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Tax Everything!

Bruce Bartlett says we need to have higher taxes to finance government spending, and such taxation should come in the form of a Value Added Tax (VAT). Kevin Drum's not so sure he prefers, "higher gas taxes and inheritance taxes combined with higher top marginal income tax rates, broadening of the tax base, elimination of the preferential taxation of dividends and capital gains, and a serious assault on high end tax shelters and corporate loopholes." I agree with everyone! Here's the thing. If you're a liberal, then over name you're going to need taxes to get a lot higher. We need four percent of GDP just to bring the current budget into balance. Add two percent of GDP to pay off the Social Security Trust Fund debt. That's a big increase. And it doesn't begin to cover the looming spending needs that actually set off smart conservative Bartlett's revenue hunger: Health care. Plus some of us would also like to see smaller-ticket items like more spending on education, child care subsidies, probably just free money for folks who have kids, basic infrastructure, foreign aid, etc., etc., etc.

So in the long view -- and I do mean in the long view -- we're looking at a lot of new tax revenue. Raising all of this through Drum-esque soak the rich schemes simply isn't feasible. Some soaking is certainly called for. But if you look at your robust European social democracies you'll see that the rich are soaked more than America's rich, but the middle classes are also paying more through VATs and similar regressive taxes. I would hope you could mitigate a VAT's adverse impact on the truly disadvantaged through a rebate/exemption kind of thing, but we're all going to have to pay more. VATs, because they're largely invisible and because they don't adversely impact savings, are an excellent source of revenue. Replacing progressive taxes with a VAT would be a bad idea, but adding a VAT on top of progressive revenue enhancements is an excellent idea. Obviously, this can't all be done at once and there's no need to do it all at once. For now, I'd start off taking just about any tax hike I can get.

UPDATE: Spending reductions, too? Sure. Spending reductions are great. Heritage has a neat government waste list. Item one is a non-repeatable event in the past, so we can't use that to save $25 billion next year. Item five is a good idea which, ironically, Heritage opposes. The other eight strike me as just fine, but they'll only get you chump change. Worth doing? Yes, of course. A big part of the solution? No, of course not.

April 6, 2005 | Permalink

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Comments

Where are you getting thos figures of two and four percent of gross domestic product? The first sounds reasonable, but the second is questionable. After all, if the seventy-five-year deficit is only $3.7 trillion, why can't we try to spread the cost out over, say, twenty or thirty years?

I wonder about the effect of a cleaned up today code. Perhaps we don't even need increases bigger than the ones Clinton enacted in the early/mid-1990s if we take away a lot of unnecessary deductions. Interestingly enough, the deduction for health care is actually regressive, since those at the higher ends benefit from it, and eliminating it would generate quite a bit of revenue: $200 billion, or so I've read. And what if we eliminated things like agricultural subsidies and other forms of corporate welfare? Granted, some of that may be extremely difficult, but if everything is hypothetically on the table in this discussion, it's worth looking into.

Posted by: Brian | Apr 6, 2005 1:07:11 PM

> VATs, because they're largely invisible

Democrats wanting to give that kind of power to politicans (of any stripe) is what lead me to move toward Republican candidates in the late 1980s. I have since moved back for obvious reasons, but heading in that direction is a REALLY bad idea.

Cranky

Posted by: Cranky Observer | Apr 6, 2005 1:10:20 PM

Why can't liberals get behind some REDUCTION in government spending, rather than simply increasing taxes. There are many government programs I think most right-thinking people agree are a complete waste of tax payer money - farm subsidies, corporate welfare, the bloated "homeland security" boondoggle, tax breaks for SUV drivers, give-aways of public land to resource extractors, and on and on. Not to mention all the government work contracted to the "private" sector that somehow ends up costing more than if the government just did it, i.e. prisons, military supply contractors, etc. If we need to raise money why not significantly increase the fines to firms causing environmental damage? It would be nice to put the Republicans on the defensive rather than just handing them political ammunition. If we do balance the budget in 6 years by only raising taxes all most people are going to think about when they vote is that their taxes are too dang high, and they'll just blame the Democrats.

Posted by: Vanya | Apr 6, 2005 1:10:43 PM

I’d be very carefult about reopeing the discussion on dividend taxation if you want to increase taxes. US dividend income is already taxed higher than it is in other countries. (Most places you take corporate profit, deduct dividends paid then apply corporation tax, the dividends then pay some form of income or dividend taxation. In the US, you take profit, apply corporation tax, then pay dividends which then are taxed again as income.)
You may well find that if everything is on the table then dividend taxation will go down, not up.

Posted by: Tim Worstall | Apr 6, 2005 1:12:32 PM

For now, I'd start off taking just about any tax hike I can get.

Well that's sure to be the lead on any number of wingnut blogs today. Lookit them libruls - they like taxes so damn much, they'll take just ANY old tax hike.

Posted by: flory | Apr 6, 2005 1:16:04 PM

When you say "robust European social democracies" you are only talking about the robustness of the democracy right?

Here is an economic question. Is it possible for America to adopt European systems without abandoning the world-wide services that Europeans free ride on? Especially security on the high seas for transport, the US security umbrella, and technological innovation underwritten by our patent system (especially pharmaceuticals). Can we really emulate their systems without giving all that up?

Posted by: Sebastian Holsclaw | Apr 6, 2005 1:18:58 PM

I say hold off talking about tax increases until the people who run the country are willing to talk about them. The republicans have been pretty effective in putting the democrats into debt handcuffs.

Posted by: joe o | Apr 6, 2005 1:24:11 PM

Reasons for avoiding Vat taxes and the like and preferring steeply progressive income taxes on a very broad base.

1)VAT taxes can be manipulated to regressivity by Republicans

2) Steep income taxes can change attitudes, the "lottery" mentality where too many Americans have the delusion they can become rich and thereby trade comfort & security for risk-taking and possible windfalls.

I know modern economics considers it essential that the majority of investors throw their money away....I think it is called the "Efficient Market Hypothesis"...but I also think modern economics has a unconcious class bias.

(Point:if the majority of investors were to buy index funds, the index funds would have insufficient market information to out-perform the rest of the market)

Posted by: bob mcmanus | Apr 6, 2005 1:31:53 PM

Vanya, you beat me to the punch: there is no point in liberals only offering tax increases, as much as we need them, without offering some form of spending reductions too. However, the top of your list should be - and the top of my list is - rescinding the awful bush prescription drug benefit, which is unaffordable, poorly designed, and hated by its target audience for needless complexity.

However, there is no getting around it: even if we eliminate the prescription drug benefit and cut every spending line item you've suggested, we still need higher taxes than we have today - wait until long rates are 200 - 300 basis points higher than they are today on north of $7T of national debt. At 7%, for instance, we're talking about a $500B line item for interest alone....

Sebastian, the answer to your question is, of course, yes we can. Whether we should (that is, whether we should emulate the public policies of western european countries) is a more useful question, but if we, for instance, imposed VAT (just for the sake of discussion), why does that change our security posture or our patent laws? I'm not sure why you are relating the two questions, unless you want to raise the "free rider" question every time someone points out that life in western Europe has a lot to recommend it....

Posted by: howard | Apr 6, 2005 1:34:46 PM

Moreover, a good deal of the vitality of our economy comes from our being an investment haven. Push taxation of investments high enough, and they could easily go elsewhere.

Posted by: Brett Bellmore | Apr 6, 2005 1:35:09 PM

"I know modern economics considers it essential that the majority of investors throw their money away....I think it is called the "Efficient Market Hypothesis"..."

The "efficient market hypothesis" says that, on average, you can't do better than the market unless you've got insider information. It doesn't say that doing just as well as the market constitutes "throwing your money away", since the market IS capable of doing well on average.

Posted by: Brett Bellmore | Apr 6, 2005 1:38:24 PM

this paper describes how europe can keep their welfare system going without overly damaging growth. The tax system in Europe is pretty effecient in getting a lot of money without overly harming investment. One interesting thing is that Europe has relatively high taxes on income and spending but low taxes on investment. It isn't all that bad to be a rich person in Europe if you are already rich.

The other interesting thing about the paper is that it suggests that some workers, especially older workers, have negative net productivity. Other people work so hard to avoid the roadblocks these workers create that it would be better if they just left. Welfare state incentives get these workers to quit preferentially.

Posted by: joe o | Apr 6, 2005 1:45:49 PM

"Plus some of us would also like to see smaller-ticket items like more spending on education, child care subsidies, probably just free money for folks who have kids, basic infrastructure, foreign aid, etc., etc., etc."


This is why Bartlett is wrong to support a tax hike. Liberals can't avoid the temptation to spend some of the money on new programs. Cutting taxes to starve the beast may not be effective in cutting spending, but raising taxes to cut deficits will probably be very effective in feeding the beast. Cutting spending, or at least avoiding large new spending programs, must be top priority.

No one ever said the starving the beast strategy would be easy or pretty. I'm inclined to let things get a little uglier before I give up on it. For now, the deficit is a good rhetorical tool to attack new spending. Eventually we'll reach a point where something must be done about the deficit. Hopefully, when that happens conservatives will have enough leverage to use spending cuts to make up at least part of the shortfall.

Posted by: Xavier | Apr 6, 2005 1:46:09 PM

Actually, Brett, the efficient market hypothesis holds that the markets "knows," and therefore discounts, all available information. It is closely associated with the "random walk" hypothesis, which holds that, since the market is discounting all known information, only by definition unknowns (either good or bad) can move market prices, and therefore, you could throw darts at the stock tables in order to select your investments and do just as well as if you studied the markets 24 hours a day.

The logical outgrowth of both of these is the notion of "buying the market," which is the argument for index funds: since you can't know more than the market knows, you may as well simply own the market.

Now, Warren Buffett (in his famous essay, "The Super-Investors of Graham-and-Doddsville") strongly disagrees: he believes, as did his mentor, Ben Graham, that the market is manic depressive, and your task as an investor is to buy when the market is depressed and sell when the market is manic. (Graham himself, by the way, argued that it is easier to achieve satisfactory results than most people think, and harder to achieve superior results than most people think, which, after all, is Buffet's point, too: only the "super-investors" have the savvy to find mispriced assets, whereas most of us are better off forgetting about trying to find that edge and instead buying the market.)

The market, by the way, is not capable of "doing well on average." The market is capable of doing as well as the economy is doing, which is why the notion that you can get 6% real returns on stock in an economy that is growing at 1.9% per annum for the next 75 years is completely bogus, but now i really digress....

Posted by: howard | Apr 6, 2005 1:49:59 PM

wacky idea of the day: let's take the federal government's big health care programs, Medicare & Medicaid, and take them off-budget, like we did with Social Security, and fund them with a dedicated VAT. (at the same time, we could scrap the Medicare payroll tax & maybe rejigger the income & payroll tax exemptions for employer-provided health care, like replacing the exemption with a refundable credit.) for a relatively small increment in the VAT rate, we could raise enough money to pay for universal coverage, on something like the individual-mandate model. and by taking all of that pressure off the income tax system we could afford some really meaningful progressive tax changes that could more than offset the relative regressivity of the VAT - e.g. lower the 10% and 15% rates to 0% and 5%, double the child tax credit & make it fully refundable, cut the phase-out rate of the EITC in half, etc.

Combine that with a couple of grand bargains on the rest of the tax system & we'll really be getting somewhere (e.g. tax all capital gains & dividends as regular income, bring back the estate tax, and adopt a package of environmental taxes on pollutants, energy, etc. - in exchange for eliminating the AMT & the corporate income tax) ...

stop me, i'm geekin' out ...

Posted by: Tom | Apr 6, 2005 1:51:33 PM

xavier, you're kidding, right? if there is one thing that i hoped we would never hear again, it's that "liberals" can't control themselves with spending.

Perhaps you haven't been paying any attention in recent years, but it's right-wingers who have no ability to control their spending appetite, even when there are no tax revenues to pay for the spending.

That is simply not a credible argument any more, and indeed, hasn't been a credible argument since the Great Society congress....

Posted by: howard | Apr 6, 2005 1:52:00 PM

In my moments of indulging in fantasy, I think about a bargain being struck in which several hundred billion in spending is eliminated while taxes are raised. Oh well.

Posted by: Will Allen | Apr 6, 2005 1:52:32 PM

Cut defense spending. At $200B/year instead of $500B, we would
still have much the most expensive military in the world, and that
would focus people's minds on doing what we actually *need*,
instead of buying whatever fancy new toys the military-industrial
complex can dream up and get a cost-plus contract for.

Posted by: Richard Cownie | Apr 6, 2005 1:54:07 PM

joe o, i meant to comment on your post. The WSJ had a similar article to what i assume is your link (i'm being too lazy to chase it down right now) a few months back.

This is why the Dems should follow the lead of Bill Bradley in the '80s and strongly support tax simplifciation (Rahm Emanuel has been working that beat)....

Posted by: howard | Apr 6, 2005 1:55:00 PM

well, will, as i suggested at 1:34, your fantasy is the only politically viable approach to what needs to be done to get our fiscal house in order. The only question left is whether we will do it at a time of our own choosing or at a time of the currency and bond markets' choosing....

Posted by: howard | Apr 6, 2005 1:57:32 PM

"Kevin Drum's not so sure he prefers...."

i'm pretty sure he prefers what is included in the quote that follows the above portion of your post. i think a '.' might be missing between 'sure' and 'he'.

Posted by: sean | Apr 6, 2005 1:59:18 PM

Things that as a liberal I'm fine cutting:
-pork based military spending (unneeded, weapons programs)
-agricultural subsidies
-have a time limit on all R+D tax credits

Most of the things that it's clear to cut, are protected by a legislative process that makes it hard to get things done, so self-interested factions can easily make the default keeping their pork/loophole alive forever.

Posted by: Tony Vila | Apr 6, 2005 2:04:12 PM

of course spending cuts need to be part of a budget balancing package (although that's not what i thought we were talking about - i thought we were just talking about taxes). there are a lot of ways to cut $1 trillion in spending over 10 years if everything's on the table, with shockingly little in the way of "cutting into bone" sacrifice - and several people have identified prominent candidates (e.g. scrapping the drug benefit & replacing it with a smaller, better targeted, more affordable version; dropping some of the more prominent white elephants from the Pentagon's wish list; going after subsidies for profitable mega-farms, oil & mining companies, arms makers, banks, and the list goes on). i'd be all for those, too. i'd even go along with changes in Social Security & Medicare that would slow down their growth so that spending won't spike so dramatically in the 15-30 years-out timeframe. (and once an up-front investment in universal health insurance coverage has been made, slowing the rate of overall health care inflation becomes a lot more feasible.)

but matt's (and bruce's, i guess) point is still on-target, that our starting position is so bad that even the most aggressive cost-cutting won't avoid the need for a lot more revenue in the longer term.

Posted by: Tom | Apr 6, 2005 2:08:22 PM

Perhaps you haven't been paying any attention in recent years, but it's right-wingers who have no ability to control their spending appetite

Come on, howard. Right-wingers cannot control their spending, but the left-wing is far, far worse! As bad as the Bush prescription drug benefit is, we all know that the Democrats offered one that was TWICE as expensive. So any Democrat who complains that the prescrption drug benefit is a budget-buster is being completely disingenuous.

I'm inclined to agree with Xavier: any tax increases will not be used to lower the deficit, but will rather be used to justify new spending (with little, if any, overall effect on the budget deficit). Hence, I am not in favor of new taxes to balance the budget. I will note that, if we could have an ENFORCEABLE balanced budget amendment (and I don't think the one from 10 years ago would really do the trick), I would be in favor of raising taxes to balance the budget, however.

Separately, I see that Matthew would like to increase spending - both for the currently scheduled increases in entitlements (SS and health care) and discretionary. He doesn't specify how much, though. I am curious what level of spending Matthew would like - what percentage of GDP does he think the federal government should spend (now, and at some point in the future when the baby boomers are retired)? 25%? 30%? 40%?

Posted by: Al | Apr 6, 2005 2:24:28 PM

"The logical outgrowth of both of these is the notion of "buying the market," which is the argument for index funds: since you can't know more than the market knows, you may as well simply own the market."

I go back to my original statement. Hypothesize that 99/100 of investors own index funds, and how much information is left available and unknown. If all investors have equal returns, there is no real net gain for anyone. In order for index funds to match or beat the market, those not in index funds have to be net losers. And I think the number of people not in index investments has to be larger than index investors in order for the indices to match or beat the rest.

In other words, net average gain requires net median loss.

Posted by: bob mcmanus | Apr 6, 2005 2:32:35 PM

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