About Taxes

At E21 Brian Riedl contradicts several commonly held beliefs about taxes that I’m sure will be like waving a red flag in front of a bull. Here are the his six statements:

1. Long term deficits are driven entirely by increases in spending.
2. The Democrats’ tax proposals will do little to reduce the deficit. Here’s the signal graph in his remarks on that subject:
   

   Congressional Democrats’ seven most common tax proposals – raising investment taxes, repealing tax breaks for oil and gas, taxing carried interest as ordinary income, imposing a Wall Street fee, imposing the “Buffet tax,” repealing the depreciation schedule for corporate jets, and taxing the business costs of moving overseas – would together close just 3 percent of the $9.4 trillion ten-year deficit. If they caused annual economic growth rates to fall from 2.1 percent to 2.0 percent, those tax increases would actually lose revenue.

3. Taxing the rich cannot balance the budget in the absence of substantial spending cuts. That’s a fact too frequently ignored. Consider:
   

   It is mathematically impossible to balance the budget solely on the backs of upper-income earners. Seizing all income earned above the $1 million threshold would fund the federal government for less than two months per year. Setting the threshold at $500,000 merely adds a third month.

   The reason that we tax “the rich” is the same reason that Willie Sutton gave for robbing banks: it’s where the money is.
   It’s where the income growth has been. Fair or not, it doesn’t mean that we can spend at an indefinitely high level and only tax the rich.

4. The U. S. income tax is the most progressive in the OECD.
5. The U. S. income tax is becoming more progressive over time.
6. Taxes are important to economic growth.

How important are deficits? They’re not the only thing that’s important but they’re still important. Although we no longer believe that public debt has a cliff at some arbitrary percentage at which point it drastically reduces growth, increasing public debt does seem to reduce economic growth. In other words running a deficit is not harmless. We should not have expanding deficits during an economic expansion.

I continue to believe that for a variety of reasons not the least of which is that the dollar has unique importance among world currencies we can continue to run deficits that are below the rate of increase in GDP possibly indefinitely. Last year the deficit was 3.2% of GDP. It is estimated that the deficit this year will be 2.6% of GDP. Those are too high.

What then is to be done? We need to establish priorities and have the courage to enforce them. We should limit our war-making to cases where war is actually justified. We can only have universal health care if we’re also willing (and able) to reduce wages in the sector and restrain the growth in spending to what we can afford. We can’t pay every public employee, active or retired, as much as they want. We can’t link every city of over 50,000 population via interstates or build (and maintain) every bridge that anybody wants.

As me auld mither used to say, we can have anything we want but we can’t have everything we want.