by Calculated Risk on 1/03/2006 01:53:00 PM

There are two distinct views of the US fiscal situation.

VIEW 1:

National Debt = $8.1 Trillion or about 63% of GDP.

General Fund Deficit = ~$600 Billion per year (about 4.7% of GDP)

Social Security Insurance (SSI) has a small, but manageable shortfall.

VIEW 2:

Publicly held portion of the National Debt is $4.7 Trillion or 37% of GDP. The rest of the National Debt the US owes to itself.

Unified Budget Deficit = ~ $350 Billion per year - a problem, but manageable.

Social Security Insurance is a massive problem.

Dr. Thoma posted Mankiw's Guidelines for Policy Makers. Mankiw's first resolution for policy makers:

Mankiw's #1: "This year I will be straight about the budget mess. I know that the federal budget is on an unsustainable path. I know that when the baby-boom generation retires and becomes eligible for Social Security and Medicare, all hell is going to break loose. I know that the choices aren't pretty -- either large cuts in promised benefits or taxes vastly higher than anything ever experienced in U.S. history. I am going to admit these facts to the American people, and I am going to say which choice I favor."

Obviously Mankiw holds View #2 above. One of the unstated, but obvious components of View #2, is that the excess SSI taxes collected over the last 20+ years has really just been another General Fund tax. In the eyes of Mankiw, these extra payroll taxes have been a surreptitious method of instituting a flatter tax system.

Ostensibly the excess payroll tax is not a General Fund tax; it is a prepayment on future benefits. Legally, the General Fund receives most of its revenue from high income individuals, whereas the revenue burden for the SSI Trust Fund falls mostly on low and middle income wage earners.

Those holding View #1 see reversing the Bush tax shifts as the primary method for restoring fiscal balance. By bringing the General Fund back into balance, SSI is only a minor problem.

Those holding View #2 see cutting future benefits, primarily for low and middle income earners, as the solution for restoring fiscal balance.

So its a question of who pays: high income earners or low and middle income earners.

Although this is mostly a normative question, View #1 has the advantage of being straightforward. In fact, any politician who really explained View #2 to their constituents would likely be removed from office, tarred and feathered, or far worse.