MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Baseline U.S. Generational Accounts 3

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Since the accounts for newborn males and females are $77,400 and $51,900, respectively, the growth-adjusted accounts for future generations are 72 percent larger than those of newborns. The size of the generational imbalance can also be described in terms of lifetime net tax rates. As indicated in Table 1, male and female newborns face a collective projected lifetime net tax bill equal to 28.6 percent of their projected lifetime labor earnings. For future generations, the corresponding projected lifetime net tax rate is 49.2 percent – or 1.72 times the tax rate facing newborns! Since most current older and working generations will also face lifetime net tax rates of roughly 30 percent, the status-quo policy entertained in Tables 1 and 2 entail a policy of much higher rates of lifetime net taxation of future than of current generations. More info

This represents an enormous imbalance in U.S. generational policy. Forcing future generations to pay lifetime net tax rates that are 72 percent higher than those facing current generations is not only highly inequitable, it’s also likely to be economically infeasible. Recall that the 49.2 percent lifetime net tax rate is a net tax and that it also represents an average, rather than a marginal, tax rate. The marginal gross tax rates on various economic activities that the government might try to impose in order to collect a 49.2 percent average net tax rate could well be so high as to preclude actually collecting this net tax; i.e., sky-high marginal tax rates could so dissuade future generations from working and saving that the government finds itself unable to collect the net tax revenue it needs to satisfy its intertemporal budget constraint.