Thursday, February 10, 2005

Financing the Federal budget

In my previous post, I commented on David Brooks' plan to replace Social Security with an asset-oriented alternative. We could use the same approach with the entire Federal budget.

Using rough figures, let's assume the current budget is about $1 trillion/year, and let's assume a 5% rate of return. Then we would need a "nest egg" of $20 trillion to finance the Federal government. To build up that amount in 65 years would require an initial deposit of about $900 billion. So if we just doubled everyone's taxes for a single year, then 65 years from now no one would have to pay any Federal taxes.

We could make it even less painful by extending the build-up period. If we allowed ourselves 95 years to build up the nest egg, say the end of this century, we would need only about $200 billion to start. Since that's about half the size of the current deficit, we could finance it easily. Perhaps no one would notice. Of course, unlike our treatment of the current "Social Security Trust Fund," we would need strict rules about how to keep our hands off that nest egg as it's building up.

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