The editors of the Washington Post point out that the National Academy of Sciences and the National Academy of Public Administration have engaged in a budgeting exercise similar to the one that I conducted not long ago. Their goal was modest: just keep the debt within 60% of GDP. The editors:
Addressing the country’s fiscal situation is a daunting task. Trying to do so by looking at only the spending side of the ledger is achievable, in theory. But it would require far more pain and sacrifice, and a more revolutionary retrenchment, than those who insist on this approach have been willing to acknowledge.
The committee considered four alternative paths:
- An austerity plan in which federal revenues were not increased and federal expenditures trimmed to match.
- What they refer to as the “high spending and revenue” plan in which federal expenditures are allowed to rise to one-third of GDP and revenues increased to match.
- An intermediate path under whicch federal spending and revenues are allowed to rise to 25% of GDP and Social Security, Medicare, and Medicaid are constrained.
- Another intermediate path under which federal spending and revenues are allowed to rise to 25% of GDP, Social Security, Medicare, and Medicaid are constrained a little less, and other spending is cut.
All four of those scenarios are totally unacceptable to some major constituency. All four plans demand that federal healthcare spending be limited and we currently have no mechanism for doing that. The latter three plans all require tax increases which would be opposed bitterly by Republicans in Congress and spending reductions which would certainly be opposed bitterly by Democrats in Congress and it’s possible that Republicans would join them.
The bottom line message of this report is that there is no easy or painless way to bring fiscal sanity to our budget (let alone balance it) and that cutting healthcare spending by the federal government is the sine qua non of reform. That was the argument that I made during the fifteen months during which healthcare reform was debated. The progressive caucus in Congress may reckon the passage of healthcare reform as a great achievement; I consider it a squandered opportunity.
Caught between Republicans who take the position that tax increases are completely unacceptable and Democrats who view cuts in entitlement spending as equally unacceptable, the Congress is less a deliberative body and more an institution for the fiscally insane.
Last I checked Republican messages of rationing and death panels met Democrat ideas to curb Medicare spending. Our problem is much more complicated than your statement. Keeping the senior vote means there won’t be a lot of attempts to curb our biggest spending problems.
Cutting healthcare spending = rationing? Congressional Democrats pursued cutting Medicare vigorously? I must’ve missed that.
What I remember is that the Democratic Congressional leadership had decided in advance on the shape that healthcare reform would take. Their emphasis was always on expanding coverage and that’s what they did.
What cannot continue will not continue. If neither political party can find the strength to solve this, and no third party arises, the question will become irrelevant in a few decades. Since we cannot grow our way out of this (particularly since Social Security and Medicare are tied to inflation and grow automatically and with the other drags on the economy), we will eventually fail to be able to raise enough from taxes to pay the interest on the debt. Last time I looked that was less than 30 years away, all trends continuing on their present course. At that point, no amount of pretending will avert the train wreck. It would be nice if we could fix things in advance of them becoming existential crises, but that depends on us all agreeing at least on the purpose of government, and since we don’t agree on that, there is no fix. We are basically waiting on external events to happen.
Alex has a post over at OTB titled, “Why the GOP Won’t Cut Entitlement Spending”, that pretty much tracks what Sam (the other one) was saying: The GOP owed much of its margin of victory in the election to the disaffection of seniors from the Democrats, and this in no small part came about because of the $500 million cut in Medicare (you know, “They’re gonna kill grandma.”). I saw this first-hand, or at least the fear the cut engendered. I was waiting for some blood to be drawn at a lab, and an elderly gentleman was asking the receptionist if she knew anything about the cuts in Medicare. She didn’t, of course, but nobody who heard the man could fail to catch the note of apprehension in his voice as he asked the question.
What gets lost in the economic and political debates about cutting entitlements is that those programs, SS and Medicare, are directed at populations that are old and frightened – frightened of pain, suffering, and death; frightened about a loss of independence; frightened about increasing powerlessness in a world that, for the most part, seems to hurry by them. Is it any wonder that cutting the programs that seem to offer to those folks some proof against their increasing marginalization is met with all the resistance they can muster?
Cutting healthcare spending = rationing? Congressional Democrats pursued cutting Medicare vigorously? I must’ve missed that.
Oh come on, Dave. This has been all over the news for months. Just today from Jim DeMint:
DEMINT: Well, look at– Paul Ryan’s roadmap to the future. We see a clear path to moving back to a balanced budget over time. Again, the plans are on the table. We don’t have to cut benefits for seniors. And we don’t need to cut Medicare. Like– like the Democrats did in this big Obamacare bill. We can restore sanity in Washington without cutting any benefits to seniors or veterans.
(h/t Chait)
Sam’s point is an entirely reasonable one: the Republicans have positioned themselves, quite successfully, as the party that’s protecting Medicare funding. Had the Democrats attempted to cut Medicare directly, rather than Medicare Advantage, they would have been even more successful. One doesn’t have to be pleased with the Democrats record on spending – I’m not – to be disturbed by the fact that the Republicans will now demogogue both higher taxes and cuts to Medicare.
We’re veering away from the point which is that Republicans and Democrats each have uncompromisable principles preventing them from taking steps we need to.
Far too many Republicans are tax cranks. I think they’re loonies. I see little way in which the Democrats are a great deal better. The array of alternatives that were available for healthcare reform wasn’t limited to the one that was arrived at. That’s baloney. Politically impossible? The alternative they took was politically impossible.
If you’re going to take the high ground, take the high ground. Don’t stake out a gully and call it the high ground, for goodness sake. If you’re going to take a, as somebody or other called it. “shellacking”, why not take it for Wyden-Bennett or a single payer system or any of a dozen other approaches that would have been clearly better than the trainwreck they arrived at.
Check this graph on Hauser’s Law.
Raising taxes is not a static event. Raising taxes results in a dynamic response. The way I interpret this empirical data is that there exist limitations on the revenue side which transcend political act or political will. Conversely, the cutting spending is limited only by political will. This means that a binary comparison, keep spending constant and raise taxes to balance the difference versus keep taxes constant and reduce spending to balance the difference pretty much eliminates the raise taxes only option because the dynamic effects on the economy will neutralize the revenue gains that you’re counting on.
In other words, we really do have a spending problem, not a revenue problem. People are only willing to give over so much of their income in order to finance government operations before they start modifying their economic behavior in order to neutralize excessive tax burdens.
Do you have any trans-national data on your Hauser’s Law?
I really hate “US data is all we have” myopia.
Do you have any trans-national data on your Hauser’s Law?
Is your unstated premise that American society is the same as Swedish society or Czech society?
We’re discussing the policy options for an America that is peopled by Americans and influenced by American attitudes. If Swedes have shown a willingness to bear a higher tax burden why do you assume that the Swedish attitude is achievable in America?
If you wish to argue that Swedish attitudes will be developed in America after tax rates are raised to cover the spending that is being undertaken then the burden is on you to explain to us why American attitudes will change into Swedish attitudes and why the historical data on American taxpayer behavior from the last 60 years is irrelevant.
I think I would have been happier then if you’d originally said
“Caught between Republicans who take the position that tax increases are completely unacceptable and Democrats and Republicans who view cuts in entitlement spending as equally unacceptable”
Other than Paul Ryan’s proposal which no other Republican will touch, they still got elected saying they wouldn’t cut anything from Medicare. Even Ryan’s cut is a cop out and will end up another AMT patch or docfix situation by putting a future congress in jeopardy of losing the old folk’s vote when his cuts actually take effect well after he’s dead.
Since it was brought up, if anyone’s interested in a discussion of possible problems with Hauser’s Law, see Lying With Charts: WSJ Edition
What kind of strawman is the “same as” Sweden or Czechoslovakia?
Seriously?
You look at cross-national data to see how it clusters or differs. You don’t set up a strawman to scare away the question before it’s asked.
FWIW I think cross-country comparisons are one of the most powerful tools we have. That is, if data doesn’t frighten you.
Sam,
The article you linked is built on a bait-and-switch gambit. It starts off looking at the validity of Hauser’s Law, basically concedes that individual tax revenue remains stable across time, then veers into an examination of Social Security revenue growth and compares that to corporate tax revenue declines. That’s a whole other issue.
Hauser’s Law stands pretty firm – there is a 1%-2% range in which is fluctuates and this critic concedes that point.
Now, if the budget gap can be closed by a 1 percent point increase of individual tax revenue, as a percent of GDP, then this talk of raising taxes to solve the “revenue problem” might be achievable. However, the deficit gap is far, far larger than 1% of GDP.
You look at cross-national data to see how it clusters or differs. You don’t set up a strawman to scare away the question before it’s asked.
What strawman are you talking about? I put a simple question to you, please don’t ignore it and claim that a strawman has been erected. Here is the question that needs to be satisfied:
If your objection is to the specific countries I used to illustrate the point, then fair enough, substitute other countries. The question is built on the principle that specific information is more valuable than general information. You seem to be arguing that generalized information is more valuable than specific information. I simply want to know why you think generalized information is more valuable than specific information. I want to know why you think that the behavior of taxpayers in other countries tells us more about the American problem we’re facing than the behavior of American taxpayers from a period that spans the last 60 years.
I’ve provided you with the reference to Hauser’s Law. This Law derives from empirical data. Why reject something that has been measured and fairly time consistent in favor of what is observed in other societies?
Uh, I think the point of his article was that the chart you presented did not take into account two tax revenue streams, one additive, one subtractive, that contributed to that flatline of tax revenues. It’s presented as: “Here’s the individual tax rates and, now look, here’s the resultant tax revenues.” He’s arguing the chart is not a valid representation of the situation.
FWIW I think cross-country comparisons are one of the most powerful tools we have. That is, if data doesn’t frighten you.
FWIW, I think that cross-country comparisons are mostly worthless when they are poorly constructed. I’ve criticized many such comparisons which completely ignore variance in social structures across societies or which ignore population variance. I just ripped one such study a few days ago for its comparison of diabetes rates in the US and the UK without accounting for the 2x greater rates of diabetes in American native, black and mestizo populations compared to US and UK white populations.
Back to the point, comparing the behavior of a people who live in a society that is very homogeneous and has high shared values to a society which is very heterogeneous and has low shared values yet completely ignores those distinctions results in a study that doesn’t tell us what the study purports to tell us.
It is a strawman because I am not proposing that you spot-check one or two countries that you think are similar. That’s stupid.
What you do is survey developed market democracies, from japan to New Zealand to Germany and Canada, and then the data tells you how culture matters, or not.
(I read your link Sam, and yes there is even less here than meets the eye.)
Uh, I think the point of his article was that the chart you presented did not take into account two tax revenue streams, one additive, one subtractive, that contributed to that flatline of tax revenues.
Even the author conceded the point when he focused on the relationship between individual tax rates and revenue from individual taxes. We see some variance, mostly due to economic expansions and contractions, for instance, the overlap of the late 90s boom with increased tax revenue from individual federal taxes paid. Once you control for the boom and bust cycles in the economy and focus on the relationship between tax rates and tax revenue, the line is fairly steady. Go and look at your critics’ graph and keep in mind that the oscillations you’re seeing in the graph are amplified by the scale used on the axis compared to the scale used in Hausers’ graph.
If there is an argument to be made that corporate taxes should be raised, then let the advocates make that case.
What you do is survey developed market democracies, from japan to New Zealand to Germany and Canada, and then the data tells you how culture matters, or not.
Why is general data more valuable than specific data? What are you going to learn from international comparisons which invalidates the empirical data collected in the US? Are you imagining something like “The countries of northern Europe all seem to be able to increase revenue as a % of GDP by simply increasing their tax rates and therefore we should be able to do so as well, despite the fact that the last 60 years of data show that we can’t.”
I think it should be transparent to anyone that the guy who says “I don’t want to see the data” is afraid of something.
He obviously isn’t leading with the confidence that more data will reinforce his argument.
Remember, I just started with a question. I asked if there was data. You are trying to tell me I don’t want to know, that whatever data there might be, would be dangerous.
Remember, I just started with a question. I asked if there was data. You are trying to tell me I don’t want to know, that whatever data there might be, would be dangerous.
Not at all. I simply want to understand your reasoning. Why is generalized data from the international system more insightful than specific empirical data drawn from the last 60 years of the American experience?
-“Your house is on fire.”
-“I don’t care. I want to know about the rate of house fires in the whole state, not just what is happening to my house.”
-“How is state-wide house fire data going to be useful to you considering that you now that your house is presently on fire.”
-“Stop responding with strawman arguments.”
-“Huh?”
You presented two pieces of data. You left out a lot of proof that one is causal for the other. I could draw the opposite conclusion and say that the overall tax system is always designed only to ever take 20% of GDP – when we lower the top rate, we always put a lot more people in it for instance.
You presented two pieces of data. You left out a lot of proof that one is causal for the other.
Causality is a hurdle to cross in the realm of economics and all of social science for that matter. Most economics support the hypothesis that increasing marginal tax rates causes slower economic growth and with reduced economic growth comes a reduction in expected tax revenues. If you have a theoretical model which posits that tax rates have no effect on the economy, then please post a link to the model.
I could draw the opposite conclusion and say that the overall tax system is always designed only to ever take 20% of GDP – when we lower the top rate, we always put a lot more people in it for instance.
The US has one of the most progressive tax regimes in the Western world. If you are inclined to argue that those lower on the tax ladder are in need of an increased tax rate, that is, an across the board, say, 5%, increase in every tax bracket, then I’ll concede that tax revenue as a percent of GDP may increase to a higher threshold, simply because low income earners don’t have the wide flexibility to structure their financial affairs in order to minimize the effect of the increased tax rate. The consequence of such a scheme is to reduce the progressivity of the tax regime and we’ll see a less top-heavy tax structure. This is how the process works in other Western countries, where their top tax bracket begins at a much lower threshold than here in the US.
It is a very suspect conclusion that tax revenue as a percentage of GDP is close to 19.5%, because it can only be close to 19.5%.
You ask what my reasoning is, the easiest way to check for “universality” is to see how that number varies, and how stable it is, around the world.
If it was the same, you sure would be right, right?
If it varies widely, you’d have to mount some kind of defense not based on how “like” the Swedes we are, but how completely “unique” we are … from our countries and cultures of origin.
Dave,
You might be interested in this from Thomas Barnett. I think it fits nicely with your posts on demographics and the insanity of our political class.
You ask what my reasoning is, the easiest way to check for “universality†is to see how that number varies, and how stable it is, around the world.
You have 60 years of data showing you what has happened in America when marginal tax rates have increased. Of what usefulness will data on the universality of the phenomenon be? This is a perfect tee-up for the maxim that defines insanity, which is, what do you call doing something over again and expecting a different result.
You, I assume, are arguing that an increase in marginal tax rates will, this time, yield significant revenue because we know that some other countries have higher tax rates and also have higher revenues/gdp than America. If you have contradictory evidence from America that spans 60 years and which demonstrates that what you propose hasn’t worked here, then why what make this time special? Because it works in Sweden?
If it varies widely, you’d have to mount some kind of defense not based on how “like†the Swedes we are, but how completely “unique†we are … from our countries and cultures of origin.
I don’t have to mount any defense, all I need do is point to the empirical data. What you’re asking for is a model to explain reality. That’s all fine and good, but a lack of a model doesn’t invalidate reality. Even if a phenomenon can’t be explained, you still have to contend with the reality of it. If we’ve raised taxes and lowered them over the last 60 years and this has resulted in very little variance in revenues/gdp then I have a reasonable basis to conclude that this time will be no different than the past. If you think that this time will be different you need to explain why the historical processes have ceased to function.
Gosh, then why aren’t I convinced?
It could be that, absent that other data, I can choose a milder interpretation: We are comfortable with 20% government, 80% private sector in our economy.
That doesn’t mean we can’t kick up to 21%, 22%, especially when it is the difference between a federal debt crisis, and not.
It could be that, absent that other data, I can choose a milder interpretation: We are comfortable with 20% government, 80% private sector in our economy.
If you step back a moment and think through the dynamics involved you’ll see that your model doesn’t make sense.
People are not making conscious decisions on their actions while having an eye on optimizing their behavior so that it results in desired revenue/gdp ratio.
What is going on is that people are responding to tax events in a dynamic, rather than static, fashion. Increasing tax rates results in changed economic behavior. This behavior is guided by individual decision dynamics, not by aggregated targets. The behavior in anchored in societal values which guide responses. This is why I pointed out Sweden as an example. Swedish viewpoints on how society functions, what are valuable aspects of society, what individual Swedes are willing to sacrifice for the benefit of other Swedes, etc are all different than what is the case in the US. Their “response curve” is different than what we’ve seen in America.
Frankly, I don’t know why Hauser’s Law works out to be so near to revenue neutral. I would have expected that increased taxes would yield decreasing marginal returns but the evidence says otherwise. I’m not going to cling to a theoretical economic model when empirical data invalidates that model. That leaves me without a model to explain why revenue neutrality, more or less, is the result.
That doesn’t mean we can’t kick up to 21%, 22%, especially when it is the difference between a federal debt crisis, and not.
This comes across as fanciful thinking. The way I interpret your comment is that you believe that a desire can translate into reality. When taxes were raised over the last 60 years I would bet that every proponent thought that their action would yield an enhanced revenue/gdp ratio. Even the critic who was cited upthread conceded that the schemes didn’t yield the desired results. Now you’re proposing that the scheme will work because the motivation is good. Good motivations are immaterial to the question. Good motivations won’t make water into wine. So many liberals are motivated by good intentions and this leads us into many disastrous policy outcomes.
Gawd, what a lot to read from one chart.
You guys might be interested in this new paper from Arnold Kling.
The paper by Dr. Kling that Andy links to above has citations for the very subject you’re discussing.
BTW where do you get the figure for U. S. government spending as a proportion of GDP as 20%? It’s closer to 40%. Taxes as a proportion of GDP are closer to 30% than to 20%.
One big difference between here and Germany or France is that in the U. S. reckoning of government spending needs to take into account federal, state, and local spending. The same is true of regulation which is a major issue for businesses in the U. S. There are thousands of different regulatory environments to take into account.
In replying I went with 20% as a loose number, based on the chart. I thought I’d also heard on the radio that 20% of jobs are government funded, though with a quick google I’m not seeing employee + contractor numbers.
I’ve got to admit that I was more amused to the “don’t look at foreign data” response than the core Hauser’s “Law” argument. It didn’t strike me as terribly mainstream.
It’s funny you should bring up the issue of contractors since it’s one I’ve been researching for some time. My intuition is that many of the discussions of federal, state, and local employees are largely bogus due to the increased use of contractors and temps over the last ten years. However, I haven’t been able to come up with the numbers to support or contradict the hypothesis. The numbers appear to be pretty hard to come by.
That’s something that always concerns me. Somewhat like the figures on reported violent crimes vs. convictions for violent crimes.
The paper by Dr. Kling that Andy links to above has citations for the very subject you’re discussing.
Indeed it does. He writes:
I’ve got to admit that I was more amused to the “don’t look at foreign data†response than the core Hauser’s “Law†argument. It didn’t strike me as terribly mainstream.
You know what I found terribly amusing? The evasion tactics you deployed to avoid answering the question I repeatedly kept asking you. Why is general international data more useful to you than specific American data from the last 60 years? I’m still waiting for you to explain why you think that general international data will trump or invalidate the specific American data. Your posturing and smug attitude in support of your feint don’t really convince people to ignore the fact that you’ve side-stepped the question I’ve asked you.
Tango, you should probably factor in my “investment” in the argument, which has been low all along.
Actually, maybe I should open up a bit about my motivations in comments. I’ve done so before, but there is no reason that you should have seen, or cared. Here it is:
Hard disk storage is currently priced at (conservatively) $100 per terabyte. That means that my random 500 character post costs someone a vanishingly small fraction of a cent.
At that cost, why not say what I think at the moment?
It’s funny. I’m accused fairly regularly of being “smug” when in fact I just consider myself one of the monkeys. The old joke was “how long would it take a million monkeys at a million typewriters to produce the complete works of Shakespeare?”
This is an experiment in progress. We are 360,985,492 users worldwide, we’ve got the monkeys beat.