It’s not hard to figure out why the government has so much trouble balancing the budget and why the national debt keeps ballooning. Americans like their taxes low and their government services high. Democrats fancy themselves Robin Hood, taxing the rich to play for government services for the poor; Republicans want to cut services so they can lower taxes, and both parties are generally only successful at making things worse for the government, but not before wasting a lot of time arguing about it.
The debt ceiling, last year’s “crisis” should have made clear, is wholly ineffective at forcing the government to keep spending down. A balanced budget amendment isn’t the answer; states have balanced budget requirements and lose massive amounts of money anyway because of the use of Stupid Accounting Tricks to hide gazillions of dollars in expenditures off-budget, and in any case such an amendment would rob the government of flexibility during war or recession. What’s needed is to encourage the government not to overspend or undertax during the strong years.
We had a surplus during the Clinton years, when a Democratic president, a Republican Congress, and a strong economy collided to wipe out the budget as a problem. We’ve seen some elements of the solution – bringing defense spending more in line with what America actually needs, for example, and if health care reform works it should actually increase government revenues as health care’s drag on the economy is reduced and the government recoups savings from waste – and we’ll examine more specific points of spending in future posts. In this post, however, we’ll look at more general principles of budget management and taxation.
First, let’s consider how the Republicans claim they can have their cake and eat it too, the Laffer Curve. It seems simple, even obvious: If the government collects tax at a rate of 0%, obviously, they won’t collect anything. On the flip side, if it collects tax at a rate of 100%, no one will be left with any reason to do anything, and the government still won’t collect tax. Hence, it is possible to actually increase government revenues by lowering taxes.
But it doesn’t take long to find problems with it. For one, it seems to rely on an overly rational view of human nature. The Laffer Curve came to prominence during the Reagan years and the 100% tax rate was said to represent what happened in the Soviet Union… except the Soviet Union seemed to work just fine for around 70 years. Most people will do things for reasons other than monetary gain, whether because they’re forced to or they just like the work; I’ve been working on Da Blog for over five and a half years and have barely seen a dime from it.
On the flip side, both the theory and practice of capitalism suggest that people will attempt to squeeze out every last penny they can for themselves. I can’t imagine why the sort of person basic economics proposes, living under a 99% tax rate, wouldn’t still try to do as much work as they could in order to squeeze out that one percent. Granted, this wouldn’t leave people with much money to spend on keeping the economy (and themselves) running, but the government itself could still contribute at least a little to the economy, even if not very well (as in the Soviet case), and both of these still seem to suggest a peak in the Laffer curve somewhere greater than 50%, possibly substantially greater. Right now, the highest marginal income tax rate the United States government levies is a measly 35%.
Until the Reagan years the highest marginal tax rate was 70%. During much of the 50s and until 1965 it was as high as 90%. From the 50s until the Reagan years the top 1% represented less than 10% of all income before taxes, probably closer to 5%; now it’s upwards of 20%. You think maybe there might be a connection there? What if I told you that the lowest marginal tax rate was 10%, not much lower than 35%?
The Tea Party’s counterargument to this is to question the premise of taxing the rich more than the poor at all, which smacks of penalizing the rich for success, stealing their presumably-legitimately-earned money, and implicitly demonizing them. For all that they attack them, after all, the vast majority of “the 99%” would trade places with the 1% in a heartbeat. Many Tea Partiers would rather do away with the progressive income tax entirely, in favor of one of a number of flat tax schemes, and cut back heavily on government services for the poor that provide less incentive to advance to a higher class, and thus less incentive to work. The left, they argue, think that the rich shouldn’t have any advantages over the poor, when that would defeat the purpose of work in the first place. There’s not really any reason for the government to be in the business of redistributing the wealth, and it’s not clear that there’s much economic benefit either; in fact, the rich are more likely to invest their money because the poor have to spend it on their needs, and the former is ultimately better for the economy, since it actually builds the engine instead of just running it.
It’s not an argument that should be dismissed out of hand, though the answers to the questions raised by the “Horatio Alger argument” are mostly out of the scope of this post. We should first mention, however, that to my knowledge, in our tax system no one ends up with less money by making more money. I referred to marginal tax rates earlier; that means that those tax rates only apply to the next dollar you spend. All the income you make within a previous tax bracket is taxed at the rate of that tax bracket. There is no “jumping” from the government taking 10% of your money at one level to 15% of it on the next. By the same token, no one would dare take 80% of a poor person’s money, even if a rich person is also being taxed at 80%.
For now, let’s shift our focus away from communistic “he has more than me and that’s wrong” questions and focus on the question of whether people have enough. Let’s shift the discussion away from “the 99%” and “the 1%” and towards “the 15%” of people that met the Census Bureau’s definition of poverty in 2010 (incidentally, the highest rate since Clinton took office). This could simply refer to people with a lot less money than the super-rich. Or it could refer to people who spend all their money on keeping themselves alive with nothing to spend on anything else, and not necessarily doing a good job of that, so that they end up spending a lot of money on junk food. It could refer to people who live in poorly-constructed houses or apartments, possibly in intense filth and squalor and near sites of pollution, if they have a home at all. It could refer to places where people have so little that gangs arise to protect what they do have and drugs become rampant to take one’s mind off their condition, leading to mass imprisonment.
It may not be clear that redistributing the wealth is within government’s purview, but reducing poverty surely is, at least indirectly, allowing the government to spend less on prisons, the health system, police, and the drug war. If nothing else I could argue for the provision of basic income or negative income tax, a compromise whereby the Tea Party gets their flat income tax (perhaps in the 20-50% range), but the government also pays a flat amount to every citizen in the United States. This wouldn’t be enough to allow or encourage people to stop working en masse, but it would be enough to keep people alive and give them a place to live; I’d imagine it would be at least as much as a part-time minimum wage job, perhaps the amount of the federal poverty level. That might allow for the dismantling of most welfare programs, as well as cuts in other programs such as Social Security, which might mean the government comes out ahead in the long run.
(The FairTax proposal advanced by some within the Tea Party contains elements of this, replacing the income tax component with a sales tax that has the added effect of encouraging investment, though relative to current tax policies it would hit the middle class harder than the wealthy, and such a tax (probably more than double current state sales taxes, close to triple) could result in massive evasion.)
We’ll see in later posts how, Horatio Alger aside, the rich tend to have advantages that mean their children are far more likely to stay rich than poorer children are to become rich; for example, investment is not only better for the economy, but it also ends up returning money back to the investor, allowing the rich to get even richer. There are probably better ways to correct this imbalance than simply taxing the rich more, but I do have a problem with lowering or repealing the capital gains tax, as it smacks of opening a loophole in the income tax system (I’d support making the capital gains tax equivalent to the income tax), and I’m actually a bit mystified as to why anyone who supposedly believes in the ideal of Horatio Alger would oppose the estate tax, as it lessens the “Paris Hilton effect” of simply having daddy’s fortune plop into someone’s lap without doing any work. Since land isn’t something you actually work for, but rather is something that’s just there, I could also see the argument for a Georgist tax on land value, which could also have environmental benefits.
By raising taxes on the wealthy and/or reforming and simplifying the tax code, combined with finding a way to curb pork, unnecessary and harmful subsidies, and wasteful spending, and enacting reforms in other areas of government, we can create a streamlined, efficient government that works for everyone and still makes headway on the national debt. That’s a vision of the government that everyone can get behind.