JONATHAN COHN APRIL 17, 2012
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Today is tax day. I was all set to write something about the importance of taxes and why, in the long run, most Americans need to pay more of them. Then I remembered I'd written that before—on last year's tax day. So here's what I wrote then. It seems no less relevant today. The only difference is that House Budget Chairman Paul Ryan has modified his Medicare proposal. But his overall scheme for the budget hasn't changed much.
Happy Tax Day. And I mean that sincerely. I don’t like parting with my money any more than you do. But I like what my tax dollars buy. Public schools. Safe food and consumer products. National security. The post office. Guaranteed income and health insurance for my aging parents, plus (soon) a guarantee of health insurance for my immediate family.
I benefit directly from all of these programs. And I benefit indirectly from the stability they provide. Capitalism and democracy could not survive without a vibrant, activist government. Such a government costs money to run.
Which is not to say government cannot be wasteful or that every tax dollar is spent in ways that I would like. Very clearly that is not the case. When I go to the supermarket, I seek low prices and high quality. And I begrudge nobody’s insistence that taxpayers show the same vigilance. But while we need to insist on a better bargain from the government, particularly when it comes to its management of our bloated health care system, we cannot expect to pay less money, overall, without receiving a lot less in return.
That’s what the analysis of House Budget Chairman Paul Ryan’s budget has shown. If we want to reduce government spending and, by the way, reduce taxes as a share of our collective income, we’ll have to scale back dramatically on the income security we provide our citizens. The Congressional Budget Office thinks Ryan's plan would leave the typical retiree responsible for two-thirds of his or her medical expenses. That would be a radical change, a return to a world we've not seen since the early 1960s.
Many conservatives insist that at least some painful austerity is necessary for our economic survival. Otherwise, they warn, taxes will grow to unprecedented levels, slowing down the economy. Ross Douthat makes this point today in his New York Times column. Philip Klein made a similar argument last week in the Washington Examiner.
I respect both writers and realize we have some fundamental, philosophical differences over the appropriate role for the state. But, as an empirical matter, I think the international evidence tell a very different story about taxes and the economy. As you can see from the above chart, which the Center on Budget and Policy Priorities constructed using data from the Organization for Economic Co-operation and Development, the tax burden in the Nordic countries far surpasses ours. In fact, the tax burden in those countries exceeds 50 percent.
That money helps finance a welfare state far more comprehensive than ours, including not just universal health insurance but universal early childhood programs. But the Nordic countries are far from stagnant, innovation-starved backwaters. As economists like Columbia University's Jeff Sachs have pointed out repeatedly, these countries have thrived. In fact, the Nordic formula may actually bolster growth, because the income protection it provides makes the people of Scandinavia more willing to tolerate the dislocations that come with loose labor rules and free trade.
The Nordic countries are far more homogenous than the U.S. and it’s an open question whether a society as diverse and unequal as ours would support such a high tax burden. (This is one of the points Douthat makes in his column.) But even if we do absolutely nothing but let current law stand--in other words, if we let the Bush tax cuts expire, allow the alternative minimum tax to remain in place, allow scheduled reductions in physician fees to take effect, and limit the control of health care costs only to the official projections for the Affordable Care Act--it seems likely that our tax burden would still not exceed what the Nordic countries face today, at least not for another 50 years.*
I'm not saying that the "do nothing" approach, as Ezra Klein calls it, is ideal. Far from it. I’d prefer a more gradual and even-handed approach to reducing health care costs than imposing those physician cuts as scheduled. My ideal plan would look a bit more like the Bipartisan Policy Center’s plan, which certainly includes its share of cost-cutting, and the principles Nobel-winning economist Joseph Stiglitz has outlined. I also could live with a less progressive tax system if (and only if) it was for the sake of financing a more robust welfare state.
But my broader point is that a substantial rise in taxes is not the end of the world, particularly if it is gradual, finances smart investments, and includes reasonable but not draconian efforts to control health care costs.
*A very wonkish footnote: I say the do-nothing approach would likely not boost tax rates beyond Nordic levels for the next 50 to 70 years because I'm extrapolating from this Congressional Budget Office chart, which Austin Frakt and Ezra have highlighted in recent days. That particular chart doesn’t include state and local taxes. But when you put the numbers together with the Center on Budget chart, which does include local and state taxes, my back of the envelope calculation suggests we only approach Nordic levels around 2080, assuming no substantial change in state and local tax rates.
I've done this long enough to know that back-of-the-envelope calculations can be wrong. I'll update this item if that's the case. Even if so, however, I think it's clear we can afford substantially higher taxes without suffering serious economic consequences.
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14 comments
Also see the study by economists Emmanuel Saez (Cal-Berkeley) and Thomas Piketty (Paris School of Economics) on income inequality in the US and who recommend a top marginal income tax rate in the 50%-70% range. I'd say they expose the Buffett Rule for what it is, a sham, that won't do anything about deficits and won't even increase tax rates for the wealthy to Reagan era rates. Google their names and you will be able to download their study (it's in pdf format). I've commented many times about Obama's failure to propose serious tax reform, instead merely adopting campaign slogans like the Buffett Rule. I don't expect Obama to pull a Mondale and sink his campaign before it even begins, but allowing the likes of Paul Ryan and David Brooks to control the tax debate is a monumental error, for which the nation may suffer irreparable damage.
- rayward
April 17, 2012 at 9:47am
When the economy does well, all of our problems are smaller. To that end, 3 issues need public resolution before tax reform: (1) Will higher top rates hurt the economy? (2) Do social programs or so called "wealth transfer programs" help the economy more than damage to the economy from higher taxes? and (3) Do fiscal policy expenditures help the economy more than damage to the economy from higher taxes? The primary emotional objection to higher taxes is that hard working people give money to lazy people. But people cheat and that is just another form of it. If such programs have net improvement on the economy (after taxing is factored in) then they are justified, despite cheating.
- Nusholtz
April 17, 2012 at 10:47am
The notion of damage by taxation is simply wrong, fundamentally. Whether health care is financed with taxes or privately, the share of output devoted to this is and will be damaging. If you pay taxes for your health care or pay an insurer for your health care represents no economic difference, except that the private insurance system is less efficient, depends on denying care, and far too many people cannot come close to affording it. Yes, when taxes include the costs of healthcare, they are higher. But then your private expenses are lower. As with anything else that we buy, the question is what we get for the money. There is no fundamental difference between collective decision-making about what to spend and individual decision-making until you reach the point where people no longer have the incentive to work and capitalism starts to fail. We are nowhere near that point. Neither are the Scandinavians. Being able to pay for your own food, clothing, housing, transportation, holidays and entertainment is more than enough reason to work. That education, healthcare, retirement, and even childcare, are provided by the state does not undermine those incentives.
- roidubouloi
April 17, 2012 at 11:19am
roi is right. Low taxes can often mean low growth and a society that is poorer overall--- that Keynesian fact is particularly in true for a society in a recession /depression caused by a liquidity trap. Unfortunately, there is NO politiician with any national stature/recognition making the case for effective Keynesian/Progressive solutions to our current problems.
- drofnats1
April 17, 2012 at 11:55am
But roi, work is its own reward, and...and...I just can't even go there. Good point about the incentives that still remain, especially the holidays and entertainment. There are always more toys and luxury goods/services to buy after the basics are covered, so there will always be impetus to work. I think America has proven beyond a shadow of a doubt that human Debauchery, Gluttony, etcetera, know no bounds.
- GSpinks
April 17, 2012 at 12:18pm
Roi's summary of essential govt services is close to comprehensive. There's no reason in the world that education, health, childcare and retirement can't be cost effectively provided by an efficient state system. These services lend themselves to state control with economies of scale and so forth (note: "so forth" refers to complex economic arguments that can't be covered here due to my lack of knowledge and low cerebral processing power. Therefore, my "so forth" is the final word on this.) Howinever, unfortunately govt provision of services (certainly in my own Deutchse Bank bridging loan of a country) has proved to be woefully inefficient, even bordering on corrupt. I'm loath to point to a Heritage Foundation report for fear of being beaten up in the TNR corridors but there's some startling facts here: http://www.heritage.org/research/reports/2010/07/inflated-federal-pay-how-americans-are-overtaxed-to-overpay-the-civil-service I think Liberals/Progressives/Social Democrats need to do more, a lot more, to try to even the Public/Private pay, benefits gap if this argument is to work and I'm one who believes in a strong public sector. Otherwise, Left wing parties in all western countries risk being viewed as nothing more than public sector lobby groups.
- IggyPop
April 17, 2012 at 5:24pm
As with just about everything else, taxes are evolving. For instance, into the creature that dare not say its name. So now governments say "user fees," "tools," "imposts," and so on. I hear the ghost of George Orwell rattling its chains.
- skahn
April 17, 2012 at 5:42pm
Might or might not be true iggy, but you might as well use Reagan's ouiji board as rely on a Heritage Foundation study. Last couple I looked at were an incredible load of tendentious nonsense. In good times, the private sector generally doesn't think it has to compete hard with the public sector for qualified people.
- roidubouloi
April 17, 2012 at 6:19pm
That's true about the economic cycle Roi but you dismiss the consequences of that too easily. Let me say first of all about my lazy link that I certainly don't know enough about that Heritage report to vouch for its validity. Nevertheless, if I use our own example, which I can stand over, I can assure you that there is chronic, shameful waste in govt provision of essential services and this is undermining the argument that we all agree on in my own country. There is a shocking discrepancy between largely accountable private workers and a largely unproductive (non-front line) well connected public service politburo. The real difference in that economic cycle argument you mention is that waste is allowed to build up and this becomes malignant in times of recession. Waste?: Flexi time that allows an extra 15 day of leave of a year for taking a half hour lunch break; "privilege days"; 3 local councils in Dublin a city half the size of Frankfurt where there is only one; an average of 28 days annual leave when the average in the private sector is 20; non competitive internal only interviews; an annual review performance pay based system that awards over 90% of public employees an "exceptional grade", which is a mathematical impossibility; tenure for life regardless of performance; the highest paid electricity workers in the world; teachers with the highest pay and lowest working hours in Europe; risk free pensions that would make the eye water...I could go on. This is parochial but I suspect you will find similar "waste" in the American system. Why is this so important? Because if you're asking people to pay more taxes and to make those "hard choices": cut welfare; cut medicare; cut public services while protecting public service unionised employees then you have to demonstrate efficiency in public service provision. If you don't, you're doing more damage to our mutual vision than the reactionary Right Wing and as I said the Left risks being viewed as a public service union pressure group. Over 70% of our public budget goes on public service pay and pensions and we're being asked to cut education funding, cut welfare for the weakest in our society, specifically to maintain this "waste". Now that's our own fucked up mess but if I was an American and was being asked to pay more in taxes, I'd want iron clad guarantees and visible action that my cash is going to reformed front line services. Of course the other side of this coin is that you should also improve the lot of your private sector proles by joining the rest of the civilised world and mandate minimum annual leave; maternity leave and sick leave and increase union representation in every sector of the economy (something that could apply to all western economies) but that's a much longer post and I'm already running out of steam here....
- IggyPop
April 17, 2012 at 6:46pm
I'm with Rayward on this Buffet Rule shtick - it's not working at any level. I keep trying to picture Bill Clinton banging on in this way and I cringe, it would never happen - he'd have something much snappier and politically airtight (probably just as empty, but much more savvy politically). It's a tedious dead end and the campaign needs to tighten up, offer something better than this.
- WandreyCer
April 18, 2012 at 8:25am
As a result of our low taxes... The US has a much better standard of living and more economic freedom than the Nordic countries or any other major country. Most want to keep it that way. The best objective measure of standard of living is National Accounts adjusted mean equivalized disposable household income (PPP) $. This equates to per household disposable income adjusted for exchange rates and purchasing power as well as different methods of calculating GDP. top 4: 1 United States 49,693 2 Switzerland 36,754 3 Australia 36,505 4 Norway 35,807
- mr_rationale
April 18, 2012 at 3:48pm
Everyone here, especially Roid, should buy and read an Econ 101 book. Taxes cause dead-weight loss. Not even Krugman would disagree. Really basic concept. Really, this is covered in every Econ 101 book in every college. Yet no of the 'geniuses' are aware of the adverse impact that taxes have in markets. Has the cognitive dissonance on the left advanced this far??
- mr_rationale
April 18, 2012 at 3:52pm
Dear Mr. Cohn, The post office hasn't been a burden to taxpayers since 1982: http://www.nalc.org/postal/perform/selfsufficient.html The CBO's analysis of the Ryan budget was based on figures provided by Representative Ryan and his committee which claim that taxes as a share of GDP would increase from 15.4% in 2011 to 18% in 2014. Of course, the Ryan budget also claims to not raise net taxes. I wish someone would ask Representative Ryan how that's possible.
- Earlybird1
April 18, 2012 at 10:38pm
Sorry Rat-- roi is right. In addition to buying an Econ 101 test, one must read it-- and understand it. Once one factors in what domestic economic benefits (and expenses avoided) tax-supported policies provide, US individual and family income is NOT greater than a set of other first-world countries. And by many measures, we are far behind many other countries in all sort of helath measures What $ value to you place on maternal and infant survival, adiitional average lifespan, etc. ?
- drofnats1
April 19, 2012 at 2:52pm