What Biden’s Medicare fight is really about

President Biden has a plan to “save” Medicare and Social Security. His Republican foes in Congress are opposed, since it requires $2 trillion in new taxes. This battle will build during the next several months and culminate in Congress’s decision to extend—or not extend—the federal borrowing limit, which will become an urgent necessity by mid or late summer.

There are new dimensions to the fight over the nation’s biggest social-welfare programs, but this is just one skirmish in a long fight over social spending that goes back decades. Republicans have long worried that America will become a “welfare state,” similar to European nations that tax heavily so they cab spend generously on their citizens. So far, they’ve gotten their way: America spends modestly on social programs, compared with other advanced nations, which has kept the tax burden on Americans low.

But unpleasant budget realities seem likely to push the United States closer to the European model of taxing and spending. Social Security and Medicare will soon run short of money, and sharp benefit cuts seem highly unlikely. Both programs are very popular, and it’s hard to imagine millions of seniors who vote at high rates accepting benefit cuts that will be necessary if there’s no increase in taxes to support the two programs. Republicans have acknowledged as much, saying Medicare and Social Security cuts are “off the table” this year, even though they demand deep spending cuts, somewhere, as a condition of extending the federal borrowing limit.

Republicans will probably target Medicaid, the health care program for the poor, for cuts, but this isn’t realistic, either. Some critics caricature Medicaid as an inner-city boondoggle that mainly benefits Democrats, but Medicaid is also broadly popular, including growing support from some Republicans who realize it covers a lot of health care in rural areas and benefits red states as well as blue.

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The bill for safety-net programs in the United States is on par with the cost in other nations, which undercuts Republican claims that social welfare is ruinously expensive. Social spending in the United States totals about 23% of GDP, according to the Organization for Economic Cooperation and Development. That’s about one percentage point higher than the OECD average, but lower than in other wealthy nations including Norway (24% of GDP), Canada (25%), Germany (28%), Spain (29%) and Italy (31%). France tops the list at 33% of GDP.

Where the United States is a notable outlier is in the tax burden borne by citizens. Of 32 OECD nations, the US tax burden is 28th lowest, at 27% of GDP. The only nations in the group with a lower tax burden are Turkey, Chile, Ireland and Mexico.

The average tax burden among OECD countries is 34% of GDP, 7 points higher than in the United States. France imposes the highest tax burden, at 45% of GDP, with Italy at 43%, Norway at 42%, Germany at 40% and Canada at 33%.

The US tax burden isn’t low because US government spending is low. The tax burden is low because the United States borrows to pay for trillions of dollars of spending not covered by tax revenue. US government debt is 148% of GDP, higher than the debt load in only three OECD nations: Italy, Greece and Japan. The average for the OECD is 90% of GDP.

The French model, with high taxes and high social spending, will never fly in the United States, where leave-me-alone libertarianism has always been a powerful undercurrent. Yet a higher tax burden in the United States seems inevitable. The outlook for the national debt is dismal, mainly due to the ballooning cost of Social Security and Medicare as baby boomers flood into the two programs. The Congressional Budget Office forecasts the national debt will mushroom from $31 trillion now to $51 trillion in a decade.

So here’s the overall situation: US spending on social-welfare programs is about average for big, wealthy nations. Demographic changes are pushing that spending up. There won’t be nearly enough tax revenue coming in before long to cover the cost of those benefits. But Americans have been undertaxed, relative to other countries, for a long time. Additional borrowing to compensate for low taxation will eventually become untenable.

There’s only one release valve: Taxes are going to go up. Biden won’t get the tax hikes he’s asking for any time soon, since Republicans control the House and will block any tax hikes for the next two years. The two parties will most likely find some other accommodation that allows Congress to raise the debt ceiling this summer, and return to normal business. But the United States will eventually move closer to Europe in terms of the taxation needed to provide health care, pensions and other services to the aged and the needy.

There will be a lot of catastrophizing in the run-up to the higher tax regimen needed to support existing social programs. But America will survive higher taxation. Germany is an economic powerhouse, with a tax burden 13 percentage points heavier than the United States (and a debt burden that’s far lower).

Most advanced nations have a value-added tax, similar to a national sales tax, that generates tons of revenue. That is probably in America’s future, as well. And higher taxes on the wealthy would barely dent the huge gain in the portion of national wealth the top 1% have enjoyed during the last 30 years.

America doesn't lack the money to support a generous welfare state. It just lacks the will to spend it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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