates. Unfortunately, there's an infinite number of combinations, and my weblog provider doesn’t give me enough disk space to post that many charts.
So, I chose a relevant range of “Tax Take Rates” and GDP growth rates (almost two hundred combinations), and compressed the results into the color-coded table below. It shows the Debt Thermometer reading in the year 2055 for each combination.
The orange and black areas above are undesirable (for different reasons, as explained in the legend). We should therefore choose policies that will steer us away from those outcomes. Our target should be the Safe Zone (light blue).
Note the conclusion: At the current tax-take rate of 16.8% GDP, we’ll need a sustained real growth rate of three-plus percent per year (assuming we keep inflation and spending growth contained as shown) to keep the debt burden in the Safe Zone.
Bottom line: Is sustained growth of 3.3% attainable? Are the inflation and spending assumptions sustainable? Let’s start hearing from both sides on those questions, how about it?
