An Expanded Safety Net is More Important than Soaking the Rich
Clive Crook says it’s all well and good to pursue comprehensive health care reform, but Obama shouldn’t try to pay for it with higher taxes on the rich. Instead, he calls for a broader-based tax like a VAT. Jon Cohn kicks that around here and here.
Readers may recall that I’m somewhat sympathetic to Crook’s point. But rather than saying what he said, I’ll instead say this. Government spending on effective social welfare programs is very progressive. The main thing to do, from an egalitarian point of view, is to have a lot of it and to pay for it through whatever taxes are politically viable. Compared to Europe, the American tax code is toward the high end of progressivity, though not off the charts. The big difference, though, is that our overall tax revenues are lower, and a much larger share of our revenues goes to the military. Whatever you do to shift spending from defense to domestic priorities, and whatever you do to increase revenue, is a step in an egalitarian direction.
It may be that it’s easier to raise revenues through taxes on the rich, because they bite fewer people. Beyond that, there are concerns about growth. Certainly I think it’s clear that restoring Clinton-era taxation won’t kill the economy. But over the long run we’ll need even more revenue than that. So I think some consumption taxation may be necessary. And I think it’s smart to look at taxes that have some direct benefits—taxes on pollution or public health hazards in particular.
Either way, the key point is to get the programs in place and pay for them somehow or other. The exact mechanism is not especially important from an egalitarian point of view unless you were to really propose something hideously regressive like a poll tax, which I think nobody is doing.
44 Responses to “An Expanded Safety Net is More Important than Soaking the Rich”
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April 7th, 2009 at 10:21 am
higher taxes on the right
I think he means “higher taxes on the rich.” I suppose he could be trying to suggest that the two are coextensive.
April 7th, 2009 at 10:25 am
but Obama shouldn’t try to pay for it with higher taxes on the right
i disagree. Republicanism is a strain on our country and it should be discouraged.
April 7th, 2009 at 10:28 am
I like the fat cat.
April 7th, 2009 at 10:34 am
And I think it’s smart to look at taxes that have some direct benefits—taxes on pollution or public health hazards in particular.
Does that mean you advocate taxes on junk foods? And if that is the case(or even regardless) do you advocate forcing grocery stores to have stores in the inner cities? Like Philadelphia for instance. Try finding a decent grocery store in North Philadelphia, because you can’t.
April 7th, 2009 at 10:40 am
Ok that cat needs to go on a diet.
April 7th, 2009 at 10:41 am
That is one fat cat…
Subscribers to an institutionalist view on economics would say that the rich need to pay more (than they are now) because they get more. Most of what government does promotes and protects wealth. The recent devastation seen can be viewed in this manner: propelled towards growth and lacking a concomitant restraint on excess growth (read: greed) the situation becomes unsustainable.
Somebody, after all, had to keep feeding that cat…
April 7th, 2009 at 10:49 am
The VAT (like sales taxes) is a horribly regressive tax. Screw it. If you think the income tax is too progressive, make it less progressive if you wish. Hell, a flat income tax is still fine if it pays for necessary social services. But a VAT or some other regressive tax would essentially amount to the government forcing low-income people to pay for their own social services–something they could just as well do out of their own pocket, so what’s the point of taxing them for it?
This should enlighten.
April 7th, 2009 at 10:52 am
It’s probably as justifiable as taxes on booze or cigarettes. The guidelines might be difficult. Some percentage of fats, sugars or salt by weight might qualify something as junk food.
If you go down that road, where do you draw the line? Will you tax a 5 pound bag of sugar or a pork chop as junk food? If so, how about walnuts or pecans? They’re loaded with fats, but their fats are very good for you.
Alcohol and tobacco are a lot less complicated.
April 7th, 2009 at 10:55 am
Isn’t a cap and trade program just this? It’s a tax on a wide array of carbon intensive goods. Except it has the advantage of actually achieving a social and environmental aim.
Also, any comprehensive healthcare reform should include new taxes on high fructose corn syrup and cooking oils.
I think we should look harder at these sorts of taxes which control for externalities, rather than just an across the board sales tax which would only serve to discourage spending and retard economic growth.
April 7th, 2009 at 10:57 am
It seems like it would make sense to start a surtax on large families. Say over two children a person would pay more in taxes as their family is not only producing more emissions but they are using more services than other people.
April 7th, 2009 at 10:57 am
Dear Mr Yglesias
As you note, your argument has not practical relevance whatsoever. We do not have to choose between whether to have a generous social safety net or whether to soak the rich. The only remotely politically feasible way for the US get a generous social safety net is raise taxes on the rich. There is overwhelming support for such tax increases (75% in the latest CBS Washington Post poll).
Significantly increasing taxes paid by most US residents is almost certainly politically impossible. Saying it would be OK even if not as good as a progressive increase in taxes is like saying you would rather be turned into a frog than dead. Maybe it would be better, but VAT in the USA is about as likely as Matthew Yglesias turing into a frog.
The fact that non rich people pay high taxes in Europe does not mean that it is an option open to activists or policy makers in the USA.
You mention “growth”. Do you know of any evidence that high taxes on the rich have any effect on growth ? How about any evidence that raising the same amount of money with VAT is better for growth than raising that amount of money by taxing high incomes ? The argument is made very often, so often, that one might imagine there must be some evidence supporting it. I don’t know of any.
April 7th, 2009 at 11:09 am
There is nothing wrong with marginalizing and ostracizing the obese, smokers and other sickly people in poor health because of personal choices. They are an aggregate drag on our health care system and cost each of us making more responsible choices unneccessary sums of money. Smoke and be fat if you like. You shouldn’t get health insurance, nor should anyone hire you for work. Just leave the country and befoul another nation’s soil. You stink and are exceedingly unattractive to catch glimpse of. There are no methods of modifying such behaviors, with food and nicotine getting gulped as if the consumers were parched denizens of a trek through the desert. You want less money spent on health care? Figure out a way to purge society of smokers and the obese. You’ll see diabetes, arthritis, heart disease, hypertension, lung and bladder cancers, emphysema and untold other diseases drop in numbers you won’t believe. Until then you’ll share your weekly paycheck with the Big Mac gulping, Marlboro inhaling crowd.
April 7th, 2009 at 11:11 am
Anonymous,
You can make a VAT more progressive. If you exempt items such as food which make up disproportionately high percentages of a poor person’s budget. You could exempt individual items of clothing; for example any article under $40 icould be exempt. You could have a process by which the poorest people could file for partial rebates of VAT for major purchases. You could have something akin to the earned income tax credit.
All that might be more trouble than its worth, though. There is also the likelihood that once a VAT was in place, the extraneous measures for making it more progressive might get whittled away. I’d prefer keeping things as they are, with minor changes, but a VAT can be progressive.
April 7th, 2009 at 11:12 am
The US enjoyed its greatest period of middle class prosperity from roughly 1950 to 1980. In that period taxes were much more progressive than today. College was relatively affordable, the average person’s living standard was increasing and a blue collar family could get by on one income. The Ronald Reagan was elected.
April 7th, 2009 at 11:16 am
Steve—Well put! No one should hire fat people, because being overweight is a clear sign of incompetence and laziness. Also, ugly people should be forced to work indoors so no one has to look at them. Handsome, skinny folks such as yourself, however, should be encouraged to breed freely so as to speed the day when, populated by the Master Race, the earth will become a paradise of health and vigor.
April 7th, 2009 at 11:18 am
In line with what Steve Duncan was saying, and considering that stress is a bigger contributer to health care costs than cigarettes, I say we also get rid of all of the extremely obnoxious jerks, like Steve Duncan.
April 7th, 2009 at 11:32 am
Whether we ought to levy “higher taxes on the right” is an important policy question that’s not discussed nearly enough. Maybe we could start with talk radio hosts and Faux News talking heads.
April 7th, 2009 at 11:37 am
I think that it is obvious that higher taxes reduce growth, if viewed in isolation. People will be deterred from working. It may or may not be a negligble effect, but it is real. The right wingers have that part right. Where they go wrong is claiming that it reduces revenue. We haven’t had those levels of taxation since Eisenhaur.
However, when you don’t consider higher taxes in a isolation, it becomes more complicated. Higher taxation may deter a few people from a small amount of work, but it can have positive effects on growth. Government can divert money that would have been spent on yachts or foreign vacations or other non-multiplier spending into avenues that spur growth – infrastructure, education etc. On the other hand, if taxation goes to dead-end streets like defense spending, it doesn’t promote growth any more than yacht buying does.
Your second point, about VATs and growth seems right to me. VATs deter consumption. That might be a good thing in the long run, we’re very wasteful, but it would be like driving our economy into a brick wall. Buying unnecessary crap is what drives our economic growth.
April 7th, 2009 at 11:47 am
I don’t know that being obnoxious increases your need for the expenditure of monies on health care. Cue to the obligatory “Oh yeah, well if it gets you punched in the nose it does!” There, that’s out of the way. Now, back to the subject at hand: Why is it OK to voluntarily be a corpulent, wheezing asthmatic shopping the aisles of Big Bob’s Tents, Awnings, Clothing & Apparel? And why should my employer pay higher rates than necessary for group coverage so you can get an annual angioplasty and once every five years coronary bypass?
April 7th, 2009 at 11:48 am
A VAT is simply not a regressive tax. All income is eventually spent on consumption, so a flat VAT is exactly equivalent to a flat income tax. Now, payroll taxes really are regressive. I wouldn’t be surprised if switching entirely to some sort of flat consumption tax would net increase the progressiveness of the US code given the regressive aspects of the current US tax system–payroll taxes and loopholes.
April 7th, 2009 at 11:56 am
Legalize all drugs. Make them a government monopoly. Use the income to fund health care. Use the surplus money for other social programs.
April 7th, 2009 at 12:00 pm
All income is eventually spent on consumption, …
Uh, no it isn’t. Plenty of income is saved or invested by those who earn enough to save or invest some of their earnings.
Poor folks spend all their income on consumption, which is why a VAT is regressive.
April 7th, 2009 at 12:02 pm
One should be careful, to the extent one is tempted to do so from the US, not to romanticize how much the rich are taxed in Europe. Even for well run countries without pervasive cultures of corruption in many areas of life there is, nevertheless, quite a lot of tax avoidance and evasion by most of the rich. For the country I know best, Germany, most rich are family business owners and these family businesses are structured to avoid paying taxes, mostly by avoiding the generation of taxable income while nevertheless generating lots of cash flow. Tax shelter schemes are widespread and heavily used. Germany raises lots of tax revenue, but most of it is from taxing middle income wage earners and consumption taxes, not taxes on ‘the rich’. This is most likely a good system that the US might to well to emulate in many respects (especially at VAT), but you need to understand what the European tax systems do and do not do. And compared to Germany the US estate tax is confiscatory.
April 7th, 2009 at 12:03 pm
I never got this. Still don’t. You’re trying to apply rationale analysis to a system, that at some point, leaves rationality behind. A solid work ethic is fundamentally at odds with greed. Indeed, these two motivators might lie at the opposite ends of the spectrum…
Observe: If I want to put 1,000 dollars in my pocket I’m willing to do the work to earn 1K + taxes. No deterrent there.
Same for a million dollars and a billion dollars. So, the amount you pay increases. So what? At some point, you pass the point of what you can possibly spend in a lifetime and then what incentive do you have to work at all? At that point, greed is your owner and you’ve moved passed rationale discussion. If you want to get all high-falutin and say you can then work your riches for the greater good… Fine. Do so through taxes. Duh.
I think being too rich is more of a work deterrent than ‘excessive’ taxation.
April 7th, 2009 at 12:07 pm
In addition to believing that progressive taxation is morally/ideologically better than regressive taxation, I think that there’s an argument to be made that, given the very high level of income/wealth inequality in America, that it’s actually more efficient to tax the rich. In a country with a lower Gini coefficient than ours, where income is more broadly spread out, it makes more sense to have taxes that are spread over a larger base (and it’s somewhat less regressive, in the sense that people’s ability to pay is more broadly shared).
April 7th, 2009 at 12:09 pm
Bill Gates has so much money he’s giving it away. This is not consumption. Your ability to consume is finite. Just ask Mr. Creosote. At some point on the wealth scale, you’re going to have more income than you can possibly spend. A VAT at this point in the wealth scale will be completely and utterly useless.
At other points on the wealth scale, your entire income will go to consumption and you will still have not consumed even the basic necessities. This is called ‘poverty’. A VAT, at this point in the wealth scale, will excise your ability to consume even that small portion of basic necessities you’re getting now. This is called ‘cruelty’.
April 7th, 2009 at 12:10 pm
Yes, we know. Progressivism trumps economics.
April 7th, 2009 at 12:16 pm
State taxes, when added to federal taxes, make our tax system much less progressive. This is a problem.
Apologize if this has been said upthread.
April 7th, 2009 at 12:25 pm
Did we not grow at all in the period from the 30’s to the 80’s when the top marginal rate ranged between something like 70% and 90%? Did rich people go Galt and go on strike? I wasn’t alive then, but I think we still had CEOs making quite a nice salary and, um, working. And Matt seems to think that we shouldn’t go much beyond Clinton top rates (shudder the thought) and put the rest of the burden on working class people via a glorified sales tax?!?
April 7th, 2009 at 12:26 pm
A VAT tax sucks, just not as badly as not having a decent safety net. Which is where the US will be unless taxes are increased on a far larger segment of the population than Obama is proposing. Now, to be fair to the administration, their strategy is the right one: lock in the safety net gains now, when deficits are literally a desirable outcome. And then worry about raising taxes when the economy can handle it. Maybe we’ll be able to afford everything merely by raising the income tax, but I don’t see any other rich countries with solid safety nets that have been able to pull of this feat. That said, Crook (whom I like, as it happens) has been a scold on this issue, because, a I just stated, deficits right now are what we need.
April 7th, 2009 at 12:28 pm
State taxes, when added to federal taxes, make our tax system much less progressive. This is a problem.
Don’t know how true it is, but I’ve often read that the US tax structure as a whole (including state + local) is broadly flat — that is neither progressive nor, strictly speaking, regressive.
April 7th, 2009 at 12:41 pm
Well, a linear rate with no per-person exemption limits how progressive a VAT can be.
There is, however, one progressive aspect of the VAT that tends to get neglected in popular discussions: a VAT taxes consumption of existing wealth, while progressive income taxes do not. There is a lot of existing wealth held by wealthy households and a good fraction of the wealth will be consumed in the not that distant future — and a VAT taxes that wealth. Indeed, in most public finance models this is the main reason a VAT is attractive: it is in part a (distortion free lump-sum) tax on existing wealth.
Which, incidentally, is one reason the VAT isn’t popular with Republicans.
April 7th, 2009 at 1:01 pm
This misses a key point, though. Comparing tax rates to Europe is not far enough, Europe has a very strong labor movement and much more level pay scales.
Either you or Ezra addressed the CEO compensation issue recently (US vs. Euro). That’s part of it, and the other part is the $$ going to providers of labor vs. capital.
Even further, look not at the money, but the value of benefits. Europeans get comparable health care for often half the costs, so does it really help me that my employer pays twice what they pay? No. Not really, but my employer gets to count it against me, right, as part of total comp. However, most of that $$ comes out as profits again, not towards better health services or Rx drugs.
April 7th, 2009 at 1:28 pm
Jasper:
It’s probably flat or close to flat nationally, but the national data hides a lot of regional variations. Southern states tend to be extremely regressive – high sales taxes, especially on grocery bills, very low level cutoffs for income taxes, deduction of federal income taxes into state taxes – etc. Other states, especially those in the Northeast, Midwest, and West Coast, tend to be much more progressive.
April 7th, 2009 at 1:44 pm
Whoa, after seeing that picture I think we need to start taxing cat food.
April 7th, 2009 at 2:52 pm
Realist, April 7th, 2009 at 11:48 am
Garbage In, Garbage Out. A substantial amount of income is allocated to wealth accumulation. Taxing consumption is taxing the income of the lowest income individuals at about the VAT rate, and taxing the income of the highest income individuals at somewhere around half the VAT rate.
However, comparing national tax incidence in Europe and the United State is grossly misleading, because in Europe the regressive consumption taxation tends to be at the national level, and in the United States that is at the state and local level. At the same time, in the US a substantial amount of the income taxation on low income individuals is hidden under the artifice of the “employer contribution” to payroll income taxes … for those among the lowest paid workers in the US who do not have a personal income tax liability, a full 50% of their total income tax payments are treated as if their employer is paying it from somewhere other than their money allocated to labor costs.
There are excellent reasons to have an overall progressive income tax system. First, and most important, a progressive tax rate is an automatic stabilizer, so its a common public interest to tax high incomes at a higher rate over all than lower incomes.
Second, in reaction to the objection that “its not fair” to make the wealthy carry the can for that public interest, its also true that the wealthy are disproportionate beneficiaries of public goods such as transport systems, our accumulated technical knowledge base, the productivity of the workforce from public education, and so on … so in addition to being the preferable policy for the economy as a whole, shifting from the present overall flat tax to an overall progressive tax would also be fair.
The third is the point of whose interests are being served by different fiscal policy stances. For a given level of spending, the tax level needed to protect the dollar as a store of value is higher than the tax level needed to protect the dollar as a means of exchange.
April 7th, 2009 at 2:53 pm
True to a small extent, but payroll taxes are the real reason taxation flattens. People payed minimum wage pay a higher percentage of their income as payroll tax than people earning a million a year.
April 7th, 2009 at 3:01 pm
stefan, April 7th, 2009 at 12:41 pm
Most consumption based on wealth is based on wealth income, not wealth consumption … and wealth incomes are taxable income. Further, when individual net consumption of wealth is “taking profits”, there is a taxable capital gain.
Since individual fortunes somewhere above the $5m or $10m range are self-perpetuating, clearly for a substantial portion of the wealth in the country, there is no net consumption overall … as a national net, some of the wealth income goes to consumption, and some goes to increasing the wealth holding.
The time when there is most likely to be individual net consumption of wealth that cannot be captured by income tax is during a recession or financial crisis, and that is just when we are least likely to want to tax that consumption.
April 7th, 2009 at 5:22 pm
Whatever form they take, everyone except the remaining 20% of wackjob voters knows that taxes need to go up. We’ve know it for thirty years, though magical thinking has kept it in abeyance.
The single most important thing that progressives can do to support the country/world that Obama is trying to create is:
Start clamoring for higher taxes.
In those words. Loudly and clearly.
He needs the political cover. If we define what ‘pubs will call “the radical fringe” in that way, he can sound centrist and make it actually happen.
April 7th, 2009 at 7:15 pm
Fat cats = cute, although not very healthy for the cat
Fatcats = clawback every misbegotten penny they have!
April 7th, 2009 at 8:13 pm
I said all income is eventually spent on consumption. This is true (basically). It is possible to e.g. burn money and not consume it, but most people don’t do this.
Investment is deferred consumption. Compare a 10% income tax with a 10% consumption tax.
Income tax: Someone gets $1000. Taxes reduce it to $900. They can either spend $900 on consumption, or invest it. If they invest it in a fund that doubles their money every 10 years, then take it out at the end, they have $1800 to spend on consumption.
Consumption tax: Someone gets $1000. They can spend $1000 on consumption, which is taxed at 10% so they get $900 worth. Or, they can invest for 10 years, double to $2000, and consume. Consumption is taxed at 10% for $200 tax, so they have $1800 worth of consumption.
The situations are identical. A flat consumption tax = a flat income tax, and investment doesn’t change this picture.
As for Bill Gates, the income he gives away is also spent on consumption, of course, just not his consumption. Whether a tax is instituted on Gates income or on the consumption of the charity recipients is irrelevant; the amount of consumption is the same in the end.
Now what if rich people do burn their money? Still doesn’t matter. Burnt money is out of circulation, so taxing income that would otherwise be burnt is equivalent to printing more money. Government printing money and spending it induces inflation, which is essentially a flat consumption tax (inflation reduces the value of everyone’s income). So even in the case of burnt money, an income tax is the same as a consumption tax. The only consideration of whether you want a VAT tax or a sales tax or a flat income tax is ease of collection and ease of cheating. Economically, they are the same thing.
April 8th, 2009 at 1:32 am
The rich don’t make enough money collectively to pay for the kind of welfare state Yglesias wants. Taxing the rich is like selling Rolls Royces: you can get a lot from one person, but you won’t get a lot in total. Total sales (in dollars) of Honda Civics dwarf sales (in dollars) of Rolls Royces, because — even though a Rolls Royce sells for a lot more than a Honda Civic — there just aren’t that many Rolls Royce buyers. Just like there aren’t that many rich people.
Another issue with Yglesias’s Nordic welfare state fantasy is that this isn’t a Nordic country. Instead of diligent and competent Swedes running the show, it will be the sort of people who work at the DMV. It won’t work here, it will be a colossally inefficient and expensive mess.
April 8th, 2009 at 4:19 am
Government should impose higher taxes on liquor and cigarette to minimize accidents and health problems.
April 16th, 2009 at 10:14 pm
Hello everyone. We are able to laugh when we achieve detachment, if only for a moment.
I am from Cambodia and also now am reading in English, give true I wrote the following sentence: “Cheap tickets airline travel – ephram back leaves with his ensuring livery, his cheap tickets airline travel – national at the jet of telephony and kyle.”
Thank you very much
. Minda.