The United States government will never raise tax rates high enough to cover all the promises it has made through programs such as Social Security and Medicare, Cato Institute Chairman William Niskanen predicted during last night’s fourth annual John W. Pope Lecture.

“We’re not going to do it,” he told a North Carolina State University audience. “We’re going to break those promises. The United States will not and basically cannot levy tax rates above 40 percent or so — average tax rates — without destroying the economy, or cannot pay the bills for Social Security and Medicare without forgoing almost everything else the government does.”

The United States economy produces output of $14 trillion a year, said Niskanen, who holds a Ph.D. in economics from the University of Chicago. “The implicit debt for Social Security is $12 trillion or $13 trillion,” he said. “The implicit debt for Medicare is in the $60 trillion range — on the order of five times the annual output in the United States. These are huge problems. This is the biggest long-term threat to the fiscal structure of the American government.”

Government at all levels taxes roughly 30 percent of American economic output, and that level has been fairly constant since 1952, Niskanen said. “The estimates are for this huge burden we have of the promises we have made to future retirees for Social Security and Medicare, we would have to raise our average tax rates to the 40-plus [percent] range to meet all of those promises.”

“We will not put our burden on our children and our grandchildren to pay the tax rates in this 40- to 50-percent range to pay for promises that have been made to my generation and you,” he added. “It won’t happen.”

Breaking promises

There are “good ways to break promises,” Niskanen said. “My preference on Social Security is to increase the age for full retirement benefits more or less indefinitely at about one month every year, one year every 12 years,” he said. “The reason for that is that people are living a lot longer.”

A retirement age of 67 seems “foolish” to the 75-year-old Niskanen. “Most of us are now younger longer; we’re not older longer,” he said. “We should not bind ourselves with a Social Security structure designed by Chancellor Bismarck in the 19th century at a time when very few people lived as long as 65 and most people who did had only a few more years of life.”

As for Medicare, Niskanen advocates an income-tested, high-deductible program. “The higher your income, the higher the deductible,” he explained. “Only when you exceed that deductible does Medicare’s promises kick in.”

Niskanen’s observations on Social Security and Medicare followed a technical description of “The Economic Costs of Government Growth.” In 1929, the last year before the Great Depression, government at all levels spent about 10 percent of the nation’s Gross Domestic Product, he said. The federal government’s share was 2.9 percent. “Right now, government spending at all levels is about 30 percent of GDP,” he said. “At the federal level, it’s about 20 percent of GDP.”

None of the growth during the past 80 years is tied to any constitutional amendments that would have authorized new government functions, Niskanen said. “All of these new programs, starting with the New Deal, have no explicit basis in Article I, Section 8 of the Constitution.”

An economic drain

A much smaller government would lead to a much larger economy, Niskanen said. “The level of government spending for goods and services — including defense and interest payments — that would maximize the after-tax GDP per potential worker is about 15 percent of GDP,” he said. “This is about one half the current relative size of government in the United States.”

Niskanen admits that his calculation does not weigh the benefits of government programs against the costs, but he says the data do not suggest that additional dollars of government spending make sense today. “The marginal cost of government spending and taxes in the United States may be about $2.75 per additional dollar in tax revenues,” he said. “It suggests the last dollar of tax revenue reduces our net after-tax income and output by about $2.75.”

That figure arises from equations calculating the impact of taxes on both labor supply and productivity, Niskanen said. Other scholars who have found lower marginal costs of government spending have not factored in the impact on productivity, he said.

Scholars also have ignored this calculation when conducting cost-benefit studies of new government programs, he said. “They have not looked at the cost to the economy of the money that the government has raised to pay for the action that they’ve been doing,” Niskanen said. “This suggests that from now on, people who are doing cost-benefit studies or cost-effectiveness studies should take their estimate of the cost to the government and multiply it by about 2.75 to get the cost to the economy.”

“The implication of that to me is that I think there are very few government programs for which the marginal value is anywhere near that high,” he said. “This suggests that all of those programs are too big.”

Niskanen has been chairman since 1985 of the libertarian Cato Institute, a non-profit public policy research foundation based in Washington, D.C. He served as a member and acting chairman of President Reagan’s Council of Economic Advisers. Niskanen has served as director of economics at the Ford Motor Company, professor of economics at the University of California at Berkeley and Los Angeles, assistant director of the federal Office of Management and Budget, defense analyst at the Rand Corporation, director of special studies in the Office of the Secretary of Defense, and director of the Program Analysis division at the Institute of Defense Analysis.

The John W. Pope Lecture Series is hosted by N.C. State University’s College of Humanities and Social Sciences and College of Management. The series “encourages dialogue on topics of political and economic interest,” according to a university Web site. A John W. Pope Foundation grant supports the series.

Past Pope Lecture presenters include Nobel Prize-winning economist Vernon Smith, Harvard University government professor Harvey Mansfield, and University of Chicago Law and Economics program director Richard Epstein.

Mitch Kokai is an associate editor of Carolina Journal.