[FoRK] Like Having Medicare? Then Taxes Must Rise

Stephen D. Williams sdw at lig.net
Thu Feb 26 22:23:45 PST 2009


Without comment...

http://www.nytimes.com/2009/02/25/business/economy/25leonhardt.html?_r=2

Like Having Medicare? Then Taxes Must Rise

Article Tools Sponsored By
By DAVID LEONHARDT
Published: February 24, 2009

Toward the end of Monday’s meetings on fiscal responsibility at the 
White House, Senator Kent Conrad stood up and produced a little bolt of 
honesty. “Revenue is the thing almost nobody wants to talk about,” said 
Mr. Conrad, the chairman of the Senate Budget Committee. “But I think if 
we’re going to be honest with each other, we’ve got to recognize that is 
part of a solution as well.”


Mr. Conrad’s frankness was delivered in the cryptic language of budget 
experts, and many people might have missed the point. So allow me to 
translate:

Your taxes are going up.

They will probably go up in the coming decade, and the increase will be 
permanent. For a half-century, federal taxes have remained fairly 
constant relative to the size of the American economy — equal to about 
18 percent of gross domestic product. But the 18 percent era has to end 
soon.

It won’t end because President Obama is some radical tax and spender, 
either. It will end because of a basic economic reality.

Americans have made it clear that they want a certain kind of 
government, one that can field a strong military and also maintain 
popular programs like Medicare. Yet we are not paying nearly enough 
taxes to maintain those programs. Even major changes to the health care 
system — the single most important step for closing the budget gap — 
will not close it entirely. Taxes must rise, too.

This is a point on which serious Democrats and serious Republicans 
agree, even if they do so with euphemism. “We are on an unsustainable 
path,” says Peter Orszag, Mr. Obama’s budget director. Judd Gregg, the 
ranking Republican on the Senate Budget Committee, has said, “Revenues 
are going to have to go up.” Douglas Holtz-Eakin and Dan Crippen, budget 
experts who advised the McCain campaign, have quietly acknowledged the same.

Fortunately, the coming tax increase does not have to be economically 
ruinous. Despite all the scary stories you’ve heard, the evidence that 
higher taxes necessarily cripple an economy is somewhere between thin 
and nonexistent.

When over the past 60 years did the American economy grow fastest? The 
1950s and 1960s, when the top marginal tax rate was a now-unthinkable 90 
percent. And when over the past generation did the economy grow fastest? 
The late 1990s, when President Bill Clinton briefly took federal taxes 
to 20 percent of the G.D.P.

The real uncertainty is how, in the current political climate, Mr. Obama 
will manage to persuade people that taxes must go up. In his speech on 
Tuesday night, he didn’t even try. But he doesn’t have forever to do so.

Eventually, the foreign investors lending the federal government 
billions of dollars every week — to make up for the current gap between 
taxes and spending — will need a reason to believe that those loans will 
be repaid. Otherwise, they will begin demanding much higher interest 
rates. That could create a new financial crisis.

“Something that’s unsustainable, like a dysfunctional relationship, can 
go on longer than you expect,” Mr. Orszag has said, “and then end faster 
and messier than you think.”

•

In his new book, “The Tyranny of Dead Ideas,” Matt Miller nicely lays 
out the history of American taxes. He begins the story with Adolf 
Wagner, a 19th-century German economist who predicted that taxes would 
rise as societies became wealthier. The idea became known as Wagner’s Law.

“As people grew more affluent,” writes Mr. Miller, a journalist and a 
consultant for McKinsey & Company, “they’d want more of what only 
government could provide — a strong military, public order, good schools 
and assorted welfare benefits, services that private citizens would have 
trouble arranging for on their own.”

The tax increases to pay for these activities do bring a cost: they 
reduce people’s incentive to work. But history has shown that this cost 
isn’t enormous. Taxes rose sharply in the first half of the 20th 
century, starting from just a few percentage points of the G.D.P., and 
the country still prospered. So long as the government spends the money 
well, the benefits from taxes — security, education, health — can far 
outweigh the costs.

To be sure, the federal government is not currently spending its tax 
revenue very well. In particular, it’s wasting billions of dollars each 
year on health care that doesn’t make people healthier. Unless 
Medicare’s policies are changed, this waste will lead government 
spending to rise to 32 percent of the G.D.P. over the next three 
decades, from 20 percent in recent years.

But an overhaul of the health care system won’t be enough to bring that 
number down to the current level of taxes. That’s the whole point of 
Wagner’s Law. Over time, societies will spend more of their resources on 
services like medical care, since they can already afford basic material 
comforts. And these services are precisely the sort of service that fall 
to the government.

Think of it this way: A tax increase isn’t so much a barrier to a 
society becoming richer as it is a result of a society becoming richer.

To the extent that Mr. Obama has talked about raising taxes, he has 
focused on households that make at least $250,000 a year. And their 
taxes will certainly need to go up. In the last three decades, as the 
pretax income of the top 1 percent of earners has soared, their total 
federal tax rate has fallen to 31 percent, from 37 percent, according to 
the Congressional Budget Office.

But the problem can’t be solved just by taxing the rich. That top 1 
percent pays only about one-quarter of federal taxes. Once the recession 
ends, taxes on the not-so-rich will need to rise, too.

There are many ways this could happen. Congress could pass a consumption 
tax, which would bring the side benefit of encouraging people to save 
more. Or it could raise tax rates. Or it could get rid of the various 
subsidies for housing, which create an incentive to overinvest in 
housing. (How’s that working out, by the way?)

But none of these ideas would be nearly as painless as the niceties of 
tax jargon sometimes imply. In the end, the ideas aren’t just about “tax 
simplification” or a “flatter, fairer system.” They’re about raising taxes.

So how will it happen? The best bet, I think, is a jujitsu strategy: 
someone will figure out how to convert weakness into strength.

We find ourselves facing long-term budget deficits largely because we 
don’t pay enough heed to the future. Paying less tax in 2009 is 
concrete. Leaving our children with a solvent government is less so.

But this same short-sightedness can be turned on itself. In 1981, 
President Ronald Reagan named Alan Greenspan to head a bipartisan 
commission charged with closing Social Security’s deficit. At the 
commission’s recommendation, Congress increased Social Security tax 
rates and raised the retirement age. The rub was that most of the 
changes didn’t take effect until future years. The last of them still 
haven’t taken effect.

Mr. Greenspan’s reputation isn’t what it used to be. But he was onto 
something here. Increasing tomorrow’s taxes is much easier than 
increasing today’s.

E-mail: leonhardt at nytimes.com





More information about the FoRK mailing list