Even under the most optimistic assumptions, taxes on the rich will still not cover a large fraction of the costs of a European-style welfare state.
By Cliff Asness
Cliff The only way to finance a big
European-style state is to have it paid for by massive taxation of
everyone, mostly the middle class. Right now, we are avoiding honest
debate on this fact.
The central issue of our time is the debate over the
size and scope of government. Two unpleasant but undeniable mathematical
truths limit the feasible policy choices. The recent sound and fury of
the fiscal cliff follies in the end signified nothing because the
resolution was in fact just a denial of both truths.
The first truth is that the current tax rates cannot support the
promises made to middle-class Americans. The most unaffordable items in
fiscal projections are Social Security for everyone and
government-sponsored health care for the middle class. You cannot
preserve these even with Draconian slashing of military, infrastructure,
welfare, education, and other expenditures.
The second truth is that you cannot pay for the Life of Julia, or any
vision of a cradle-to-grave welfare state, without massive and
increasingly regressive middle-class taxes. The poor don't have the
money to pay for a European-style welfare state, and the rich, rich as
they are, don't have anywhere near enough.
Not only that, it's easy to tax middle-class assets and transactions —
things like payrolls, sales, and real estate — but soaking the rich
means taxing investments. Investments are complicated and can be
restructured to minimize taxes. Also, investments are the lifeblood of
economic growth. Raising significantly more taxes from the rich also
requires higher marginal tax rates — and their rates are already quite
high. High marginal rates distort the economy and yield less revenue
than anticipated because they increase the rewards for legal and illegal
tax avoidance.
That's not to say it's impossible to get more money from the rich,
but it's tricky and past attempts have typically been less effective
than forecast and often counterproductive. Moreover, even under the most
optimistic assumptions, taxes on the rich — or taxes on businesses,
financial transactions, or anything else aimed at the rich (and often
hitting others) — will still not cover a large fraction of the costs of a
European-style welfare state. Ask the Europeans — they’ve tried it all
and failed.
To be in our political center today, you have to deny both these
truths and pretend that if we sharpen our pencils and make a bunch of
wildly optimistic assumptions, we can close a few tax loopholes, cut
some waste from spending, and maybe nudge upper-income tax rates up a
little, and continue merrily on the same big-and-growing-bigger
government path without unfortunate consequences. This is a “balanced
approach,” as it ignores both mathematical truths equally, but the
denial of clear reality means this approach is doomed to fail.
Surprisingly, many progressive pundits are moving away from their
traditional complaint that America’s tax code is too regressive,
favoring the rich. They are starting to tell us, albeit only after an
election mainly contested on these issues, the truth: to fund the
European-style social welfare state which they advocate, we must tax everyone more.
For example, Ezra Klein, blogging for the Washington Post on December 7th, writes,
“The need for tax receipts to grow underscores the necessity of finding
an efficient way to collect them. Experts say that should include tax
reform and new tax sources that take the pressure off the income tax,
such as a value added tax or a carbon tax.”
Klein is mild compared to Eduardo Porter, who writes in
the New York Times on November 27th, “Many Americans may find this hard
to believe, but the United States already has one of the most
progressive tax systems in the developed world” and “Taxes on American
households do more to redistribute resources and reduce inequality than
the tax codes of most other rich nations.” Mr. Porter, it is shocking to
see you argue in the New York Times that the United States is a
progressive paragon! Those in the Occupy Wall Street movement must be
surprised to learn that you, one of their standard-bearers, think the
United States already does considerably more redistribution than Western
Europe!
These pundits know the math. To achieve anything like the European-style entitlement state they advocate, we need to tax everyone
a lot more, not just the 1 percent. Despite all the drum circles
protesting the inequitable distribution of resources, the wealthy just
don’t have enough. The middle class and even the poor must step up to
carry more of the burden if this is our desired endgame.
In his November 27th op-ed, Porter also writes “The experience of
many other developed countries suggests that paying for a government
that could help the poor and the middle class cope in our brave new
globalized world will require more money from the middle class itself,”
and “Big-government social democracies, by contrast, rely on flatter
taxes to finance their public spending.”
What we cannot have is the Life of Julia at no additional burden to 99 out of 100 of us.
In a similar vein, Jared Bernstein, a senior fellow at the Center on
Budget and Policy Priorities and a former economist for Vice President
Biden, writes, "It's perfectly reasonable for the White House to begin
collecting more revenue from folks who have done by far the best in
pretax terms." But wait a moment for it — he then adds, "But ultimately
we can't raise the revenue we need only on the top 2 percent."
Note the use of “2 percent,” a number the president himself has begun
using more often. It is a small but telling evolution from decrying the
“1 percent.” One wonders if the Occupy Wall Street protestors have
corrected their signs to read “We are the 98 percent”? Are those in the
98th percentile already saying “They came for the 1 percent and I said
nothing…”? According to the more honest progressive pundits above, it
will not be long until the 50th percentile is saying it too.
If we take the logic of a Porter or Klein or Bernstein seriously —
and we should — their prescription for taxes is nearly the opposite of
the president’s public stance. Let’s say what Porter and others are
saying but in plain English (or, failing that, let’s just underline a
lot).
If we are to redistribute like Europe, we must tax like Europe. The middle class must pay more taxes and they must pay a larger share of the tax burden.
The president, in contrast, is vowing to raise taxes on only the rich.
One wonders if President Obama would have won the election if he had
warned voters that “to pay for Obamacare, stimulus spending, increased
regulatory oversight, and the rest of the big government wish list I
believe important, we need to raise the level and share
of taxes paid by the middle class”? One also wonders why more
progressive pundits were not as clear about their goals and the
necessities pre-election as they are starting to be now.
The choice the country faces is simple. We can have big government
and the Life of Julia (at least for a while, but that is another essay),
with everyone paying through the nose and the middle-class share of
taxes rising not falling, or we can return to the American tradition of
limited government, with everyone paying a smaller burden to the state,
with relatively limited services for, and relatively light taxes on, the
middle class. What we cannot have is the Life of Julia at no additional
burden to 99 out of 100 of us. Nobody, Left or Right, really thinks
that math works, no matter what they may say in public.
Surprisingly, many progressive pundits are
moving away from their traditional complaint that America’s tax code is
too regressive, favoring the rich.
So what happens if we continue down the current path, with perhaps
some small amount of revenue raised from some additional taxes on the
rich? Remember, the only way to finance a big European-style state is to
have it paid for by massive taxation of everyone, mostly the middle
class. Right now we are avoiding honest debate on this fact, perhaps
because those desirous of this change know the middle class would rebel
if it saw the future bill it will have to pay. Instead, large government
benefits are being continued and increased, and still new ones
introduced, with little accurate discussion of who will ultimately pay.
What happens historically when benefits are bestowed without a bill
also coming due is that we get hooked on them. Then, even when they
become disasters not worth their cost, people are terrified to change
them, as giving something up is indeed quite frightening.
Of course, as a byproduct of this growth in the state, many of us
believe we also suffer a terrific erosion of liberty, free-enterprise,
and individual responsibility and initiative.
Finally, after we become fully addicted to the latest increase in big
government, the bill will ultimately be presented to everyone
including, and in all likelihood over-emphasizing, the middle class and
the poor. The people who were promised they would be untouched will see
the largest proportional hikes. That’s exactly what has happened in
Europe. We have seen this movie before, but this time we don’t need
subtitles.
In other words, if we told everyone the ultimate destination right
now, the country would likely reject it. But if built up in this
piecemeal manner with benefits up front and the bill presented later, it
can become reality.
The way to boil the frog of freedom is slowly.
We may, with open eyes, choose the reassuring security of big
government with a far larger safety and subsidy net and far higher taxes
for all — by no means just the “rich” but in fact more so on the middle
class — and likely the sclerotic growth and dependency of Europe. Or we
may choose the opposite. But we deserve an honest debate about this
critical issue. A debate missing from the last election.
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