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21st Century Tax Policy and Aging Populations

Author: Michael W. Hodin, Adjunct Senior Fellow
April 24, 2012
Huffington Post

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Now we've all paid our taxes and, hopefully, avoided those automobile accidents that only make tax day worse. And even if you're one of the lucky few expecting something back, the whole ordeal is still a big headache. Tax regulations are on a nonstop march into baffling complexity and the political chatter around the so-called Buffett Rule is more theater than policy. Nor has Romney's latest specifics about the deductions he'd cut generated much other than the predictable partisan banter. But it's mostly the future which is so worrisome. If you look at the inevitable 21st century trend where more and more Americans will be over 60 -- that longevity we achieved in the 20th century combined with increasingly low birth rates -- tax and spend policies will have to profoundly shift if we are to avoid burdensome, confiscatory rates on those in the traditional working population.

Here's where we are today: For every dollar we spend on a child, we spend $2.40 on an over 65er. And if the $68 billion budget on education seems generous, it pales next to the $480 billion annual price tag for Medicare. According to the Brookings Institute, this lopsided spending is only going to increase in the coming years, "rising to 7 to 1 if looking just at the federal budget."

That does not compute against 21st century demographics, unless we profoundly alter the policy approach. 700% more spending on the elderly than children? Of course, you justify 700% more spending on seniors than children if you are operating on paradigms that posit the aging as dependent, needful and socially and economically obsolete. If Boomers want to continue the proud national tradition of handing off a better America to each generation, then it's time to rethink what it means to age. If Boomers are going to take from their grandchildren at a seven-to-one clip, then there's not much prosperity on the horizon. Especially if we continue to assume a growing tax burden on those who are traditional working age.

Worse, this conventional approach to work, tax and spend leads to an "age-warfare" as reflected in a recent finger-pointing article in this month's Esquire. Author Stephen Marche declares that the Boomers have waged a "war against youth" by creating a "gerontocracy" that is "bleeding up the national wealth" and "eating the young." If it sounds outlandish, first consider Marche's jaw-dropping statistical evidence. In the last 25 years, older Americans have increased their wealth by 42% while younger Americans have seen their wealth decrease an astounding 68%. In 1984, Americans over 65 made ten times more than those under 35. Today, it's 47 times more. And "a retiring couple with low to average wages" who pays a lifetime total of $510,000 in taxes will receive a whopping $821,000 in entitlements over their lifetime. And, as Marche points out, it will be the low-wage-earning Gen Xers and Millennials who are left to foot the bill.

Marche's piece is a sobering reflection on the current generational divide in America. But it's also wrong, not least because it is so narrow and has not an ounce of innovation on what a 21st century demographically transformed America can be. Marche's thesis makes a fatal presumption. He supposes that the economy is a fixed size that offers diminishing returns as more participate in it. Or, to put it in metaphorical terms, he believes that the economy is like a pie that must be divided into ever-smaller pieces as more people want a part of it. But, as we have seen in the past, this is not our experience in a growing economy based on markets, innovation and change. The pie does grow, and more people will have bigger shares. It happened with the women's movement, and it can happen again with population aging.

It is true that it requires driving leadership to effect a changed approach to how a federal government taxes and spends based on a historic transformational shift in demographic make-up of "old" to "young." And it is a change that is global, as recently articulated by Undersecretary of State Robert Hormats.

Paying taxes may be gloomy, but it can also be a moment to reflect. The challenge of getting older Americans to be healthy, active and productive members of the economy is an essential path on which true tax reform can be based. It is through that lens that we can truly change how we approach the spending that is the rationale for those exploding tax rates.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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