Tax Cuts For the Rich
There are lots of good reasons to dislike the OBBB, but political rhetoric is heavily focused on the “tax cuts for the rich” and “tax cuts for billionaires” themes. Today, Noah Smith, one of the most widely-followed economic commentators, blamed the growing public debt mainly on the Reagan, Bush, and Trump tax cuts, titling his substack post "We Can't Keep Cutting Taxes for the Rich."
Let’s look at some facts. In 2002, federal tax revenue was 17% of GDP, spending was 20%, and federal debt held by the public was (what sounds today like a very low) 32%. Last year, tax revenue was still at 17%, spending (which includes interest on the debt) was up to 25%, and debt had climbed up to 97% due to a long string of deficits. During all the intervening years, tax receipts had stayed within a narrow band centered on 17%.
How is this possible when there were large tax rate reductions under Bush and Trump 1.0? With a progressive rate structure, (60% of federal taxes are paid by the top 5% of payers and 72% by the top 10%) nominal income growth every year, if uncorrected, will push taxpayers into higher brackets and raise the tax take — a phenomenon known as “bracket creep”. The tax cuts had done little except to counteract the bracket creep and keep the tax take in its normal range. The OBBB doesn’t include a further “tax cut for the rich,” but does prolong the cuts made in 2017 — except for special-interest gimmicks like no tax on tips or overtime and a particularly unwarranted extra deduction for seniors receiving Social Security.
As we know from projections by the CBO and other sources, the OBBB will create a string of even larger deficits far into the future and take the debt/GDP ratio to stratospheric heights (160%-200%, depending on your exact assumptions), threatening a debt crisis.
Given that prognosis, maybe taxes as a % of GDP in the U.S. should rise, as Paul Krugman, Robert Reich, and others have argued. U.S. taxes are lower than in most EU countries, although it should be kept in mind that most of those countries rely on a Value Added Tax that hits middle- and low-income taxpayers hard, a device that has been a political nonstarter here. Personally, like a large number of economists, I would be in favor of replacing the income tax completely with a (mildly progressive) consumption tax, which would provide better incentives for the saving and investment that help power economic growth, but, once again, such a thorough tax reform never seems to get any political traction.
A politically-feasible solution will probably require some combination of tax reform and control of the spending increases baked into the major entitlement programs, Social Security and Medicare, by population aging and cost pressures. But more on that at another time.
As a frequent reader of your work, I’d like to request that you indulge me with your time as I write a longer reply which I’m unable to condense any further:
1. The dynamic where we have ever-increasing deficit, debt, debt:GDP, and gov. expenditure as % GDP numbers is one all democracies seem to confront. There is a reason the Founders supported the Tenth Amendment restricting the Federal Government to only those prerogatives explicitly allocated to it. At the risk of hugging the third rail, FDR tying healthcare to employment, unleashing the social security demon, and starting the student loan bubble should mark him as one of the worst POTUS’s in history. An education system which addressed this wouldn’t have produced a populace which let matters get to the present situation. Hero worship allowed to him only strengthens the case for “DO SOMETHING” tax and spend foolishness, as NYC is demonstrating.
2. As a tiny sliver of the economy carries an ever-increasing share of people who are tax-negative on net, the democratic process incentivizes ever more onerous taxation. Progressive taxation almost demands this spiral.
3. I’m in my 20s. I don’t expect to see Social Security. Yet I have to fund it. My generation is split into those who want it “saved” and those who know we’re funding another generation. Combine this with its redistributionist setup and there is a real opportunity for a Romney-esque correction.
4. If we are to amend this demise of democracy the Founders predicted, we need to use the language of morality. The average billionaire has paid enough into Social Security, Medicaid, and Medicare to be deemed a lifesaver. This needs to be celebrated and the tax-burdens need to be admonished. If this is no longer a shared burden, I expect the more affluent classes will lose all buy-in w.r.t the democratic process and national pride. This can be fixed but only by unapologetically appealing to the Darwinian undercurrent my generation possesses- it mirrors the precepts Madison and Jefferson revered.
5. I say this advisedly: Noah Smith isn’t an honest broker of truth. I know of at least two instances where he, despite charging his subscribers for his input, and himself knowing the facts, has lied. These are in matters I’m well-informed on. I trust there are more I haven’t caught. He is thus, technically, guilty of wire fraud in this respect, absurd as it may seem to prosecute him for this sleight of hand. As someone who values your writing a lot, please treat him more like an influencer with a large fan base.
6. A consumption tax would make capital formation even harder for those struggling. I would argue that privatization of retirement funds instead increases the population% committed to fiscal and monetary sanity, while fixing the same issues.
Thanks for your time! I would love to know what you think of my perspective.
VAT requires a Constitutional amendment, unfortunately.