The Numbers Don’t Add Up

I don’t read or cite the Daily Beast very frequently but this piece there from Brian Riedl is well worth reading. His message is that we cannot pay for a single-payer system, a federal jobs guarantee, student loan forgiveness, free public college, and a big infrastructure spending plan just by taxing the rich:

In reality, spending like Europe requires taxing like Europe. This means, in addition to federal and state income taxes, a value-added tax (VAT)—essentially a national sales tax—that affects all families. CBO data estimates that raising 15 percent of GDP would require imposing an 86 percent VAT rate, or hiking the payroll tax from 15.3 percent to 56.5 percent. No wonder many spenders prefer the “just tax the rich” fairy tale.

Read the whole thing. To his analysis I would add the following observations.

  1. We cannot pay for all of the things we may want just by issuing ourselves credit, either. Most of these proposals are for operating expenses and they are operating expenses that are rising in cost fast—much faster than incomes, generally. Paying operating expenses by issuing credit is a very bad practice. There is no perpetual motion.
  2. Most educational spending and health care spending is consumption not investment.
  3. Taxing like Europe would not be enough. We’d need to pay like Europe, too. On average physicians in Germany earn a third of what American physicians do. The highest wage that can be earned by a primary school teacher in Germany is about $62,000 per year. In Chicago elementary school teachers start at $50,000 and most earn $80,000 or more.
  4. We’d need to live like Europeans as well. A lot less personal consumption.

IMO we need to set our sights differently. We should trim health care spending to something much more like public health—a limited palette of services much more equitably divided among the population, much greater emphasis on palliative care for terminal patients than at present. Education should be targeted more narrowly at producing good workers and citizens. We need an educational system for the population we have not the population we’d like to have.

13 comments… add one
  • Guarneri

    The “you can’t tax the rich enough” point is obvious, and one that has been made by many (of us) for years. Its just political BS.

    Your observations in the last paragraph, it seems to me, are thoughtful and correct, at a minimum, directionally. Politically, and especially with the progressive cradle-to-grave mindset, I fear nothing of the sort can be achieved.

  • steve

    The problem we have, Europe is headed this way, is that so much of our wealth and income is controlled by very few people. You have to go where the money is if you want to pay for stuff. You would need to tax other people also, but I don’t see how the wealthy don’t bear more of a burden. (Well, I do. They control our politicians so somehow they will come out OK.)

    Steve

  • Andy

    Steve,

    Look at these CBO charts:

    https://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-households

    The tax burden for the top quintile hasn’t changed much while everyone else’s tax burden has gone down substantially.

    Trump’s tax reforms continued this trend, though we need to see the numbers before passing final judgment.

    Liberals pine about pre-Reagan tax structure where the wealthy supposedly “paid their fair share” but the numbers tell a much different story.

    As for all the programs progressives want, I don’t see how they get around the brick wall of hard financial reality without making politically dangerous compromises.

  • Guarneri

    To echo Andy’s observations – the wealthy are paying an ever increasing share, but it hasn’t fixed a thing. Only a dimwit doesn’t understand why: politicians spend whatever they can get their hands on, for their own self interest: votes. Go back people, and read the debates that surrounded the income tax in the early 1900’s. Only the very rich would pay, and just a small amount. Snicker. The ruse never ends………

    Further, one almost never sees a real analysis of the detrimental effects of greater taxation on the prospects of the nation. But its easy advertising to focus on a sympathetic case. You know – “its for the poor, uneducated, diseased, mentally ill, environmentally challenged, opportunity challenged….. children.” How’s that worked out over…………70 years.

  • Gray Shambler

    New sources of income, sin tax on alcohol, property and income tax on religious institutions and non profits, which are generally a tax dodge anyway, confiscatory death taxes and high wall to keep everybody in.

  • Ben Wolf

    Don’t tax. Spend. There’s no such thing as issuing one’s self credit.

  • steve

    Andy- You should have two more charts. The first shows that all growth in income has essentially gone to the top quintile.

    https://www.cbo.gov/publication/53597

    The next shows that the growth in the top quintile has mostly gone to the top 0.01%.

    http://review.chicagobooth.edu/economics/2017/article/never-mind-1-percent-lets-talk-about-001-percent

    So we can show that the country had significant advances in lifestyle, health and incomes for everyone while the government grew. Then sometime about 30-40 years ago that growth went to that top group. What do the rest of us have to show for having that group become so rich?

    “debates that surrounded the income tax in the early 1900’s. Only the very rich would pay, and just a small amount. Snicker. The ruse never ends”

    Our government is pretty much an insurance provider with an Army. In 1900 people didn’t live long enough to need SS, the best medicine was to avoid doctors and we had a minimal standing military. Just wasn’t much to spend on. Times change. Your arguments should change also.

    Steve

  • Guarneri

    “So we can show that the country had significant advances in lifestyle, health and incomes for everyone while the government grew. Then sometime about 30-40 years ago that growth went to that top group.”

    steve doesn’t know it, but he’s just made the case for smaller government. For it is the growth and intrusiveness of government that have largely provided the means for the select few to grab hold of power and bend it to their ends. And to add insult to injury, they claim its all for the common man. My ass.

  • Andy

    Steve,

    I’m aware of those figures and I wish they were different. How does that relate to tax policy designed to fund federal government activities?

    The top 1% of households are still paying about 1/3 of their income in federal taxes as they were in 1979. As their incomes have increased, so has the nominal amount of taxes they’ve paid.

    In the late 1940’s and early 1950’s the effective tax rates peaked at just over 40%. If we could somehow reinstate those effective rates (a very difficult problem both politically and practically), that would raise about $270 billion a year. That sounds like a lot of money (and it is), but it’s still only about 1/3 of the present budget deficit.

    Yes, the income growth has increased for the wealthy above all others over the past few decades. That doesn’t automatically mean that every high-cost social program can be funded by increasing their taxes. We can’t even pay for our present expenditures by increasing their tax rates to the highest they’ve been in our country’s history, much less progressive wish lists.

    Ben,

    What is the upper limit for spending without taxing? What is a sustainable level? At what point do negative effects start to kick in?

  • What is a sustainable level?

    Let me put words into Ben’s mouth. The rate of increase in GDP. If GDP is growing at 3% per year we can spend more than we take in by 3%. That can go on indefinitely.

    We are way above that right now even without the ambitious social services programs. That’s not sustainable. It will eventually come crashing down. “Eventually” could be a pretty long time given the demand for the dollar.

  • steve

    “For it is the growth and intrusiveness of government that have largely provided the means for the select few to grab hold of power and bend it to their ends.”

    Nope. It is the profound growth in wealth and influence of those wealthy few that guaranteed we got to where we are. Cut our government in half, and they still have that outsize influence. All we need to do is let the wealthy have a free hand and they take more and more.

    Andy-What I said was “but I don’t see how the wealthy don’t bear more of a burden. ” Agree that they couldn’t fund everything in Dave’s overly ambitious plan. However, if you decide to undertake even a modified version of that plan, I dont see how you pay for it w/o hitting the wealthy a bit harder. It is the Willie Sutton rule, and we are only talking income here. I am sure you know that when you look at wealth, things are tipped further to the top 0.01%.

    Steve

  • Guarneri

    You reversed cause and effect steve.

    Dave – you have often cited that 3% stat, but I don’t know what logic underpins it. As any credit officer would observe, if leverage exceeds a healthy number, “the deal must get better over time.” Credit 101. Why? Because you can’t run at maximum financial risk forever. Operating event risks will eventually bite you in the ass. Again, Credit 101. What might those risk be? Wars, natural disasters, financial crises, structural financial imbalances (the baby boom retirement bulge), etc. it’s not a permanentlyntenable situation.

  • steve

    Forgot to add link. Back when total government spending was just 12% of GDP compared with our current 36% we let the rich folks run wild. Did not work out well.

    https://www.usgovernmentspending.com/past_spending

    Steve

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