Jagadeesh Gokhale, Benjamin Page, Joan Potter, and John Sturrock
Although relatively new, generational accounting has been used in 26 countries to evaluate the generational stance of national fiscal policies. Generational accounting calculates the size of prospective net tax burdens and lifetime net tax rates that different generations face under current fiscal policy—information that standard budget presentations do not reveal. This method can also be used to calculate the policy changes required for achieving a generationally balanced and therefore sustainable fiscal policy—one that implies equal lifetime net tax rates on today’s newborns and future generations (those born after 1998).
Calculations made two years ago suggested a sizable generational imbalance in U.S. fiscal policy, implying lifetime net tax rates on future generations that are 72 percent higher than those on newborns in 1995. Since then, unexpectedly strong growth in both gross domestic product (GDP) and the tax share of GDP has boosted revenues, and slow growth in defense spending has reduced federal purchases as a share of GDP to a postwar low. Those developments augur federal budget surpluses for at least a decade and portend a corresponding reduction in the generational imbalance.
This paper presents the latest generational accounts and lifetime net tax rates for the United States. As before, calculations are based on a reference path modified from a 75-year projection by the Congressional Budget Office (CBO). The reference path used here incorporates a growth rate of labor productivity of 2.2 percent per year, a rate consistent with the historical record, given the most recent data revisions and changes in the measurement of prices.
As expected, the reference projection suggests a much smaller generational imbalance than before. However, to consider the possibility that projected surpluses will not fully materialize, we calculate U.S. generational accounts under three alternative assumptions: faster growth in government purchases, lower federal income taxes, and a policy that maintains the off-budget (trust fund) surpluses through 2009 and “spends” the on-budget surpluses through a combination of lower taxes and higher discretionary spending.
The reader is referred to earlier papers on generational accounting for a description of its methodology. The following sections report the latest generational accounts for the United States under reference and alternative projections and describe policy changes that would achieve a generationally balanced fiscal policy in the United States.