It’s unanimous: Deficit spending today will require tax increases in the future. No ifs, ands, or buts. It simply cannot be denied by anyone who can think logically.
But if there's a coherent proposal on how to extract all that extra tax money from our kids’ and grandkids’ generations, it certainly hasn't gained a wide audience yet. That’s not good, because with every month that passes, those youngsters are that much closer to taking responsibility for paying all those extra taxes. Don’t we baby boomers owe them at least some kind of explanation about how we thought they could pay for the effects of today’s deficit spending when it came their turn to pony up the dough?
Of course we owe them that explanation. And I hereby volunteer to step up to the plate.
First, here are some federal taxation statistics, including my rough estimates of how much we should raise our kids’ and grandkids’ taxes compared to 2006:
• For reference, in 2006, federal taxation brings in $2.3 trillion.
• 25 years from now, I recommend federal taxation of $9.8 trillion/year; that’s a $7.5 trillion increase.
• 50 years from now, I recommend federal taxation of $42.2 trillion/year; that’s a $39.9 trillion increase.
Those are just my rough estimates. To be honest, I’d be a lot happier if our kids’ and grandkids’ federal tax payments turned out to be a lot higher than that...
...but before you assemble a lynch mob to come and get me, take a look at the following three charts. Click on each one in turn to enlarge it.
The principle in play above is that the federal government’s “take rate”—the percentage of the economy that the federal government taxes away from individuals and businesses—remains less than or equal to today’s take rate: 18% of GDP. The charts above assume a steady, annual GDP growth rate of 6% nominal—lower than the rate we are experiencing right now in 2006.
A federal tax take rate of 18% in a $13 trillion economy yields $2.3 trillion in federal tax receipts; in an economy ten times as large, it yields ten times as much in tax receipts. In short, eighteen percent of a GDP that grows each year is the important concept here.
Our grandkids' paychecks
Let’s translate that into its implications for a typical individual’s paycheck over time. Yes, it’s true that the federal taxes being extracted from that check will grow, grow, grow. But because GDP growth (for the entire economy) translates to gross-pay-growth for the typical individual, the gross pay on that paycheck will also grow, grow, grow.
What does that mean for that typical paycheck’s “after-federal-tax” dollars? Obviously, it will grow, grow, grow. In order for federal taxes to grow by a factor of ten without taking a bigger percentage bite out of the economy, it requires gross pay and after-tax pay for a typical worker to grow by a factor of around ten ("around" ten because it depends on the size of the economy's workforce). When our grandkids inherit that kind of growth tradition, or better, they’ll be paying $42 trillion in federal taxes (in 2056) with no more trouble than we have paying our taxes today.
In short, the right way to raise taxes on future generations is to raise their pay. The right way to raise their pay is through real economic growth. And the pathway to real economic growth includes growth- and productivity-friendly federal laws and policies.
Think what would happen if we capped the federal tax “take rate” at, say, 18% of GDP: Then, only when the take rate dipped below that level would our politicians have the option of increasing tax rates to increase tax receipt dollars. Otherwise (i.e., most of the time), their only option for “increasing taxes” would be to successfully implement growth-friendly laws and policies that increase the tax base instead of the tax rate. If the "take rate" drifted above 18% GDP, they’d be forced to reduce tax rates, and that’s growth-friendly. [...correction... that's "growth-friendly” in the opinion of most people, including me, but there are a few contrarians who, believe it or not, think that tax rate hikes are “growth-friendly.” I kid you not.] Growing the tax base requires productivity growth (GDP per worker), and population growth—or, more specifically, workforce growth. I'll have more to say about that in future articles.
By the way, I decided to get an early read on what the next generations will think of my plan for taxing them—don't forget, we'll need our grandkids to come up with forty-two trillion bucks fifty years from now, give or take a few trillion. So, I took a small, preliminary poll [...sample size=1: my granddaughter]. Click on the following thumbnail to see her reaction to my plan after I ran it past her. 
I take that as a good sign. I think my plan has legs.
So: Let's force our leaders to change the subject
A three-pronged fiscal strategy of capping the feds’ tax take-rate, capping the debt-to-GDP ratio [explained in other articles at this website], and controlling inflation would force the national debate onto the subject of real economic growth.
Wouldn’t it be unexpectedly strange—and invigorating—to see the fiscal debate shift towards how to raise everybody’s pay by fostering the creation of new, better jobs in new, better companies and industries, and by leveraging an ever-growing stock of intellectual capital? It would be a long-overdue change-of-subject, in my opinion.
Yes. It would change the subject from fear to hope, from pessimism to optimism, from "how to avoid deficits" to "how to make better investments in our future." Anyone who has ever bought a home or grown a business knows that borrowing money to help fund good investments is perfectly sound financial practice. So why can't our leaders get behind that simple concept? Wouldn't it be refreshing if they stopped talking about deficits, and started talking about how they'll work towards growth-friendly laws and policies—i.e., "good investments"?
I bet they would if we'd start demanding it.
