NCPA - National Center for Policy Analysis

"Generational Accounting" For The Burden Of Government

March 9, 1999

One generation lives it up and passes its big-government spending bills onto the next generation. That's been the U.S. way of life in the 20th Century.

Now, economists Alan Auerbach, Jagadeesh Gokhale and Laurence Kotlikoff have developed a new tool to measure how much total government debt one generation is passing along to the next, including promised future entitlements as well as government debt to the public.

Children born in 1996, for instance, would have to pay nearly half, or 49.2 percent of their income in taxes to pay for future government spending, according to Gokhale, an economist at Cleveland's Federal Reserve Bank.

Alternatively, to pay as we go for such things as the Medicare and Social Security retirement benefits of 76 million Baby Boomers without passing the burden on to future generations:

  • Starting in 2003, income taxes would have to jump 25.3 percent, social insurance payroll taxes would have to go up 38.7 percent, and indirect taxes would have to climb 50.8 percent.
  • Or Social Security spending would have to be slashed 57.4 percent, while spending on health care would have to be cut by 42.2 percent.
  • All transfer payments would have to be decreased by 21.8 percent, and government purchases would need a 19.5 percent cut.

Five years ago, the Clinton administration's budget proposal for fiscal 1995 came with a table that showed lifetime net tax rates for Americans born after 1992 would rise to 82 percent.

Generational accounting data were put together for the fiscal 1996 budget -- but were pulled from the president's final spending plan that year. The White House has not used generational accounting in its budget since.

Experts caution, however, that the figures depend upon the assumptions used.

Source: Daniel J. Murphy, "The Real Generation Gap: Taxes," Investor's Business Daily, March 9, 1999.

 

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