Poterba: Higher taxes likely inevitable

These commitments are only expected to get bigger as the size of the retired population expands and the cost of medical care continues to rise. If program benefits are maintained at current levels, higher taxes are inevitable. The most likely outcome is a combination of benefit reductions and higher taxes. That mix will be determined by political forces.

There are only two ways to raise more money with our existing income and Social Security payroll taxes: Raise rates or expand the bases to which the current tax rates apply, such as by eliminating deductions.

Neither of these reforms has attracted much support in Congress. This raises the possibility that the nation may need a wholly new revenue source such as a value-added tax or a national retail sales tax. Either could raise substantial revenue at modest rates. Unlike the income tax, neither discourages saving by taxing returns earned by savers and investors.

Make no mistake, either tax would mean lower spending power for households and a larger share of resources controlled by government. These consequences are unavoidable if we are to support our entitlement programs. Adopting either tax would require major reforms, which are rare. But given the challenges that lie ahead, the odds of tax reform during the next decade are much higher than usual.

James Poterba is Mitsui Professor of Economics at MIT and president of the National Bureau of Economic Research, the Cambridge nonprofit best known for officially dating the beginning and end of recessions.