In an op-ed in the Wall Street Journal Glenn Hubbard questions the Biden Administration’s arithmetic:
Recall the maxim: “When you find yourself in a hole, stop digging.†The Biden administration needs to put the shovels down. Permanent new social spending should be financed by incremental tax revenue so it doesn’t add to already elevated deficit and debt levels. Borrowing would be permitted for one-time expenditures that add to productivity and future wealth (and taxpaying ability)—for example, true infrastructure such as roads and bridges.
But the Biden budget doesn’t follow this advice. It spends more money on social causes and makes government larger without coming up with enough new revenue to pay for it. The budget proposes to spend 24.5% of gross domestic product on average over the next 10 years. The post-World War II record before the pandemic was 24.4% in 2009, and the 50-year average is closer to 20%. Meantime, revenues are projected to rise only to 19.7% of GDP by the end of the 10-year budget period, just below the record share of 20% in 2000 during the dot-com boom. The gap reflects additional pressure on deficits and debt even as rising deficits from the Social Security and Medicare programs pose a significant challenge.
What Mr. Biden is trying to achieve with his budget can’t be accomplished simply by “taxing the rich.†Proposed increases in corporate taxes already hit earners with annual incomes less than $400,000, because part of the corporate tax is paid by workers, not capital owners. And higher capital gains taxes also burden middle-income stockholders since upper-income individuals are the marginal investors in the stock market, with their higher tax burdens decreasing stock prices.
The much larger problem is arithmetic. Such tax increases can’t come close to funding the additional social spending the president’s budget proposes. Closing the gap would require a general tax increase. European governments that offer such social-welfare spending rely not on high corporate or capital taxes, but on consumption taxes, a k a value-added taxes. Ordinary taxpayers pick up the tab.
The trust funds for Social Security and Medicare are heading toward exhaustion in the coming decades unless the Biden administration can find a way to slow the growth of spending on entitlement programs. The trick is to do it while bolstering benefits for those with low and modest incomes. The right approach is to establish a strong minimum benefit, with little or no increase for higher-income recipients.
The problem is actually even simpler than Dr. Hubbard suggests. Presently, the top 1% of income earners capture about 20% of gross national income. That amounts to between $4 trillion and $5 trillion per year. That means that the absolute maximum amount that can be realized by taxing the top 1% if you tax at 100% of taxable income and are able to collect it is around $5 trillion. That is a ceiling. Total federal government spending in 2020 was around $6.5 trillion and this year it’s anticipated to be around $7 trillion.
And that ignores the ever-flexible definition of “fair share”. Can we all agree that 100% of income exceeds that fair share. How about 50%? That would put the maximum amount that might be derived solely by taxing the top 1% of income earners at around $2.5 trillion. That’s far below the amount the administration wants to spend.
As I’ve been saying consumption taxes prebated at a varying rate depending on income to ensure progressivity are the way to go. Hard to cheat and much easier to administer. But a lot of that won’t fall on the top 1% at people earning much more modest sums.
What happens to AMZN stock if Jeff and his brother blow up on the launchpad?
Would that be a “Black Swan�