May 15, 2006 5:18PM

Why Massive Tax Increases Are Not Inevitable

Optimistic economist (no, that’s not an oxymoron) David Henderson provides some food for thought on the question of whether the explosion in government spending – current and future – will inevitably lead to a tax increase. Henderson argues in this very compelling essay from the Hoover Institution’s journal Policy Review that the prospects for entitlement reform and spending restraint are not as grim as some conservatives and libertarians think they are.

Government revenue has never exceeded 21 percent of GDP in the past half-century. And as Brink Lindsey pointed out on this blog last week, government spending has been stable for at least a generation. These conditions persist for a variety of reasons, but Henderson suggests the primary influence is a "political equilibrium" we have reached in the U.S. That equilibrium is likely to tip in favor of entitlement reform as the Social Security and Medicare systems become more costly per worker than they are now.

Thus, the odds are that when it finally becomes politically necessary to do something about the entitlements problem, reform is likely to be the more politically preferred avenue than massive tax hikes. Just because something is not yet politically feasible, argues Henderson, does not mean it never will be.

Money quote:

"The budget numbers are such that various market-based reforms will be looked at seriously – soon and for a long time. We must not give up on these reforms because they are not politically popular today. What reformers should do, instead, is keep honing their proposals for reining in government spending and keep their powder dry."