JONATHAN COHN APRIL 17, 2012
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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