Doing it With Tax Increases
Writing for CAP, Michael Ettlinger and Michael Linden say that achieved a balanced budget by 2014 solely through higher taxes “is not a likely or necessarily desirable policy.” Still, as they say it’s certainly a feasible policy:
Much is said about the economic effect of tax increases, but it is worth noting that there is little risk of the United States becoming economically disadvantaged relative to other advanced economic nations by raising its aggregate tax levels. We have the fifth lowest taxes as a share of GDP among economically developed nations (counting all federal, state, and local taxes). If we raised taxes in aggregate to a level that would safely balance the budget, the United States would still be in the bottom 10 out of 30.
Obviously that’s not a politically kosher solution. But on the merits I think the case for doing this almost entirely through tax side measures is pretty strong. Higher taxes on the scale under consideration would simply leave the United States with the kind of tax levels found in Australia and Canada, exactly the kind of countries you would expect to be similar to America.
The larger issue is that no matter what happens in 2014 as long as the US is committed to providing health care to senior citizens and the cost of health care grows faster than GDP, over the long run taxes as a percent of GDP will need to consistently rise. And as far as I can tell Republicans aren’t prepared to break that commitment to providing health care to senior citizens and Democrats aren’t prepared to back continually higher taxes. Across some margin of time you can fudge this by messing with defense and domestic discretionary spending but ultimately the choice will have to be made.
19 Responses to “Doing it With Tax Increases”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Matt YglesiasContact Me
Donate
October 3rd, 2009 at 8:54 am
The Republican party will HAPPILY cut Medicare and/or Social Security to ribbons rather than raise taxes or indeed to keep them at current levels instead of cutting them more. Their current position on Medicare is mere political expedience, that is, a lie.
They’ve twice before, in 1995 and 2005. What makes you think they won’t try again?
October 3rd, 2009 at 9:06 am
But as noted it’s all levels of government. The chunk of taxes that go to provinces relative to the Canadian federal government is much higher than the the states to the US government. (The provinces also pick up much of the health care tab through their own GST/HST imposts). (Also, don’t know about australia, but I think I read previously – maybe here – that the Scandanvian countries also have a considerably more even fed/local split)
It’s a much different dynamic, I would think, to raise the level of taxation that pushes the US to the right on the chart purely on the federal level – because after all that is what is needed to balance the *federal* budget (Also, the raise in federal taxes would have to be mostly through income tax, because well, any sort of VAT or national sales tax would break the promise of no tax increases on those making less than $250K)
October 3rd, 2009 at 9:36 am
Is this news? Do serious people doubt that you can raise more money through taxation, Arthur Laffer’s acolytes notwithstanding?
I can imagine what the response would be if the Heritage Foundation came out with a “study” highlighting the fact that we could balance the budget through spending cuts. Sure you can. Nobody doubts that. But it’s a total line of BS if you are not actually willing to make those spending cuts happen. And clearly, in the case of the tac cuts, Democrats are not willing to do what it would take. In large part because making that proposal would most likely result in an electoral drubbing. So I guess people get the government they deserve, or something like that.
I eagerly await studies that show you can lose weight by eating less, and stop smoking by… not buying, lighting and inhaling the smoke of cigarettes.
October 3rd, 2009 at 11:02 am
Ah yes, California writ large. Reps won’t raise taxes; Dems (properly in my view) balk at cutting spending. Voters unwilling to admit that choice is required of them.
October 3rd, 2009 at 11:11 am
There’s no way average people will accept higher taxes as long as the budget is largely a slush fund to service the plutocracy and reward campaign contributors. The current health care “reform” spectacle is a perfect example of this nonsense.
October 3rd, 2009 at 12:00 pm
How do we arrange a national intervention to de-program ourselves of the cult-like mantra?: “Lower Taxes Good. Higher Taxes Bad.” A good starting point would be the legislators who (literally) think that tax is a four letter word, then insert pork-barrel earmarks totaling billions of dollars. If the tax burden does get down to Mexico’s rate, that kind of quality of life will be the result either through California style chainsaw cuts or through national bankruptcy.
I hope to live long enough to watch the “Guns vs Bubby” debate. Rest assured the geriatric crowd in leadership posts in both parties will make sure they won’t be affected.
October 3rd, 2009 at 12:14 pm
We could lower GDP and it would have the same effect on our position in the graph as raising taxes. Comparisons like these are so utterly uninformative.
October 3rd, 2009 at 12:25 pm
Kolohe,
Your comment about Canadian provinces having higher taxes than American states reminded me of a point that Gregg Easterbrook made in 2003. Federal revenue transfers to state governments are the only reason states can balance their budget with their current tax rates. Adjusted for inflation (and not even factoring in new stimulus funding), $412 billion in 2002 is roughly $500 billion today.
In fiscal 2001, 21 percent of state revenue came as federal grants for education, transportation, Medicaid, and a range of other programs. Were it not for such donations from the U.S. Treasury, all states would run perennial deficits.
In turn, national budgets in the postwar era have often dipped into the red owing to federal support of the states. In fiscal 2002, Washington gave $412 billion to the states, more than it spent on defense, while running a $158 billion deficit. Had federal income tax funds not been channeled to states, the fiscal 2002 national budget would have shown a huge surplus; federal taxes could have been cut and the central government still been comfortably in the black. Instead, the U.S. Treasury went into debt to support the states and their cities, while the federal income tax was higher than it might otherwise have been, focusing voter rage on Washington as states could post lower taxes than actually needed to support their spending.
http://www.tnr.com/article/states-rites
October 3rd, 2009 at 1:23 pm
I can’t tell if Matt is really this stupid or only pretending to be in the good Progressive mode of lying.
The United States AND State governments are getting themselves out of the health care business.
By making health insurance mandatory now then in not very many years Medicare and Medicaid will be phased out for all but catastrophic care and that severely curtailed.
After all it is just like the supplemental insurance seniors must currently purchase. With the hundreds of billions in cuts to Medicare (yes I know the Obama lie that it is all waste and fraud) the elderly will face either reduced services or have to increase their supplemental insurance.
As for Medicaid the exemptions are growing and Medicaid is shrinking.
Obama Care is nothing more than requiring we all purchase overpriced policies and that we will be required to carry those policies into retirement.
As for those taxes you’ve been paying for future health care well forget that. Those monies will go the way of your Social Security taxes.
Note that this year Social Security is running a deficit.
Rosy projections of a return to “full” employment put those deficits at two years with a return to surplus.
Ha Ha Ha Ha!
Does anyone believe that?
No those taxes have gone to growing the Federal Government and keeping down the reported deficit.
And every citizen, except for the very poorest, will be required to in effect pay double for their retirement.
Every Ponzi scheme eventually fails when the supply of fools dries up.
Fortunately America is still chock a block with fools.
October 3rd, 2009 at 1:37 pm
That’s not quite true. Republicans don’t really want to cut spending on the programs they want, for example, military spending. And voters would behave more rationally (at least, according to some polls), if they weren’t constantly bombarded by propaganda that overwhelmingly comes from one side. Once again, following the Pareto prinicple, about 20% of the population is causing about 80% of the problem.
October 3rd, 2009 at 1:59 pm
Military spending is so bloated that serious cuts would give us, oh, a couple of decades before we had to worry about Medicare.
I don’t believe that health care costs will continue growing at the same rate forever. It just doesn’t *work* that way. So a couple of decades could be plenty.
October 3rd, 2009 at 2:30 pm
Ha etc.,
Uncap FICA tax and Social Security revenue increases by a third.
Beyond that, who cares? The US government couldn’t go bankrupt if it tried (I hated to admit it, but Cheney was right, deficits don’t matter). All of our debt is denominated in dollars and the Treasury owns the printing presses. Which begs the question, why even borrow instead of just printing the dollars to cover our deficits? Every dollar the Fed garners from debt sales leads to the creation of roughly 10 additional dollars by bank loans.
If we had full reserve banking (as both Paul Douglas and Milton Friedman advocated) instead of our fractional reserve system, the Treasury could create the same amount of total money as Treasury + banks do today. Congress could use the money to fund the government as well as finance real estate and other lending (banks could still make money on origination fees and lending up to the value of their deposits).
Yeah, that’s crazy, there’s no way a public option government system could operate as efficiently and profitably as private banks. Surely it will both cost too much and save too much money. Besides if the Framers wanted to give Congress the power to coin money and regulate the value thereof, they would have put that in the Constitution.
October 3rd, 2009 at 3:06 pm
a bar chart I would like to see is spending on defense-related expenditures as a percent of gdp. Per country including China, Russia, North Korea, etc.
October 3rd, 2009 at 6:01 pm
Beowulf
Art I, Section 8 Clause 4
I knew no one here really has read the Constitution
Also, you apparently don’t know the Social Security Act. Uncapping the FICA tax would only create larger Social Security benefits for the people who pay the uncapped tax, hence very marginal gains. Or untether FICA taxes from benefits and make it a lower and middle class welfare program
October 3rd, 2009 at 10:16 pm
It would never work. An attempt to balance the budget (a stupid goal anyway, since a currency issuer faces no solvency issues and has no more money to spend when it is in deficit than when it is in surplus) would withdraw so much money from the private sector that it would further tank the economy, and reduce tax revenues more than you could raise them.
What you are talking about was tried – in 1937. FDR tried to balance the budget (and also added a huge new tax – fica – to the populous, which didn’t help), and most of the gains that had been made since 1933 were wiped away and the budget went furthur into deficit.
October 4th, 2009 at 12:03 am
Mike K,
Further evidence of the Framer’s genius and foresight, I suppose, that they would think to use Ye Olde Internet (might have still been called ARPANET back then, look into it champ) to copy the exact wording I used. I can’t think of any other explanation.
On your second point, a program tagged as “a lower and middle class welfare” running a surplus is preferable to one unsullied with such shocking terms that runs a deficit. Sticks and stones and all that. The Social Security Act is not in the Constitution, not that I’ve actually read the darned thing since, um, this afternoon. The same Act of Congress that’d be required to uncap the FICA rate could also adjust the benefit formula.
October 4th, 2009 at 12:07 am
Obviously that’s Framers’ plural and sorry about the unncessary a in the quote. Its late.
October 4th, 2009 at 5:05 am
Looks like the muscle part of stimulus is about to start taking its shots. It doesn’t look lame, but it doesn’t look super duper either. Timing is good, though.
http://www.boston.com/news/politics/politicalintelligence/2009/10/biden_sets_new.html
October 4th, 2009 at 12:38 pm
Once again, following the Pareto prinicple, about 20% of the population is causing about 80% of the problem.
As I am fond of saying, Canada is basically a miniature version of the U.S., minus the South, plus Quebec. If that 20% were spread evenly throughout the U.S., it’d be less of a problem, but when that 20% is concentrated in about a third of the country and can elect enough representatives who are part of the problem to form the dominant part of one of the two major political parties, then it really can be responsible for 80% of the problem.