Is This Cigar Just a Cigar?

I was astonished to awaken this morning to find both the editors of the New York Times:

A first step in resetting the conversation is to eliminate the debt ceiling before its next scheduled appearance in 2025. President Biden has brushed aside calls for his administration to pursue a legal ruling that the ceiling is unconstitutional. In doing so, he is repeating the mistake he made last fall, when he failed to press for legislation to repeal the ceiling. A case pending in federal court in Boston, brought by federal workers concerned that a default would come at the expense of their pensions, offers a potential vehicle. Other legal avenues also should be explored. It makes sense to pursue a ruling while there is no imminent danger of hitting the ceiling. If courts reject the legal challenges, that would also be clarifying.

Any substantive deal will eventually require a combination of increased revenue and reduced spending, not least because any politically viable deal will require a combination of those options. Both parties will have to compromise: Republicans must accept the necessity of collecting what the government is owed, and of imposing taxes on the wealthy. Democrats must recognize that changes to Social Security and Medicare, the major drivers of federal spending growth going forward, should be on the table. Anything less will prove fiscally unsustainable.

That will require painful choices. But the failure to make those choices also has a price — and the price tag is increasing rapidly.

and the editors of the Washington Post:

Unless Americans are willing to live with a substantially smaller military, reduced Social Security payments, more crowded classrooms and other diminishments in what their government provides, lawmakers need to find about $2 trillion in additional tax revenue over the coming decade, on top of the money-saving budget reforms that we have detailed elsewhere. Congress’s task is to raise the money without dulling efficiency and warping incentives to grow, innovate and work.

writing about the urgent moral necessity of increasing taxes. Just to give a quick take the preferences of the WaPo editors are eliminate the “carried interest loophole” (disagree), let the Trump tax cuts expire (agree about personal income taxes, disagree about business taxes), and imposing a carbon tax (regressive).

I think there are two points worth making. The first is that taxes are by definition withdrawing money from the private sector. That always reduces economic activity.

The second is that raising tax rates is hard enough but generating additional revenue is that real kicker. Consider this graph:

As you can see although there’s considerable noise in the federal tax receipts as a percentage of GDP it has remained within the same range for nearly 80 years regardless of changes in the tax code.

State and local tax revenues have skyrocketed over that period. When they declaim about federal revenues, they’re actually saying that the federal government needs to break through that 22% barrier.

I know there are lots of countries that pay a larger percent of GDP in taxes than we do. Most of them have much higher social cohesion than we do, too. As a consequence they receive more in government services than we do. Our problems are (in descending order of importance) poor ROI on government spending, too much government spending, not enough tax revenue.