What if Prof. Boskin is Right? 
Jeff Lemieux
6/30/2003

BusinessWeek reports that Professor Michael Boskin of Stanford University has done new calculations showing that tax collections as a percent of GDP will rise substantially over the coming decades -- without an increase in tax rates -- as the baby boomers cash in their 401k and IRA accounts, and pay tax on the income.  However, using updated figures from the Centrists.Org budget baseline, even a 4 percentage point increase in the revenue-to-GDP ratio does not sufficiently close the projected gap between spending and revenues over the next three decades.

Centrists.Org's baseline projections assume that the ratio of federal tax revenues to GDP is roughly constant at historical rates.  That is mostly a political assumption.  The political process has kept the ratio steady at about 19 percent of GDP over time; therefore, it makes sense to assume that rate continues in the future.

Here is a snapshot of federal outlays and revenues under the Centrists.Org baseline (that is, with a flat ratio of revenues to GDP):



However, economist Michael Boskin's recent work indicates that as the baby boomers retire and withdraw their 401k and IRA savings, and pay tax on the income, the ratio of revenues to GDP will rise, without a politically painful increase in tax rates.

Our first opinion at Centrists.Org, is that the "Boskin Effect" is likely to be much smaller than expected, simply because the political process -- with the baby boomers in charge -- is likely to change the rules so that IRA and 401k savings are not so heavily taxed.

Yet we thought it would be interesting to take an up-to-date look at the federal budget, with and without a 4 percentage point increase in the revenue share of GDP between 2010 and 2030.  (The 4 percentage point increase is a crude approximation of a possible "Boskin Effect" on tax collections.)

Here is the outlook for federal outlays and revenues assuming a 4 percentage point increase in the revenue-to-GDP ratio between 2010 and 2030:



Needless to say, the outlook is still pretty bad.  Even assuming a "Boskin Effect," the gap between outlays and revenues reaches 5 percent of GDP in 2020 and 8 percent in 2030.  (Note that outlays are lower in this scenario, because with higher revenues, the government incurs less debt and its interest expenses are reduced.)

Of course, baseline projections are meant to tell us what would happen if nothing is done.  Yet we know Congress will eventually take action to address the deficits projected in these baselines.  So we don't expect budget baselines to actually be accurate forecasts of the future.

But it is not comforting to know that even under highly optimistic assumptions about future revenue collections, the budget outlook as the baby boomers retire remains very poor.  Congress will almost certainly have a lot of work to do over the next several decades to keep the budget deficit under control.

Links:
Centrists.Org No-BS Politically Realistic Budget Baseline (updated June 22, 2003)
BusinessWeek "A Hidden Stash?" (June 30, 2003)