Responding to Yuval Levin on the future of more tax hikes


Yuval Levin is a reasonable guy. He looks at the above chart and draws a perfectly reasonable conclusion over at NRO:

The idea that you can leave today’s spending trajectory in place and pay for it with rising taxes is just a fantasy. Revenue is now a bit below its postwar average, but a return to that level (which CBO projects, again based on potentially dubious expectations of robust growth) would do precious little to address our coming fiscal calamity. What you see here is a spending problem, and it requires a spending solution. That’s not a matter of ideological preference but of the actual nature of our budget trends. … This is the problem to be solved. And it cannot be solved with tax increases, for reasons both political and economic. The Democrats have spent years arguing for a tax increase on the wealthy, now they’ve gotten it and basically gained nothing in the fiscal debate, and they aren’t getting any more tax increases. So can we get to work on the actual problem?

I think the answer from Democrats will be “No.” And here’s why:

1. Many on the left simply don’t believe or accept the numbers reflected in the chart. The spending number is driven by Medicare spending. And liberals now think the CBO is wildly exaggerating the cost of Medicare going forward.

2. Many liberals think the U.S. can afford to raise taxes dramatically from current levels. Research from liberal economists Peter Diamond and Emmanuel Saez suggests — wrongly, I believe — the top marginal rate could go to at least 70% without hurting economic growth.

3. Another example: The liberal Economic Policy Institute has created a model budget through 2035. It pegs spending at 27.8% of GDP (40% above its postwar average) and revenue at 24.1% (a third above its postwar average).

And the increased revenue comes almost entirely by raising taxes on the wealthy and on business including a) letting the Bush upper-income tax cuts expire, b) adding a 5.4% millionaire surcharge, and c) taxing all investment income at labor income rates. Clearly liberals think their tax-hike strategy has plenty of room to run, even though it makes our lopsided tax code even more distorted. They believe the long-term fiscal problem can be solved with a big helping of tax hikes and some IPAB cost controls lightly sprinkled in.

4. Is it true that liberals “aren’t getting any more tax increases”? I argued earlier today that President Obama may get some more tax hikes as part of the sequester/debt ceiling battle. But beyond that, what happens in a debt/dollar crisis? At that point, as we have seen in Europe, the politicians will include tax hikes as part of — or even the bulk of — of any austerity program. Bring on the value-added tax.

I hope Yuval is right, and he would be in a Washington where economic reality prevailed. But the evidence at hand would suggest that is not the case.

5 thoughts on “Responding to Yuval Levin on the future of more tax hikes

  1. I agree with Yuval. Wanting is not the same as getting. I don’t see a majority in either house voting for middle class tax increases at this point. Obama campaigned exclusively on taxing the rich. Now that is done, it seems like it would be politically very difficult to go back for more.

  2. Item #2 above – I can see how someone can make that assumption…since the US is stagnant and has extremely little to no economic growth you could raise taxes rates to 70% and you would still have extremely little to no economic growth. I guess the estimator never included negative growth due to increased taxes?

  3. Revenue at 21.6% of GDP in 2021? 24.1% in 2035? Man, that is just some bad forecasting right there.

    I wonder how they justify a forecast where revenue is at unprecedented levels.

  4. Question:

    Let’s take the statement that the CBO is over-estimating Medicare costs going forward at face value. Assume that is absolutely, 100% correct.

    My question is: why is that a bad thing? Shouldn’t we plan for higher spending?

    It seems to me that if one plans for higher costs, then, if those costs come in below what he was planning on, he has some extra cash. Conversely, if costs come in greater than what he planned, he needs to scrounge up some extra cash.

    • Congress never plans for higher costs because if they did, they would never get the spending passed in the first place. In 1965, Congress created Medicare by asserting that costs in 1990 would be $9 Billion. They were, of course, almost 8 times that projection. Had they owned up to a $67 billion projection, they could never have passed the bill. Honesty doesn’t pay when you work in Congress.

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