The US—with a projected 2018 federal budget deficit of 4 percent of Gross Domestic Product and an economy running at close to full employment-- just cut taxes by $1.5 trillion over 10 years, even as it increased net spending by $300 billion over just the next two. Germany—currently running a budget surplus—has no plans to cut taxes, according to Chancellor Angela Merkel’s government. And Singapore—running a surplus this year and looking at a roughly balanced budget next year—is proposing a significant tax increase.
On its face, the contrast between the US’s short-sighted fiscal policy and that of other developed countries is striking. But it is even more stark when you dig a little deeper.
Taxes and an aging population
In Singapore, the proposed tax increase (a 2 percentage point hike in its 7 percent Goods and Services Tax as well as a hike in its property tax for expensive homes) would take effect between 2021 and 2025. And the government explicitly identified the reason: The growing needs of a rapidly aging population.
The problem should sound familiar—populations are aging rapidly throughout the developed world. In the US, the number of people aged 65 and older will double by 2060 and we are doing nothing to prepare for financing their needs. Singapore’s population is aging even faster. The difference: It has a government that is willing to acknowledge the challenge and do something about it.
This is how Finance Minister Heng Swee Keat explained the decision, according to Bloomberg: “There is a need to strengthen our fiscal footing. In the next decade, between 2021 to 2030, if we do not take measures early, we will not have enough revenues to meet our growing needs.”
ISO courage and foresight
Sadly, it is hard to find anyone in the current US administration with the foresight or courage to either describe the problem in such a straight-forward way--or to do anything about it.
The story in Germany is somewhat different, though closer to Singapore than the US. Germany has been running an annual budget surplus for the past five years and its ratio of national debt to GDP is half that of the US.
Yet, there is no interest there in cutting taxes. According to the Wall Street Journal, only 20 percent of the German public backs a tax cut and none of the major political parties favors such a move.
Indeed, far more Germans would rather use the money for either new spending or to pay back the nation’s relatively small national debt. And the Merkel government is planning to boost spending on both domestic programs and the military. But unlike the US, it will not also cut taxes even though its current surplus gives it more flexibility to do so.
Room for error
About now you may be saying there is no lesson here: The US is neither Germany, a mid-sized country long history of social insurance that goes back to Bismark, nor is it Singapore, a tiny city-state half way around the world.
It is surely true that we have more room for fiscal error. Our economy is vastly larger. We have the world’s reserve currency and they don’t.
In addition, Singapore’s taxes are only about 14 percent of GDP, not only among the lowest in the world but the lowest in Asia. It has plenty of room to raise taxes.
Germany is in a less competitive tax situation. It is holding its taxes steady even though its businesses and individuals paid about 37 percent of the nation’s GDP in taxes in 2015—a bit higher than the average of all major developed countries and significantly higher than the roughly 26 percent the US paid—even before passage of last year’s tax cut.
Then there is that aging population business: Germany also faces a serious demographic problem, though somewhat less severe than the US (its population of those 65+ is projected to increase from 17 million to 23 million by 2060. Singapore’s is even worse. Its population of those 65 and older will double—but by 2030.
Such a demographic time bomb focuses the mind. But while the US problem is less urgent than Singapore’s, it is serious enough that we need to pay attention. We can support our social needs, including those of an aging population, by raising taxes. We can reduce promised benefits for the aged, and pay the social price for doing so. But we can’t both provide sufficient retirement and health services for older adults and keep cutting taxes. That math doesn’t work, whether you are counting in US dollars, Euro, or Singapore dollars.
