The New Republic

All well and good, but there's a storm brewing with people calling for Fair taxes, flat taxes, and consumption taxes. When you guys push taxes next time, make sure it comes with an explicit set of principles beyond meekly asking that they be progressive. The right is trying to overhaul our tax system (probably a good thing) and cut all corporate, capital gains, and estate taxes to zero. Several have pushed that. Cain has pushed cuts of 35 to 9, 15 to 9, and nonzero to 0 respectively. Romney argues that the middle class deserves a hefty cut in these taxes--is he a front organization? The middle class barely pays these kinds of taxes. You need rhetoric that points out that zeroing taxes is an attempt to deep-six the government, which for our purposes means defence and old-age programs. Then you need to point out that when Republicans do come up with offsets (raising taxes!) they tend to dramatically shift the tax incidence down the scale. Hence, radically reduce the top income tax to 23% (Huntsman) or 9% (Cain) and, if you're feeling arithmetical, add a consumption tax of 9% or some other flat number. But that tax is levied on everyone at the point of sale. And since lots of income isn't devoted to consumption if you're rich, the more you earn the more drastically your taxes plunge. And the poorer you are, the more your taxes go up. It's almost Dickensian, and someone needs to see this as the 2 by 4 that it is and bash Republicans over the head with it.

- chaitless

September 29, 2011 at 9:04am

What blather. If you can't do better than that, stay home. There is evil abroad in the land. It is the government-haters, Confederates at heart, in league with the pirates of capitalism posing as its pillars, just as they were in the Civil War, that colossally evil and stupid enterprise, in which greed became parasitical and persuaded decent people to hate their government and their own future and thereby destroyed it. It's happening again. They rip away sensible regulation, they challenge the progressive tax, first imposed here by Abraham Lincoln, as a communist plot, they empty the treasury and then refuse to replenish it by any means, they strangle the economy when it most needs nourishment because they are either economically retarded or preoccupied again with their own myopic greed. Meanwhile, persons of reason and good sense, wimps that they are, protest almost audibly but otherwise do not fight. Soon the walls will come tumbling down again, and it will be every man for himself. Hard times are coming.

- douglaswil

October 4, 2011 at 8:56pm

A civilized society recognizes this problem and vows to mitigate it. Unfortunately, our society also fails to recognize some people can't be helped. Could Bill Gates have made his fortune without government-financed education and technology? Such was made available to all. Gates and his ilk made the best of it, so it's his work, not "ours." Could Sam Walton’s stores have spread across the country without government-sponsored roads on which goods and customers travel? This argument fails in the same way. Further, no one (beyond a few loons) on the right denies road levies are needed. Having Sam's truck pay the same fare each trip as others do automatically proportions the payments to the delivered service. That's a true "fair share."

- karlwk

October 6, 2011 at 10:32pm

Paying a little bit of tax is like being a little bit pregnant. Or maybe a little bit aborted.

- skahn

October 10, 2011 at 12:37am

The key sentence is the second to last. Paying taxes is not an act of treason or surrendering the principles of the Founding Fathers. They did not complain about paying taxes. It was paying them without representation that irked them so.

- Bigarn

October 10, 2011 at 7:08am

I may not be a CPA, but I do know that there are two sides to the ledger, one for receipts and one for disbursements. By focusing entirely on the receipts side of the ledger, progressives fall into the Republican trap. Republicans, you will recall, have focused almost entirely on the receipts side of the ledger, believing, falsely, that by cutting receipts the other side of the ledger will take care of itself. Well, we have trillions in debt that disprove that. What's needed is a focus on the disbursements side of the ledger first, then a focus on the receipts side to offset the disbursements. It's only in the second step that issues of fairness and efficiency are appropriate. The budget battles should be waged on the disbursements side, not the receipts side. Again, focusing entirely on the receipts side is the Republican trap, for who among us wishes to pay taxes; it's a political battle that progressives are certain to lose. America has chosen to be the world's policeman. Fine. Let's define the cost first, then let us know how we will pay for it. Or the interstate highway system. Or Medicare. Or any of the other major items on the disbursement side of the ledger. Of course, that would require those who spend all their politcal capital attacking the receipts side of the ledger to identify exactly which government disbursements they wish to cut. And that's a political battle progressives can win. [As for the receipts side of the ledger, I have objected many times to Chait's position that redistribution in and of itself is a goal of progressive taxation. That is not only wrong as a matter of policy but wrong as a matter of politics (as is the related "morality" argument being made by the editors). That's not to say that I oppose progressive taxation; indeed, I support it. But not for its redistributional affects, but rather because (1) we have chosen a size of government (or, more accurately, we are required in a compex world to accept a size of government) that cannot be sustained by imposing the same tax rate on the bottom, middle, and top without doing serious damage to those in the bottom and in the middle, and (2) those at the top are able to bear a higher tax rate. I will note one reason for progressive taxation that some progressives have latched onto, to their detriment in my mind, namely that those at the top should pay a higher tax rate because they get more from government than those in the bottom and in the middle. Arguing who gets more out of government, from roads to defense, is a losing argument, for it assumes that government is a zero sum game, with winners and losers, a counterproductive argument if one believes all Americans have an equal interest in a strong public sector.]

- rayward

October 10, 2011 at 8:22am

The budget battles ARE waged on the disbursements side -- except Republicans are reluctant to actually say what they'd do with Social Security, Medicare/Medicaid, Departement of Education, and Welfare. From time to time, in the heat of Conservative groups, they'll suggest destroying them all. So their strategy since Goldwater in 1964 has been to hugely increase the budget through military spending, then in lean years suggest cutting the budget "across the board" because we "can't afford" all these "entitlement" programs. That IS the Republican strategy. It's also called "Starve the Beast", as you say cutting revenue in the vain hope that the Beast will automatically lose weight. And as you say, the results have been huge budget deficits while costs have not been cut. The Clinton years DID try to cut domestic (and military) spending, with some success. But the Republicans decry those years, blaming the economic success that resulted on the Tech Bubble. Really, the only argument that can succeed with Democrats and Independents is "Fairness". The Bush tax-cuts created an unaffordable AND unfair tax system, that actually taxes the wealthy LESS (through Capital Gains cuts) than the middle-class. Let's correct THAT situation on the basis of FAIRNESS.

- AllanL5

October 10, 2011 at 8:46am

@karlwk: The point is that we all paid for that infrastructure. If you were to invest your money in a company, and the company did well, you would expect a share of the profits, wouldn't you? That's the whole point of investing. We invested in Bill Gates's education, and in the roads Sam Walton uses. Their success would not have been possible without that investment. @skahn: Thank you for keeping your nonsensical post short.

- Dausuul

October 10, 2011 at 10:08am

Ditto rayward. The editors point out that there is "evidence" that we need more taxes to pay for "existing services" (like $40+ billion per year on Medicaid/Medicare fraud, farm subsidies for millionaires, etc, etc?); and "evidence" that higher taxes won't hinder economic growth (by extrapolating from the fact that we had growth after flattening most of the competition in WWII, or during the tech bubble). They don't say, as they should, that there is evidence that "the money is poorly spent". I'd say there's considerable evidence that a very great deal of it is. Let's fix that, then discuss how much we need to raise in taxes.

- Robert Powell

October 10, 2011 at 10:26am

RP and rayward miss it and AllanL5 gets it. If you don't remember, $500 bn of savings in the health care act came from cutting the growth of Medicare. In demagoguing the election, Republicans didn't even attack the mandate much--they used the fact that there would be cuts to Medicare in the future. So we kind of know what focusing on the disbursements side the ledger would lead to. (Note that ACA also raised taxes on the rich by means-testing Medicare some more, so it is more accurate to say that they tackled spending and revenue simultaneously. Health care is about 40% of the budget.) And need we even mention about the job-killing and surrender-inducing effects of cutting defence spending?

- chaitless

October 10, 2011 at 10:33am

Behind every successful individual is a set of public investments that past generations made. Could Bill Gates have made his fortune without government-financed education and technology? Funny that should be brought up. Probably like most engineering firms today, a large percentage of the engineers at MS were educated overseas. Combine that with the fact the US economy would collapse without foreign trade, and the underlying "social contract" of the world surely demands a 75% marginal tax rates on all US income over $25,000, the proceeds to be distributed to the world's "disadvantaged."

- karlwk

October 10, 2011 at 10:52am

@karlwk, Odds are a larger percentage received their educations here. Either way, I suppose you could make your point about 75% marginal tax rates on all US income over $25K to distribute to the "world's" disadvantaged and include the celestial inhabitants of both Venus and Mars so that it would pack even more punch. And it would do nothing to decrease how irrelevant your point already is. But that's the best you've got? Really? It is a bit trollish but thanks for putting it on display.

- dcwood10

October 10, 2011 at 1:00pm

I keep hearing about "fairness" but no one seems to be able to say what that means, except that "the rich" however defined, should pay more, however defined. The fact that the top 1% of tax filers pay about 20% of federal income taxes isn't mentioned, and that the top 10% of filers pay 70% of federal income taxes is likewise not seen hereabouts. I'm all for fairness - what do you think it might be?

- butchie b

October 10, 2011 at 2:37pm

What is needed is a full-throated Progressive program-- not only of fairness in taxation, but also in spending. Both domestically and for foreign wars. Tnr's editors make a part of that argument-- Elizabeth Warren a bit more. BHO weakly and inconsistently. Until that argument is convincingly made by Dem candidates, especially at the Presidential level, there is no chance to put Progressive policies in place. BHO and 2012 whether BHO is re-elected or not is almost certainly a hopeless cause for Progressives. Best move is to start planning for 2016.

- drofnats1

October 10, 2011 at 2:47pm

The argument that the “social contract” gives the state license to confiscate our private property because it has used previous confiscations to build useful stuff is deeply flawed. This erroneous logic suggests that because taxpayer funded achievements were exploited by some entrepreneurs in business ventures, the government now has dominion over all wealth and income and can take whatever share it sees fit to confiscate. Or because the state has bothered to perform its primary function, protecting our rights, we must now cede our rights to the state. After government has scavenged its “rightful share” of our income, what remains is graciously bestowed to the individual, not by right, but by permission from the state. If such a contract truly existed (perhaps presented for signature by the likes of Luca Brasi), it would be a gross violation of our fundamental rights.

- Nicomachus

October 10, 2011 at 2:55pm

Butchie. How about 40% as per the great years of Reagan?? Or 70 -90% as under Eisenhower when the US really dominated the world economically and militarily??? Have you never seen the graph showing that the more the rich are (nominally) taxed, the greater the US exceptionalism? Are you a data-refusnik, anti-US, treasonous wuss destined for a decade in Guantanamo for re-education (at best)?

- drofnats1

October 10, 2011 at 2:56pm

Well, fair is not nothing for starters butchie - that's the point of this piece. They said once that is agreed upon, that paying taxes is an act of citizenship, non-negotiable like jury duty. How is that number defined? I think we have to properly define the problem with the discussion first. My friends across the aisle scream that we're socialists, which is on its face absurd, hysterical and meant to shut down really analysis. Fair is it having the system rigged in your favor and screaming lies (socialism) when you're called on it, ie: 200 billion checks from Uncle Same outright to rich corporate pig farmers, socialist farm policies for huge farms to prop up a failed business model, tax payer bailouts for another, more catastrophically failed business model on Wall Street - one where the banks STILL bully citizens and own the government apparatus - all created and run by the Capitol Hill prostitution ring that really runs America at this point. As Krugman said this morning, this is hardly John Galt. Wall Street and the health care "industry" in no way resemble proper businesses any definition. This is Uncle Sam giving money to failed businesses that can't stand on their own two feet, which lecturing the average citizen about socialism, about the temerity of asking their government, that they pay for, to do a damn thing for them. So, let's first redefine what's real in this discussion before moving forward - take back the nonsense/smokescreen that's been foisted on as a narrative for too long now. Ding dong Reagan is effing DEAD.

- WandreyCer

October 10, 2011 at 3:07pm

BTW - the President of Bank of America perfectly exemplified the arrogance of the plutocrat-Capitol Hill prostitution ring when he said "we have a RIGHT (my caps) to make a profit." He exemplifies the change in the discussion that needs to happen. Calling this guy an ass and demanding that any system that creates such a monster change NOW - is not socialism. Unbelievable - Wake up pal - your limo must have hit a bump on the way up 5th Ave. NO ONE HAS A RIGHT TO MAKE A PROFIT. A profit is something you EARN through the goodwill and patronage of the customers you SERVE, who choose to buy your product because the competition of the marketplace makes it the best. Not because you are entitled to anything. Eff you!

- WandreyCer

October 10, 2011 at 3:13pm

Sorry, typing this is on a bus in a huge hurry - pardon my lack of editing!

- WandreyCer

October 10, 2011 at 3:18pm

Jill, I agree that fair is not nothing, and that no business has a right to make a profit. But - no one has said that the percentages I quoted are wrong, and no one has said that it's unfair on the low side. Many here focus on banking, but there are lots of non-banking rich who made their $$ fair and square. drof, the highest tax rate is 35% today, so we're not far from Reagan. My question, still, is - what's fair?

- butchie b

October 10, 2011 at 3:31pm

Let's agree that taking money from hard working wealthy people and giving it to lazy poor people is not the purpose of taxation. Taxation is to fund the government. The Bush Tax Cuts cost us $2.1 Trillion before we get to two unfunded wars and an unfunded prescription drug benefit. You can find plenty of things not to spend on, but how about paying for the debts that were already incurred? Now, given that you have to pay for these things, progresive rates are the best way to do it. Flat rates place too much strain on the lower half when you could have lower bottom rates and higher top rates.

- Nusholtz

October 10, 2011 at 5:03pm

Sorry, dcwood10, you may wish to wave off my point, but the point was valid. Consider my wife. She was raised in a poor country and educated through a masters in engineering. She took a second degree (at her family's expense) in the US, and then began work here. No one in the US paid a penny to educate her, and her experience is far from unique. One of the largest US engineering forces is at Caterpillar, and I'd say at least 1/5 of the engineers there have similar stories. The fact is, US engineering enterprises would come to a halt if the foreigners were pulled out. Here in the US, the Left decries that some come out poorly by their trades, and they need help. Given our imports of metals, fuels, components, etc., the poor of the world can make a similar claim on us. As the world's economies become more integrated, the US Left seems to be in danger of becoming merely a "national socialist" group. There's gaping holes in the Right's positions as well, but at least the basic capitalist structures readily embrace foreigners as well their own. This universal aspect gives it some appeal, an appeal the Left is often lacking.

- karlwk

October 10, 2011 at 5:23pm

I think what we need to do is rechristen health care as a national security issue and that solves the philosophical problem. And if Truman had gotten health care through in the late '40s, as Paul Krugman wrote a while ago, it would be as American as apple pie by now.

- ironyroad

October 10, 2011 at 5:28pm

Nusholtz: Flat rates place too much strain on the lower half when you could have lower bottom rates and higher top rates. I've long wondered to what extent a progressive tax structure is self defeating. The wages at the bottom especially are driven by supply and demand. Give them income in the form of government medical services, etc., and it seems likely competition will simply drop further the wage level. Perhaps economists comparing the US and European economies have been able to separate the effects?

- karlwk

October 10, 2011 at 5:29pm

Karlwk says, "Such was made available to all. Gates and his ilk made the best of it, so it's his work, not 'ours.'" This misses the point, as if the simple fact that a wildly successful entrepreneur has made better use of a common resource were somehow evidence that it was not really a factor in his success at all -- so let's not worry about maintaining it for others. The argument about globally educated workers is only a "slippery slope" straw man. The basic point is that governments provide a fundamental stability and infrastructure that allow businesses to operate, and so businesses should pay taxes to help maintain those necessities in the countries where they operate. As for foreign workers themselves: did your wife go to a public college? If a private school, did it maintain its own roads and power grid and transportation hub? Were all of her professors privately educated? Did campus security alone arrest criminals and repel hostile invaders and put out fires? Somewhere, some American taxpayers made her education possible. Then there's the argument of Nicomachus, with another straw man about government claiming dominion over all wealth. Oh, yes, exactly -- just as my phone bill suggests that, because I have benefited from telecommunication, the tyrants at Sprint are claiming ownership of all of my wealth and property. I think modern conservatives do secretly realize that the government-funded infrastructure and the social safety net contribute to success, but this is exactly the problem: they're desperately afraid some people will get some help that they don't "deserve," and that this will somehow mean that their own hard work and virtue will go proportionately unrewarded. So let's make sure future generations start with absolutely nothing(*), and then our children will live in a better world, one where they can safely judge poorer people as morally inferior. ----- (*) Well, except for their tax-free inheritance, if applicable.

- frippo

October 10, 2011 at 6:21pm

I just recieved my latest Snail Mail copy of TNR and read this disappointing editorial. The previous issue was so well put together and had some much good material that I was surprised and thought TNR was getting it's Mojo back. Then this drivel of an Editorial. TNR defends taxes. Wow, these guys are really out there on a limb. Next week they will cover death and let us know just because it's inevitiable, it isn't bad. TNR really blew this one because they were afraid to say what they wanted to say. They wanted to say that they want higher taxes, but were either afraid or confused. TNR alludes to higher taxes in their last paragraph, but pussyfoot around it. I am sure that most readers of TNR, of every political affiliation, are also supporting taxation to the tune of about $ 30,000 per year. Does TNR really think that someone paying $ 30,000 a year in taxes is a Scofflaw? Are they an Immoral Cad? I think the Temptations said it more succiently and clearly back in 1970. 'Politicians say, "More taxes will solve everything," The band played on.' 'Great Googamooga, Can't you hear me talking to you?'

- CRS9TNR

October 10, 2011 at 6:35pm

Actually, without death, things would get pretty crowded -- so, there's that. But if you are dead set against taxes, there are plenty of countries without them, usually because there is no functioning government to collect them. Of course, they also tend to be more full of death.

- frippo

October 10, 2011 at 6:40pm

Clarification: obviously everywhere has a 100% mortality rate, so instead of "more full of death" I should say "...premature death." Unless failed states, being free of excessive government regulation, have allowed unrestrained market forces to find the true value of human life, in which case I guess that's not a problem.

- frippo

October 10, 2011 at 6:52pm

butchie - why are you only including income tax? You full well know that FICA and medicare taxes just pour into general revenue like everything else, and that sales taxes are sharply regressive. When they're all added in, the numbers don't look so good, do they? As for "the highest tax rate is 35% today", I'm not sure whether you're serious or not. Who, that is "rich", pays 35%? Perhaps the tea partiers (and in that they have a good point that they are carrying a significant tax burden), but if you're "rich", you're almost certainly spending a lot of time ensuring that you maximise your capital gains income ( Which is taxed at 15%) and your deductions. What is vastly more important is total tax burdens, and unless you missed a long series of Chait posts, it's clear that its pretty flat. Talking about income tax alone is almost meaningless, as payroll taxes actually exceeded income taxes during the downturn. And once it's clear that someone at the bottom of the scale (who can least afford it) is paying the same percentage of their income in taxes as those at the highest (who can obviously afford to pay more), the fairness question should be pretty obvious. But you are right that "fairness" is probably not the best criteria. We need to raise revenues somehow, and ideally that it done in the fashion that causes the least economic distortion and harm. And all historic evidence just happens to indicate that that a more progressive taxation system gets us closer to that goal than a less progressive one. Capital is valueless and evaporates without labour after all.

- Nari224

October 10, 2011 at 7:21pm

frippo: Somewhere, some American taxpayers made her education possible. True, but to a tiny fraction of that provided by people elsewhere. The foreigners have the better claim. I'm not the one clamoring for a "fair share!" so let's not worry about maintaining it for others I don't argue that. I argue that disproportionate burdens are wrong. I have no trouble with taxes to pay for services, nor do I have a problem with a fixed percentage income tax. The progressive tax strikes me as wrong. Your income is your labor and thus your time. A fixed percentage means everyone gives an equal part of their time--fair enough. A heavy progressive tax seems to be a poor bandage for the problem with sloppy corporate governance found in the US.

- karlwk

October 10, 2011 at 8:26pm

karlwk wrote:"The wages at the bottom especially are driven by supply and demand. " The purpose of progressive rates is to minimize the exertion of government power to collect. When people who can not pay their taxes owe $345 billion to the goverment, a patrol of revenue officers are unleashed. As the debt grows, government looks to new methods of collecting such deficiencies and the courts, hard pressed to deny the collection of revenue, expand the collection powers of the government. Progressive rates are easier and more efficient to collect. Whenever government must force payment from people who cannot pay, we have a problem.

- Nusholtz

October 10, 2011 at 9:32pm

Since we produce virtually all that we consume and investment, with a couple of percent shortfall in trade balance that we should not tolerate, it follows that we can necessarily afford everything we spend on consumption and investment. All the income is right here. In the aggregate, revenues and expenditures are equal. The problem is that the government's share of expenditure and the government's share of revenues are not. This is easily remedied with progressive taxation if we had the political will. Tax away the surplus in the private sector and there is no deficit in the public sector. Neither consumption nor investment need change. It is an accounting problem. We don't do this because rightwing savages and lunatics who detest government have been lying about this for 30 years, first pretending that we could cut taxes and raise revenues in order to set us on this destructive path. The feckless left has failed to understand that it needs first and foremost to counter the rhetoric and money-driven political power of the right. Instead, like the good student, it obsesses about good policy in the naïve belief that it will be rewarded by the public for good policy. Not at all. It the Republicans have taught us anything it is that you can tell the most preposterous lies and get away with it, and even convince a large proportion of the public. The left needs a better class of lies because, gosh darn it, that's what sells in America. It would be impossible for the top 10% to garner the 50% of GDP that it does if the bottom 90% were not laboring away. It is therefore appropriate that the top 10% pay the overwhelming portion of the costs of government. 50% of NDP (GDP net of depreciation) for 90% of the population works out to $63,000 of take-home pay per household. That leaves only $3 trillion of take home pay for the top 10%, $272,000 per household. Cry me a river. But let's say that the bottom should pay 10% of its income in taxes, taking home only $57,000. That boosts the take-home pay of the top 10% to $330,000 per household, nearly 6x that of everyone else. Seems like enough. If we could then reduce our medical costs from 17.5% of GDP to 11%, as in France with equally good medical outcomes, we would have an extra $1 trillion. We have a country where rightwing and libertarian morons have essentially been determining economic policy, with a brief interlude under Clinton, for 30 years. It is a dramatically failed experiment. Time to move on.

- roidubouloi

October 10, 2011 at 10:14pm

For a nice little demonstration of how moronic right-libertarian thinking is, about taxes and pretty much everything else, try this little experiment: Rank the states by per capita income or by teen pregnancy rates. You will find that it fairly well splits the states between blue and red. You get similar results by educational attainment. The red states, where they believe all of the dumb right-libertarian shit, including their moronic ideas about creation, sex, climate, have the highest teen pregnancy rates and the lowest per capita income. If the blue states, where we don't believe or practice all this idiocy, were not propping up the red by transferring wealth via the federal government, the red states would likely have ridden their libertarian crap down to the level of Syria by now.

- roidubouloi

October 10, 2011 at 10:40pm

For a nice little demonstration of how moronic That split seems to have more to do with which of the states back in the mid 1800s--and they were all more libertarian at that time--chose industrialization and which chose slave labor agriculture for their economies. As it is, the industrial jobs now seem to be flowing south? If it weren't for all those bloated salaries you hate in the financial and industrials upper ranks up north, I doubt you'd find the split you're trying to point out. This is easily remedied with progressive taxation if we had the political will. I agree, but it can also be remedied with a flat percentage as well. It would be impossible for the top 10% to garner the 50% of GDP I see the income distribution problem as more of a problem with how corporations are organized and controlled. Progressive taxation is a poor fix for the underlying problem. Also, I'll point out that even if true, that 10%/50% part isn't the figure of merit. Consumption is what people feel. A fair bit of consumption for the bottom 90% is in the form of government distributions (welfare, social security, medicare, etc), and I don't believe those are tallied so in the "income" column. I read recently the Feds plan to start counting these. I'm curious how the balance shows. As for that 50% to the top 10%, a good amount of it is never consumed. It shows up as investment which returns a few % (about 6%?) as return for consumption (or reinvestment).

- karlwk

October 10, 2011 at 11:12pm

Not at all, karl. The split is not simply between North and South but between red and blue. Whatever the cultural origins, it is the states that believe in libertarian nonsense and try to practice it that end up poor, pregnant, and uneducated. We have nearly flat taxes now when all taxes, income, payroll, excise, state and local are taken into account. Not enough. Impossible for the top 10% to garner 50% of GDP? But that is the fact. Whatever causes the maldistribution of income, far and away the simplest way to solve it is progressive taxation that puts most of the cost of government on the shoulders of those who have most of the national income. It is a perfect fit for the problem. Detailed regulation of corporate behavior would be far more difficult. It is precisely the portion of GDP that is neither consumed nor invested that finances the federal deficit. We could leave both private consumption and investment largely unchanged just by taxing away the private revenue surplus, almost all of which is at the top. There is no reason to give the rich pieces of paper, treasury securities, for this money as we do now. All we have to do is tax it away and the federal deficit vanishes.

- roidubouloi

October 10, 2011 at 11:49pm

"Life Without Government" Bastrop, TX http:/keller.blogs.nytimes.com/2011/10/10/life-without-government/?ref=opinion Right on cue.

- roidubouloi

October 10, 2011 at 11:59pm

Do you think stricken residents of Bastrop will turn back the assistance from FEMA on account it comes from Big Gummint? You know, on principle.

- roidubouloi

October 11, 2011 at 12:00am

"A fixed percentage means everyone gives an equal part of their time--fair enough." Leaving aside the fact that the amount of time one must work to pay the bills is not a consistent factor across income levels, having people give a equal portion of *income* is not, in fact, fair enough. A flat tax falls harder on people with less, whether it's a 10% income tax or a roughly 30% national sales tax (presumably on top of existing ones) -- both are among serious proposals by regressive tax fans. People living paycheck to paycheck couldn't really afford either.

- frippo

October 11, 2011 at 12:34am

roidubouloi’s invites us to compare the relative success of red and blue states. Presumably blue states are far less libertarian and consequently more successful. Examination of the data shows this to be counter-factual. Let us case study California, a quintessential blue state and a bastion of left wing ideology. California has immense natural (e.g. agriculture) and human resources (e.g. silicon valley). It also boasts a very “progressive” taxation policy and ample government benefits. By all measures it should be an unequivocal success. So why is California government on the verge of bankruptcy and the state in economy in free-fall? According to the “2010 State Debt Medians Report” California has one of the highest per capita and per income debt burdens. This is somewhat surprising since California has one of the highest effective per capita tax rates in the country. From whichever angle you slice it (per capita, % if income, % of state GDP, etc) California taxes is among the highest in the nation. In June 2009 Gov. Arnold Schwarzenegger said "Our wallet is empty, our bank is closed and our credit is dried up." Furthermore, California’s economy is failing. Each week brings news of yet another business that has decided to relocate out of state to escape crushing regulation and taxes. California has one of the highest unemployment rates in the nation - 12.1% as of August 2011 (Bureau of Labor Statistics). At the same time, California’s grade K-12 education system is consistently ranked at the bottom in math, reading, science, and variety of other metrics. For those that have children in the California public school system, this comes as no surprise. This is the net result of “blue state” policies. roidubouloi’s intense personal hatred of all things libertarian seems to have driven him to a kind of intellectual psychosis. Irrational with rage he has equated libertarianism with fascism, communism, cultism, creationism, and all manner of villainy. He hallucinates that libertarians have acquired some modicum of national power and persecute him with their twisted ideology. There is no honest difference of opinion here, in roidubouloi’s mind, Evil walks the earth. This would be amusing if it were just a simple case of sophism, but I fear roidubouloi actually believes the bile he is spewing. Ironically, he accuses libertarians of blind theological dogmatism. Take a good look in the mirror friend and wipe the foam from your mouth.

- Nicomachus

October 11, 2011 at 1:26am

The principal reason this discussion goes on and on without really getting anywhere seems to me related to the tendency of some to ascribe highly complex phenomena to highly simplistic causes. Surely many of the differences between "red and blue" have more to do with two hundred years of effects from two radically different social and economic systems than with current political ideology held by a tiny minority of their residents, most of whom don't have one or vote much. And California does in fact puncture the theory effectively on its own. Similarly, chaitless, roi, Alan, etc seem to think every problem can be addressed by pointing out Republican perfidy. I'm not saying that perfidy doesn't exist, just that it is displayed throughout the political spectrum, and shouldn't be allowed to distract us from what we need to do. This is not really economics, but politics. If one wants to start with a baseline that every wasteful, corrupt, and stupid program of government needs to be funded at current levels, and the solution is simply to continue to raise taxes until either everything is paid for or no income is left to tax, you will not find many takers among America's electorate. This is about as hopeless as arguing that we can dispense with government in its totality, which I believe no one, even in Somalia, is asserting.

- Robert Powell

October 11, 2011 at 2:13am

roidubouloi writes: “We could leave both private consumption and investment largely unchanged just by taxing away the private revenue surplus, almost all of which is at the top.” This assertion would only be true if the wealthy hoarded this so called “surplus” in mattresses and private safes. In reality, any surplus is invested in stocks and bonds, business ventures, banks that lend to others, and various other vehicles. In reality, the financial system transfers one person's savings to someone else who can spend it. In fact, the federal funds market and overnight repurchasing agreements exist because institutions refuse to sit on unused cash even overnight. The wealthy (whoever is considered wealth by roidubouloi's standard) understand this concept quite well. Removing funds from the economy impacts private consumption and investment with perhaps the aforementioned minuscule exception of funds in safes and mattresses.

- Nicomachus

October 11, 2011 at 3:20am

What's with the italics? @Nicomachus--I would just add that there's an implicit assumption in roi's formulation that money taken away from "the rich" by the goverment would automatically go towards good purposes, minimally increasing demand and maximally solving all our problems. Many of us feel that sending additional money to Washington under the current circumstances is at least as likely to cause harm through unintended consequences of new programs being funded.

- Robert Powell

October 11, 2011 at 6:15am

There isn't enough foam in the world, nichomachus. Libertarianism is indeed an evil and psychotic ideology, the mirror image of communism. Can there be an "honest difference of opinion?" Sure. There can be an honest difference of opinion with an orthodox communist too. So what? We still need to understand that, notwithstanding its utopian pretensions, the spittin' image of the utopian pretensions of libertarianism, in practice it is simply evil. Real, appalling, disgraceful, immoral, horrifying evil. It should not be entertained by civilized people and the true believers should not be permitted to pollute important discussion with ideologically driven lies. They can talk, but we need to call out their lies for what they are, every time. Libertarianism is the intellectual garb of extremist laissez-faire capitalism, a practice so thoroughly discredited by the end of the 19th century that even such an arch conservative as Otto von Bismarck had to invent the social security system to moderate its vicious extremes. Libertarians, however, are nostalgic for an imagined utopia that never existed. It was only when the extremes of laissez-faire capitalism were brought under some kind of control that capitalism was able to generate the most extraordinary and unimaginable growth in wealth. Libertarianism bears the same relationship to capitalism as Marxist theory bears to socialism, a theory that assures us of blessing but, in practice, produces nothing but loss and harm, leading only to the next rationalization for how it didn't work out this time but will for sure next time. The communists too were masters of such ex post facto rationalization. Just like libertarianism, communism always failed because "it did not go far enough, was not extreme enough. Just like libertarians, Marxist theorists would say, oh, it isn't the theory that is wrong, it is just the way it is put into practice. Well, there is no way to put libertarianism into practice that is not devastating. Everything we have done in that direction since the advent of Reagan has been a disaster. No matter. The libertarians insist that we just haven't been extreme enough. Sorry, friend, but the philosophizers cannot be excused from culpability for the outcome they midwife any more than Marxist theorists can be excused from the horrors they produced just because they were not themselves wielding weapons. We have to recognize evil when we see it and all it for what it is. As for the psychosis, you can see it on display constantly right here on the pages of TNR. Just as orthodox communists continued to maintain that communism was a great blessing to the people even as it was wreaking economic havoc and rendering them impoverished, requiring therefore brute force to sustain itself, so too libertarians. They are completely oblivious to reality. They will maintain that progressive taxation is inimical to growth although that has been the complete opposite of our own experience of the last 100 years. Indeed, the 20th century in the west brought incredible growth, but only after all of the programs, all of the mitigation of laissez-faire that libertarians now rail against, were introduced. Does the fact that Medicare has for decades grown much more slowly than private medical expense keep libertarians from claiming that it is public medical care, rather than the private so-called market, that is out of control? No it does not. They just keep repeating the same demonstrably false claims endlessly. Does the actual history matter to libertarians? Of course not. They are psychotic. Completely impervious to facts in the same ideological manner as the communists. We tried laissez-faire capitalism, nichomachus (very funny that). It was a horror for millions. We outgrew it. Libertarians want to drag us back into that nightmare and are doing a fair job of it despite the fact that we live in a liberal, advanced industrial economy that has done a much better job than anything that came before it and have examples of how it could be better. As for simplistic, what could possibly be more simplistic than libertarianism? Nothing. Eliminate regulation, eliminate taxes or at least cut them to the point that they pay only for what libertarians like, make them as regressive as possible and, voilá, utopia. Pragmatic liberalism is messy, a little more here, a little less there. Try this, try that, try to adjust, try to moderate the extremes. Libertarianism is simply enough for a two-year old. Exactly as simplistic as the idea that sweeping away capitalist forms of production will produce utopia. You are a purveyor of an odious ideology, nichomachus. I have no trouble saying so, again, and again, and again, and again. As long as there are libertarians around dumping their lies into the public forum, it needs to be said.

- roidubouloi

October 11, 2011 at 8:21am

Your screed above is manifestly unfair, roi, and ahistorical to boot. I urge you to pick up "The Road to Serfdom", in which Hayek carefully debunks most of your take-it-to-the-extreme descriptions of what respect for liberty actually means in practice, including taxes to provide necessary services and protection against favoring one group over another. Republican policies of crony capitalism bear about the same relationship to libertarianism as voodoo to modern cardiology. The idea of individual liberty as we know it today has its roots in the Renaissance, and over several centuries produced the most amazing growth of wealth and well-being the human race has known. Leftists are impatient with even this spectacular accomplishment, and want to "speed up the process" by reverting to the pre-Renaissance world where the State/Church/King owned everything, and dispensed crumbs from the table to chosen groups. Everywhere this "progress"has been tried it has been a miserable, at times genocidal, failure.

- Robert Powell

October 11, 2011 at 8:49am

Sorry, nichomachus, but your grasp of macroeconomics is too limited for this discussion. Leaving aside imports, GDP is the sum of consumption, investment, and government spending. This is an accounting identity, meaning it is not approximate but exact, even if we cannot accurately measure all the pieces. That means that total output (income) exactly equals total spending, including inventory changes. If the government has a deficit, that means that the private sector has an exactly equal surplus IN EXCESS OF ITS AGGREGATE CONSUMPTION AND INVESTMENT. Just do the simple arithmetic and perhaps you can see why this is so. What happens to the surplus? It does not go into consumption or investment because it is a surplus in excess of those. Does it go into mattresses? No. It is used to purchase Treasury securities, funding the government deficit. The two exactly cancel out. When the government spends, it prints money. In order not to generate inflation, most of that money has to be withdrawn from the economy. There are two ways to do it, borrowing and taxes. Borrowing a dollar or taxing a dollar withdraws the exact same amount of money from the economy, a dollar. The trick is to make the withdrawal that has the desired effect on demand, or at least has as little of the undesired effects as possible. When you borrow, the people who are not going to spend all their income on investment or consumption self-select and give the government their surplus, through however many financial intermediaries it takes to do that. When you tax, some portion of what you withdraw comes from people who would have spent it. Thus, taxation potentially reduces private demand by as much as it increases public spending. But we do not need perfection here. And it is clear where you have to tax to have the least private reduction in spending, at the upper end, because that's who doesn't need all the income. Now, popular in right-wing and libertarian circles is the notion of "crowding out," that taxation at the upper end will reduce investment. This is certainly nonsense in a slack economy where there is relatively little reason for investment anyway. Best thing you can do under those circumstances is take so-called investable funds and spend them. But it is also not true in general. Investment responds to private demand. Period. Forget government. All it does is use up a share of productive resources. The balance of labor and capital then serves private spending. What happens if there is not enough investment relative to spending? There is a shortage of goods and services relative to demand and the price goes up. When the price goes up, real labor income goes down. When real labor income goes down, profits go up. The profits and the unfilled demand signal to the market that more investment is needed. Is the adjustment perfect? No. The point is that the market has to solve the identical problem of matching investment and consumption with or without government spending. There is no basis for the idea that the fact that government commandeers a share of productive resources creates a mismatch between private consumption and private investment. That's as much real, as opposed to wacko libertarian, economics as I think you can take for one day. __________________ Speaking of reality, were we speaking of reality? Wasn't California the very place where the right-wing anti-tax wackos sold the snake oil of Proposition 13 that was going to create libertarian nirvana? California is currently 11th in the nation in per capital personal income. It is 9th in per capita taxes. Taxes as a percent of personal income, 6.45%. National average, 6.05%. You think maybe you are barking up the wrong tree here? Heck, imaginary economics and libertarianism are like hand and glove. ______________________ I don't think every government program is a good thing, Mr. Powell. Quite beside my point, which is that, whatever level of government is democratically decided upon should, under normal circumstances, be fully paid for by taxes, and that the fairest, most efficient, and most economically advantageous way to collect those taxes is with progressive income taxation on a full economic basis, no exclusions. Given the skewness of income is this country, that means sharply progressive taxation. If we have a structurally balanced budget, then you can fight about what is worth funding all you want. But then you have to get the votes, you cannot "starve the beast." Getting the votes without flim-flammery is what libertarians and the rest of the right don't want to have to do. Anti-democratic.

- roidubouloi

October 11, 2011 at 8:57am

That's truly nonsense, Mr. Powell. We have no socialists on the left anymore, and, within the liberal left that dominated the American left from the 30s until today, they were always regarded as extremists even when they were more than a handful. In sharp contrast, the Republican party has actually been captured by extremists. There is no longer any such thing as a moderate Republican other than a handful of powerless leftovers from an earlier era. Apart from the fact that the libertarian "corrections" to welfare capitalism have all been a failure, it is regulated, welfare capitalism, based on progressive income taxation, not laissez-faire capitalism, that has been overwhelmingly responsible for our greatest growth and wealth. Why then should any sane person pay attention to simplistic claims that we should wholesale abandon what has worked so well in favor of de-regulation and regressive or flat taxation, returning us to a pre-welfare capitalism that did not work and was a parade of horrors? Does that mean, however, that every regulation is good, every aspect of the tax system is just as it should be? Of course not. But there is a world of difference between attention to the particulars and the extremism of libertarianism.

- roidubouloi

October 11, 2011 at 9:06am

Let's stop wasting time with straw men roi. I don't think you're advocating state control of the means of production, and I believe that by now you know perfectly well that I'm not advocating the total destruction of the State. We should have as much government as we need and no more. Currently I think we have way too much--more than we can afford, in more than one sense. Do we need sensible bank regulation, a reasonable social safety net, a justice system that enforces the Constitution, and a competent defense establishment? Of course we do. Do we need unlimited, non-means tested, corruption-riddled entitlements feeding the explosion of healthcare costs, subsidies for millionaire farmers, a military the size of the rest of the world's combined, a militarized drug policy tasked with saving us from ourselves at inestimable foreign and domestic cost, a sprawling "intelligence" community, and Homeland Security tasked with removing all possible risk from life? I don't think so. Surely there's room for compromise here. In terms of history, taking the last 500 years I don't think you can make a fact-based case that our greatest breakthroughs in growth and wealth have occurred under modern welfare state circumstances. It works pretty well most of the time, but without the scientific breakthroughs of the Enlightenment and industrial revolution, it wouldn't exist at all. We need a sensible balance of individual liberty and state, and right now a lot of us think we've got a lot more State than we need, especially given that a lot of what should be done by the State is being done poorly or not at all--see bank regulation and domestic security.

- Robert Powell

October 11, 2011 at 10:08am

I think roi is right in the main. RP says we are getting too much state. Health care spending and the employer-funded tax break mean that we spend far too much for a non-universal health care system. But if we had France's health care system, we would simultaneously have more state, more effective health care, and less cost. If you define "state" by how much the state is spending, then sure, we have too much "state" when it comes to health care, education, and defence. But if we ran South Korea or Finland's education system, we would instantly find out that for the amount of money we spend on "state", we could get much better results.

- chaitless

October 11, 2011 at 10:18am

karlwk wrote "it can also be remedied with a flat percentage as well." Let's say a 10% tax collects "$X" in revenue but it means no deductions and because of no deductions, it means that many at the bottom will have a tax that they can't pay. At the same level of $X collection, wouldn't a 2% tax at the bottom and a 15% tax at the top be preferred?

- Nusholtz

October 11, 2011 at 10:39am

France clearly has a better, and much more effective, healthcare system. They pay 9.7% of GDP for the WHO #1 top rating, while we pay 14.6% for #17. We're clearly not getting our money's worth in education spending, not to mention other areas. All I'm saying is that in political terms, Dems would be a lot more effective in convincing people that we may have to pay more taxes if they would address some of what absolutely everyone knows are massive systemic problems. Let's be practical.

- Robert Powell

October 11, 2011 at 11:37am

Once again, RP, it's very important to point out political realities at they exist today. If we had France's health care system, we could start to crimp cost growth to at least make sure that 17% of GDP doesn't grow further out of control, if not take it down to 12-13% of GDP. The avowed interest of the Democratic Party's platform was to do just that. Republicans cried death panels and almost refused to let any meaningfully comprehensive bill out of committee. As a result, they scrapped "single-payer" or "Medicare-for-all" schemes to take the costlier private insurance pathway. And Republicans tried their darnedest to stop that in its tracks. What's more, they built their 2010 campaign on how Obama both ran roughshod over democracy by trying to accommodate them, and approved cuts to Medicare cost growth that amounted to increased cost sharing and means testing. These same people then say that the only way to solve our problems is to means test Medicare and Social Security. But not just yet, mind you. We can't harm today's seniors, whom we've made promises to (and continue to bribe for votes), but somehow people under age 55 right now are not really parties to the same social contract. In fact, we might as well cut off Medicare guarantees to them and give them a voucher that is guaranteed to fail at providing medical care to a significant fraction of the future elderly. It beggars reasonableness to be a Republican these days. It's nothing more than a tribe that uses Fox News to hawk its wares of identity politics.

- chaitless

October 11, 2011 at 1:02pm

roidubouloi, I must pay you a compliment. You have a very effective debating style. You inundate your opponents with so many garrulous fallacies that they are paralyzed in the face of choosing which artifice to rebut next. Your adversaries simply drown in a deluge of falsehoods, hopelessly overwhelmed by the effort required to refute the sheer quantity of hogwash. I could not even get passed the first paragraph where you enlighten us as to the constituents of GPD, a rudimentary macroeconomics concept known to all underclassmen. You further state: “If the government has a deficit, that means that the private sector has an exactly equal surplus IN EXCESS OF ITS AGGREGATE CONSUMPTION AND INVESTMENT” In the context you presented, this statement is obviously true, but what has this to do with the price of tea in China? All you are proving, rather like counting the number of cow legs and dividing by four to get the number of cows, is that net GDP equals the sum of its components…WOW. Given the reference to my lack of macroeconomic proficiency, I was hoping for more. There is also this rather pedantic axiom: “This is an accounting identity, meaning it is not approximate but exact, even if we cannot accurately measure all the pieces.” LOL, Really? Give me a little credit. You must be accustomed to debating with imbeciles (you can hit this one out of park if you want). For the record, I never refuted the fact that government redirects resources into treasury notes by various mechanisms. All I asserted was that had it not done so, the economy would have allocated those funds to other productive purposes. These funds would not be lying around useless if not for government. I am happy to debate whether that is true or not or if government is a better allocator of resources then the free market in this instance, but please refrain from launching pedantic torrents of tiresome truisms. By the way, I am not a libertarian, but I agree with many of their positions. I actually agree with some of your positions too, you occasionally make some good points, but they are eclipsed in self righteous wrath and other mambo jumbo.

- Nicomachus

October 11, 2011 at 2:41pm

10/11/2011 - 10:08am EDT | Robert Powell Robert, right on. Though I fear this sentiment will fall on deaf ears.

- Nicomachus

October 11, 2011 at 2:45pm

Chaitless writes: "Once again, RP, it's very important to point out political realities at they exist today. If we had France's health care system, we could start to crimp cost growth to at least make sure that 17% of GDP doesn't grow further out of control, if not take it down to 12-13% of GDP." Consider France pays their doctors an average salary of $55K. We pay $150K. And our union fork lift drivers get $70K. Tell me, if we just dropped France's system into the US and bumped the $55K figure up to $150K, what do you think would happen to the 11% GDP they spend on health care today? I suspect that since health care is very labor intensive, it'd head north of 20%. Alternately, we could take our fork lift drivers and doctors and teachers and engineers, and drop their salaries to 1/3 the current level. Adn then we'd come close to matching France's 11% figure. But either way, you are dreaming if you think there's a quick fix to any of this. Yelling "hey look over there!" while ignoring these realities is silly.

- seattleeng

October 11, 2011 at 3:29pm

Labour is about 20% of health care spending in the US. If anything, there is a physician shortage since all those uninsured people need regular doctors. That said, the staff we do have are overcompensated. Remove the inefficiency of having to pay hundreds of thousands of dollars in order to get a medical education and you can reduce compensation in the US. It also would help to shift away from fee-for-service to a salary-based compensation scheme. In any case, there's no way that tripling the cost for labour in the French health care system would cause a jump from 11% to 20%. It's unpossible. Maybe 13 or 14%, if we're being generous. If you graduate debt-free in six years from studying medicine in France, why do you need $155K? You don't.

- chaitless

October 11, 2011 at 3:39pm

Sorry to be late, nari, but I include only income taxes because those are the only tax rates the President talks about when he says that "the rich" (now moved by Schumer from $250,000 to a million) don't pay their "fair share." Whatever that may be. yes, I'm aware of other taxes, FICA, etc., but BHO is not talking about them. And yes, federal income tax rates top out at 35% on ordinary income - but the President has not not proposed raising the capital gains tax, so far as I know. My comment was limited by design - a wider discussion would be fine. tell the President, don' t tell me.

- butchie b

October 11, 2011 at 4:00pm

The article states: “Nobody questions whether society can require people to serve on a jury or, in times of war, to enlist in the military. So why do we question whether society can require people to pay for the government whose services, and protection, they enjoy?” Unknowingly the authors refute their own argument. The answer to the rhetorical question is precisely because the people, who are being compelled to pay for these so called “services” and “protections”, do not believe there is a net benefit. Jury service is payment for living in a society of laws where citizens can settle disputes in the courts rather than through force – a truly universal and necessary benefit. Similarly, military service is required payment for protection from foreign aggression and although it has been abused in the past, this benefit is both necessary and universal. (I can’t pass up the opportunity to note that the Left has throughout history taken exception to this requirement; so it is interesting to see it presented as an argument in support of leftist policy.) Another key aspect to these two benefits is that ONLY government can provide them. For obvious reasons, the legal system and a national military cannot be controlled by free enterprise. In summary, jury duty and military service share two key aspects (1) they are universal necessities and (2) they can only be provided by the state. Now contrast this with the other so called “protections” and “services” provided by the federal government. Let us take the social security entitlement for example, a perennial favorite of the left. Like many Americans, I do not look forward to social security playing a large financial role in my retirement. I am compelled by the state to participate despite my belief that I could better allocate the money being siphoned out of my pocket to fund the program. I can go on and on about the folly of social security, but the key point to make here is that it lacks the two essentially ingredients required for general acceptance by the tax payers. Social security is not a universal necessity nor is government the only possible purveyor of the benefits attributed to it. This assertion is self evident in the fact that countless people already provide for their own retirement, completely independent of any government program. Thus, I have answered the author’s self defeating questions as to why taxes and jury duty are two very different things.

- Nicomachus

October 11, 2011 at 5:30pm

What's with the italics? Sorry folks, that appears to have been my fault. I think I failed to close an HTML tag and the forum software let it pass through, affecting the rest of the page.

- karlwk

October 11, 2011 at 8:01pm

Sorry, nich. You think you understand, but you don't. However, I detect a willingness to learn so I am going to take you through it step by step. Your claim is this: "I never refuted the fact that government redirects resources into treasury notes by various mechanisms. All I asserted was that had it not done so, the economy would have allocated those funds to other productive purposes. These funds would not be lying around useless if not for government." You have cause and effect backward. If not for government, those funds would not have existed in the first place (and I don't mean in the general sense of government making it possible for the economy to run). It is the government that created those "resources" through its deficit spending. Hence, without the deficit spending, there would have been no surplus to allocate. Here's how it really works: Let us ignore the distinction between private consumption and investment as it is irrelevant for present purposes. Let's just all private spending C. Call government spending G. C + G = Y, where Y stands for GDP. In the aggregate, revenues must equal spending; what someone spends, someone gets. Call the private sector income I and the government sector income F. By accounting identity, C + G = I + F. This leads directly to: I - C = G - F. I - C is the private sector surplus, its income in excess of its spending. G - F is the government budget deficit, its spending in excess of its income. The government is the autonomous actor here. So long as it runs a deficit, the private sector must have an equal surplus. If the government does not run a deficit, there is no surplus. If the government runs a surplus, the private sector has a deficit. If, as you suggest, the private sector tried to spend the surplus, then C would go up and I would go up in an equal amount. The private sector surplus would be absolutely unchanged because it is not the result of private sector spending and income. It follows that the surplus is not a "capacity" or a "resource" for the private sector to spend. It is simply income given to the private sector by the government in excess of the income produced by the private sector autonomously. The mechanics of this are surprising, but actually quite simple. When the government spends money, it is creating money that did not exist before. There is no law of nature that says the government must retrieve the money it has created. It could fund itself just by printing money. However, if it did so we would get a roaring inflation by and by as the money supply in the private sector would be increasing at a much faster rate than private sector output. Let us just accept that inflation is bad. The government therefore has to soak up most of the money it creates in the course of spending. It can do this in one of two ways, by taxing the money from the private sector or by borrowing it from the private sector. Either way, the government extracts the money it created. Either way, the funds put out by the government when it spends do not remain in the economy. From the standpoint of the ability of the private sector, in the aggregate, to spend, there is no difference between taxing the money away and borrowing it away. That, however, is only in the aggregate. Because different portions of the private sector have different propensities to spend. If we take it as a given that people on the bottom end of the economic scale pretty much spend their income, it also follows that the extra money issued by the government has to have accumulated as income at the top end. Hence, if you don't want adversely to affect output when you retrieve the excess dollars, you want to take the dollars from the people who have the excess and therefore will not have to cut their spending when those dollars go away. Particularly in a recession, there is some efficiency in terms of output to borrowing the money back rather than taxing it back. That is because the people who are inclined not to try to spend their piece of the surplus self-select, giving back to the government as the price of bonds only that which they were not inclined to spend. If you tax, you are inevitably going to take some more money out of the hands of people who would have spent it on something, because she cannot identify who is who on a tax return. We report income, not spending, and no one would save if they knew their savings would just be taxed away. However, while there won't be quite as good a fit between surplus and sending money to the government when we tax, if the taxes are levied at the upper end, you can be pretty sure that you will get reasonably close. Contra your claim, the private sector surplus has nothing to do with the resources available to the private sector to spend. That surplus is purely an artifact of government deficits, extra income to the private sector that, by definition, it does not require to sustain its spending as its income without the surplus is equal to its spending. And that surplus will only remain with the private sector if the government neither taxes nor borrows it away. That is, if the government just prints the money. There is a somewhat different issue of how the creation of a private sector surplus affects spending behavior. For example, there is a decent argument that a government surplus increases investment because it takes money from consumers and, by using it to buy up Treasuries, puts more money into the hands of investors who then try to spend it they way they do, on investment. Conversely, running a deficit takes money from the hands of investors and puts a lot of it in the hands of consumers by spending it. This is a good thing in a recession as investment demand will be even more slack than consumption demand. Finally, it is possible that the presence of extra cash in the hands of the private sector helps induce private sector spending. This is actually an argument for printing money. Instead of taxing or borrowing back the money the government creates, it just leaves it out their to enhance spending psychology. Mechanically this happens by the Fed buying up the Treasuries that the government issues so that the government isn't really borrowing the surplus back from the private sector; the government is the market for its own securities. Indeed, this is going on, although arguably not nearly enough. If the surplus money builds up in the hands of the private sector because the government is just printing it, and there are no Treasuries to buy, sooner or later you would expect people to start trying to spend it. Eventually that may generate inflation, at which point the Fed would have to issue debt to soak up the surplus. But we do not seem to be anywhere near that point. Only the budget vigilantes are keeping us from doing the right thing out their fear of inflation, some of which would be a good thing. I don't know whether you can follow that or not, Nich. You can take comfort in the fact that the conceptual mistakes you are making are quite common, resulting from the tendency of people to think of the economy as if it were a large household. It isn't, and applying to macroeconomics the intuitions we all have from managing finances privately leads to many such errors. In short, contra what you claim, the entire reason we have a recession and unemployment, indeed the very definition thereof, is that private sector funds are lying around uselessly. The government, by increasing its spending, can offset the recessionary tendency of the private sector to leave funds lying around uselessly. That is exactly what it should do. It can increase its spending by taxing, by borrowing, by printing money. We should be relying primarily on high-end taxes and printing money. Then we would have little or no increase in the public debt. When the economy turns around, we could run deficits to soak up the excess money. Even smarter would be to raise taxes at that point.

- roidubouloi

October 12, 2011 at 12:56pm

To clarify a point, what we should be doing right now is increasing taxes significantly at the high end, say above $100,000, and especially above $250,000, to moderate deficits, while printing money for a large chunk of the rest of the deficit that remains. If inflation starts to appear, we can raise taxes some more to prevent it from getting out of control. At that time, making taxes much more progressive, toward to progressivity pre-1980, reducing them below $100,000 and increasing them above, would be an excellent way of keeping the economy growing.

- roidubouloi

October 12, 2011 at 1:21pm

There are many types of public goods. I would not lump education and roads together. Bill Gates probably derives exactly the same benefit from public highways as does the middle class worker at Microsoft. Without the jobs that Bill Gates' provides , the education of the middle class worker might have little value. So it seems that Gates and the government have a complementary relationship which gives the middle class worker a better life and higher income. So maybe we should raise taxes on the major beneficiary of : the middle class worker; and eliminate corporate income taxes?

- rvogel

October 12, 2011 at 8:00pm

roidubouloi, thanks for your relatively respectful comments, I will respond in kind. First, you are correct that I did not initially understand the meaning of “surplus” in the context you have used it. However, I think that this is almost entirely a matter of semantics. In this post, I will focus on taxation so that we may have a manageable conversation. Your essential point is that the upper classes (those you define to be making $100k or more) have “excess funds” which are essentially useless to the economy- i.e. these funds are not contributing to aggregate demand. By seizing and spending these idle funds (directly or through transfer payments), government can put them “in play” economically, consequently expanding demand. Have I captured the conceptual core of your argument regarding taxation? There are several indispensable premises in your argument the require scrutiny: (1) Implicit in your argument is that the principle economic problem is lack of demand and increasing it will lead to economic benefits. I think this is a bit one-dimensional, but let us agree for now. (2) You believe in the concept of “useless funds”. This is where I challenged previously. If funds are invested in any manner, then they in turn drive demand. If interest is being paid, then someone is utilizing the money for productive purposes and contributing to demand. How can funds truly be excluded from economic activity? They would have to be parked in a 0 interest dead-end financial instrument - an economic end point equivalent to a mattress. Despite the best efforts of the Federal Reserve, there are still plenty of savings instruments. So where are large quantities of these “useless funds” kept? If you find such moneys, I give you my personal consent to tax it away from the blockheads who posses it. We can call it “the tax on stupid people”, akin to the lottery. (3) Finally, either you do not believe in or disregard the impact of taxation on incentives that lead to key economic activity - namely, the incentive to work and take financial risks. I assume you have thought this through. Can you speak to it? I would be interested in hearing your point of view

- Nicomachus

October 12, 2011 at 9:53pm

My point, Nich, is actually slightly different. You say that if the government didn't take the excess funds out of the economy, they would be put to some other arguably more productive use. My point is that you have cause and effect reversed. The government is not taking those funds out of the economy because the government has a deficit. It is the government deficit that created those funds in the economy in the first place. When the government then withdraws the surplus by borrowing or taxing it away, it is not taking from the private sector anything that could have supported additional spending. It is withdrawing excess, useless funds, primarily in the hands of investors, that would otherwise generate inflation. In a recession, some inflation would actually be a good thing. But all that means is that, rather than withdraw the whole surplus produced by the government deficit, it could leave a big chunk of it out there to try and create some inflation. Enough of a cash build up will do that eventually. The money only appears to be invested, because financial assets are not really investment. Those, be they stocks, bonds, or bank deposits, are intermediate forms for holding real assets. Since we are in a recession and not an upswing, aggregate real investment is what it is for the time being. When there is more money in the hands of investors, and the government is not borrowing it to add to the pot of interest income, then the additional money ultimately just dilutes the investment return of intermediate assets. Since there is no difference from a banking standpoint between the older money and the new money, the surplus turns up as book profits in the first instance and then when held in bank deposits it just dilutes the interest earned on bank deposits. Just spreads more or less the same interest amongst a larger deposit basis because there is not additional real investment generating additional real returns to add to the interest pot. Of course, people with the surplus can try to get rid of it by buying financial assets, but then the people they buy the assets from have the surplus. It is still just sitting there as bank deposits, money, diluting the bank interest rate. The surplus in the private sector arises because both the private and public sectors have a mismatch between their revenues and their expenditures. And the amount of the mismatch must be exactly offsetting. If we simply re-arranged income, via taxation, so that the income of the government went up and the income of the private sector when down, the deficit and surplus disappear without need of any change in the expenditures -- the consumption if you will -- of either the private sector or the public sector. The devil of course is in the details. While one can make the statement that, in the aggregate, the surplus can be eliminated this way, the process of taxing can change the distribution of the surplus and end up having a contractionary effect on spending. The reason for borrowing rather than taxing is that this more precisely extracts the surplus from those least likely to spend it. The fact that they are willing to buy Treasuries is a way of self-identifying that they have cash they do not want to spend. If you use taxes rather than borrowing, you will take some of the surplus from those people who will not spend it, but some of the tax revenues will come from people who would have spent it. Thus, while the government spending that created the private surplus is expansionary, taxing will partially offset that expansionary effect with a contractionary effect. Borrowing less so. Hence borrowing is more stimulative overall and the reason for running deficits in a recession. That process is painful now because we began the recession with structural deficits caused by unsound tax policy. Of course taxes affect incentives, but a lot less than you would imagine. If you stop focusing on financial flows and focus on real flows, you can think about it this way: The government, by its ability to issue money, commandeers whatever share of productive resources it wants. It can pay whatever it has to to get what it wants because it owns the printing press. The remaining productive resources generate private goods and services that are shared amongst workers and investors. If investors don't invest, they get no piece of the pie of private goods. Since no can live on the public goods alone, especially the investor class, they have every good reason to invest even though the output pie they can share in is smaller due to government use of productive resources. But they also don't need to invest as much for their share because the government is doing the public investment. If investors don't want to invest, then the capital of the private sector does not go up to keep up with demand. With government spending stoking the furnace, the cost of goods and services rises as there is a shortage. The returns will continue to rise until the needed capital is provided. Even with a large government sector providing lots of military, or health care, education, whatever, everyone still has to work and invest to get everything else, the private goods and services, they want. Hence, they still have to generate income. That's why taxes affect incentives much less than you think. If they are not assessed uniformly amongst activities. they will certainly skew activity toward that less taxed. But if levied uniformly, the general equilibrium effects will largely eliminate what you see as a disincentive to work and invest. Many mistakes are made by considering only partial equilibrium rather than the way the entire economy adjusts to some changed factor.

- roidubouloi

October 12, 2011 at 10:44pm

Chaitless writes: " if we're being generous. If you graduate debt-free in six years from studying medicine in France, why do you need $155K? You don't." So, how do you rationalize that relative to GM fork lift driver that is seeing his compensation totaling $70K? He has no school costs either since he didn't go to school. He did earn $70K a year, however, for the 10 years the doctor was in school. So the doctor starts $700,000 behind the fork lift driver. So, what do you do to the $70K salary? Beat it down to $35K?

- seattleeng

October 13, 2011 at 2:57pm

American doctors make a larger multiple of the income of American forklift operators than do French doctors relative to French forklift operators. Make medical school free to the qualified. There will be no shortage of doctors.

- roidubouloi

October 13, 2011 at 6:21pm

I have friends in Paris who are doctors, both in clinical practice and research. They lead very comfortable lives, upper middle class by our standards, and don't have to worry about their own healthcare, retirement, or children's education through college. They take holidays all over the world, eat out whenever. They don't drive Ferraris, have huge homes, though some have two, or collect art.

- roidubouloi

October 13, 2011 at 6:48pm

roid.. You point out that by spending government has created a deficit. This deficit is in fact a surplus in the private sector both formulaically and conceptually. In a sense, “money” has been created in the economy. Without the government reaping the private sector surplus through either taxing or borrowing, M2 would remain expanded possibly leading to inflation. The equation will balance by definition. I get it; I just don’t think this is the interesting part. Where it gets interesting is in the area of side effects the various policies can create. Let us for the moment free ourselves of dogmatic concerns and focus entirely on what is effective with the desired outcome being an expansion of aggregate demand. You seem to be saying that taxing the wealthy would create a positive side effect while recouping the surplus. This means the wealthy must be holding idle funds. Here is where things get kind of fuzzy for me. Since you have a penchant for equations, I propose that the following is mostly true: Net Individual Nominal Income = Individual Consumption + Individual Savings Facing a decrease in total income, because government has taxed it away, either consumption or savings must decrease. A decrease in consumptions wins us nothing in terms of increasing aggregate demand since it will offset the increase created by government spending (lets keep the multiplier discussion on hold for now). Thus, the only way we can hope to have a net increase in consumption is to decrease the individual's savings. A key premise you are making is that a significant numbers of wealthy people will make the choice to decrease savings rather then decrease consumption (let us assume this as given for this line of thought, but I would like to revisit in the future). Let us work through an example. A hypothetical individual who invests his savings in the stock market will diminish the purchase of stock to offset a tax increase on income. The following side effects would occur: 1. The government would cover increased spending on various “stimulus” without incurring debt. 2. The increase in value of the forgone stock that would have been purchased will not occur 3. Cash that would have gone into the hands of the stock sellers is now essentially spent by government. Once a stock transaction is complete, someone has the cash (price of stock, fees, tax, etc) and someone has the stock. If the cash is used on another investment (for simplicity lets say more stock), this process will loop until someone spends the cash on goods and services. (There is some amount of money that is "in flight” during the looping; however, given efficient markets this is negligible) 4. Moneys that would have been paid for transaction fees for the sale of the stock are spent by government. 5. Tax revenue, which would have been associated with the seller’s gains (and potentially spent on stimulus), is similarly canceled out. Clearly point #1 is conducive to our goal of expanding aggregate demand, but points 2-5 seem to be offsetting #1. It seems to me that the net effect of these expenditures is negligible. This idea has some support in academia. For example, Robert Barro believes that the net effect of the Keynesian multiplier is close to 0, but I suspect you disagree.

- Nicomachus

October 13, 2011 at 9:42pm

If the multiplier were zero, we would have no economy at all. No one would be spending their income as that would "multiply" the impact of the spending of the person whose spending produced that income. The challenge for Barro is to explain how money spent by me for goods and services when I receive my income from the private sector is somehow different in its effects from my spending if I have either a government job or work for a government contractor. I think that is impossible. However, even if Barro were correct, it is quite irrelevant. If we have X productive resources and some portion is idle, then having the government commandeer the idle portion puts that to work and provides jobs for the unemployed. They now have a share of GDP and spend it in the private sector. Barro would claim that the part of the private sector that was previously employed cuts its consumption by the same amount by which the newly employed increase theirs. Okay, so what? We now have public goods we didn't have before and full employment with private sector income shared amongst all the gainfully employed. Sounds good to me. Do the Barros of the world also believe that once we reach full employment further economic growth is therefore impossible? That would be really ridiculous. It is precisely when all productive resources are employed that we get fresh investment. I am not quite sure about the meaning of your 2-5. In real terms, money cannot "flow into the stock market" although we talk this way. For every buyer, there is a seller. In a secondary market transaction, the net change in money "in the stock market" is actually zero. Only title changes hands, and the price can go up increasing the putative "value" of the market. The money is still in deposit accounts as stock transactions cannot extinguish money. Payment of bank loans does; payment to government does, as those are the two "issuers" of money. Money raised in a primary offering should get spent by and by on investment, although it might pay down debt and extinguish money. But that does not seem to have any relevance to what we are discussing. The converse of the Barro argument, by the way, is that 100% of a tax cut will be spent on consumption (since 100% of a tax increase reduces consumption), even though 100% of the proceeds of the tax cut will be borrowed back by the government. Does this really seem possible to you?

- roidubouloi

October 14, 2011 at 10:33am

Please do note, I said above that borrowing is more efficient in a slump than a tax increase because the borrowing is likely to have no effect on the balance between savings and consumption of the "non-surplus" whereas taxing will be partially offset by a reduction in consumption. However, I think that we could get the same net effect, with a near zero increase in the public debt, with a combination of high-end tax increases and printing money, the Fed buying up the deficit, with the possible added benefit of some inflation in the 5% range. Yes, the wealthy cut their consumption somewhat due to the tax increase, but then the new money increases spending. The key would be to find the proper balance between the two so that the contractionary effect of the tax increase is zero. The government spending thus funded provides the expansionary effect. If you see too much inflation, you ratchet taxes up. That just gave me a terrific idea for the paper I have to write for a macroeconomics seminar. I am going to see if I can model just that. Needless to say, the political obstacles to doing the right thing are formidable, particularly as tax policy is set by Congress and monetary policy independently. They should give the Fed some standby authority to levy sur-taxes up to a point, a great idea, if I do say so myself, that I have never heard of anywhere before.

- roidubouloi

October 14, 2011 at 10:46am

Glad the idea showed up here.

- ds111

October 14, 2011 at 5:15pm