Pethokoukis, Economics, U.S. Economy

The conservative case for middle-class tax hikes

Credit: Tax Notes

Credit: Tax Notes

US federal revenue as a share of GDP averaged 17.9% from 1960 through 2013, dipping as low as 15.1% in 2009 and 2010 and climbing as high as 20.6% in 2000. This year it’ll be roughly 17.5%.

The big question: can we keep revenue/GDP at the average level of the past 50 years for the next 50 years? Some things to keep in mind when approaching that question:

1. To cover the projected increase in health and Social Security spending, the tax burden would have to be roughly one-third larger in 2038 and more than one-half larger in 2063 than it is today.

2. Keeping these programs at 10.6% of GDP rather than growing to 20.8% by 2063 would require that benefits be cut in half from the level implied by current policy.

3. As e21′s Charles Blahous recently explained, the aging of American society will increase health care spending even if we are able to get a handle on health-cost inflation: “Last year CBO estimated that over the next quarter-century, cost growth in the federal health entitlements and Social Security will be 75% attributable to population aging and only 25% to health cost inflation. Thus even in the unlikely scenario that we completely conquer health cost inflation, we would still have to confront the bigger problem of the growing number of people receiving federal health benefits.”

4. Even Paul Ryan’s budget proposal calls for revenue to rise to 19.1% of GDP by fiscal 2023, significantly above the 1960-2013 average of 17.9%.

5. Taxing the wealthy won’t be enough. Economists at the Urban-Brookings Tax Policy Center have calculated that raising the top two ordinary income brackets to more than 95% would not be enough to bring the ratio of debt to annual GDP down to 60% by 2035. And that ignores likely changes in taxpayers’ behavior such as less working and saving, not to mention tax avoidance.

Some of the above numbers and analysis comes from a new paper by AEI’s Michael Strain and Alan Viard.

They see six fiscal realities that many folks on the center-right need to understand when thinking about tax and spending policy going forward: a) defense spending will decline as a share of GDP; b) entitlement benefits will be restrained relative to current policy; c) revenue will rise as a share of GDP; d) a shift toward consumption taxation will occur in some form; e) much of the burden of fiscal consolidation will fall on the broad middle class; f) and consolidation will be achieved through bipartisan agreement.

Their bottom line:

Policies to reduce the long-run deficit should be agreed upon and enacted as soon as possible, to be implemented over a period after the economy recovers from the Great Recession. We particularly warn against waiting to see whether the long-run projections will change. Even if healthcare costs grow at a dramatically slower pace than projected, it is still certain that a large imbalance will need to be addressed. Given the massive size of the projected imbalance, prudence dictates that the projections be taken seriously, if not conclusively, and acted upon. To support robust economic growth, we propose heavy reliance on entitlement cuts rather than revenue increases. We emphatically recommend acknowledging that the broad middle class must bear much of the burden of long-run deficit reduction.

If there is a data-driven, fact-based countercase, I would love to hear it.

20 thoughts on “The conservative case for middle-class tax hikes

  1. “We emphatically recommend acknowledging that the broad middle class must bear much of the burden of long-run deficit reduction.”

    Quite obviously you are not running for office nor would you be elected if you did. Substitute the word “denying” for “acknowledging” and you might stand a chance.

    • The solution seems obvious. Dump the income tax and limit government to doing only the things that it is authorized to do by the Constitution as written.

      Of course, the GOP mouthpieces would have none of this even as they pretend to stand for small government while they ignore the fact that defense related activities consume more than the total amount that comes in from personal income tax.

      • “while they ignore the fact that defense related activities consume more than the total amount that comes in from personal income tax.”

        Yeah, but so what? Millions of Americans pay all sorts of federal taxes besides income tax.

        And it all goes into the same pile. We should eliminate the shell games.

        • Yeah, but so what? Millions of Americans pay all sorts of federal taxes besides income tax.</b.

          So what? All of the individual federal income tax cannot pay for defence related expenditures and you think that it isn't a problem? Don't you claim to be a fiscal conservative?

          And it all goes into the same pile. We should eliminate the shell games.

          What you should eliminate is around 95% of what the federal government does. Have you forgotten that Americans chose republican federalism over nationalism?

          • “Have you forgotten that Americans chose republican federalism over nationalism?”

            Oh, shut up, Vangel. I’m not defending our bloated federal leviathan. You think everyone other than you and your master Ron Paul are corrupt statists.
            But the truth is the majority of this generation of Americans chose Barack Obama, hardly a paragon of federalism. If we can roll it back then let them start at least paying for all the free shit they’re voting for.

          • But the truth is the majority of this generation of Americans chose Barack Obama, hardly a paragon of federalism. If we can roll it back then let them start at least paying for all the free shit they’re voting for.

            How about stopping the stuff that they did not want? Like all those wars that most voters oppose? You really think that American taxpayers want to pay for the defence of Europe, Japan, or Korea? Or keep troops in Afghanistan for another ten years? For a guy who does not support big-government you have a lot of tolerance for its activities.

          • “How about stopping the stuff that they did not want? Like all those wars that most voters oppose?”

            The war in Afghanistan was overwhelmingly supported by the American people right up until the past few yrs. The war in Iraq also had majority support on the front end, depending on how the questions were worded. In May of 2003, “A Gallup poll made on behalf of CNN and USA Today concluded that 79% of Americans thought the Iraq War was justified, with or without conclusive evidence of illegal weapons. 19% thought weapons were needed to justify the war.”

            http://en.wikipedia.org/wiki/Popular_opinion_in_the_United_States_on_the_invasion_of_Iraq

            “You really think that American taxpayers want to pay for the defence of Europe, Japan, or Korea? Or keep troops in Afghanistan for another ten years? For a guy who does not support big-government you have a lot of tolerance for its activities.”

            Show me where have I ever voiced support for any of those deployments. I believe in a strong military, and an aggressive policy against terrorism. That doesn’t mean I support every $ spent on the military, and every policy the military carries out.

          • “So what? All of the individual federal income tax cannot pay for defence related expenditures and you think that it isn’t a problem? Don’t you claim to be a fiscal conservative?”

            That wasn’t my argument. My argument is it’s dishonest to play shell games with taxes. This is a Larry G tactic you are deploying. All my federal taxes are taken out of the same pocket and dumped into the same pile. There shouldn’t be any reason we can’t cut Medicare, Social Security, Defense, etc, regardless of which tax supposedly funds a given program.

      • Personal income taxes yielded about $1.1 trillion in 2012. All defense-related spending was about $900 billion. The GOP wants the limited government you seem to want, and the Democrats certainly do not. The real answer to paying for everything lies in spending restraint, but also in re-enabling a fast-growing economy. Fast growth is not a possibility when all levels of government in the US eat up 60% of the economy. We need only look at the example of Europe.

        • Personal income taxes yielded about $1.1 trillion in 2012. All defense-related spending was about $900 billion.

          It is higher than that. Add the Pentagon, CIA drone program, the DOE’s nuclear arsenal budget, NSA, NASA military satellite budget, DHS, VA, off budget war funding, and interest on the debt accumulated for previous wars and you have a number that is more than $900 billion. We have listed those and other expenditures on this site and Mark’s old site previously.

        • The GOP wants the limited government you seem to want, and the Democrats certainly do not.

          Neither side wants small government. The GOP did not propose any real cuts in spending. Its budget was not all that different than Obama’s. I support as small a government as possible. That means cutting defense spending by around 90%, ending all foreign wars, closing of foreign bases, eliminating the departments of Health, Commerce, Housing, Agriculture, Education, Energy, etc. When the GOP takes a similar approach I will consider supporting it.

          • “When the GOP takes a similar approach I will consider supporting it.”

            A) No you wouldn’t. One slight deviation from your fringe demands and you would still say the GOP is as bad as the Democrats.

            B) Who really gives a sh*t since you’re Canadian.

  2. Demographic trends will lead to a Federal expenditure share in the mid 20′s within a decade or so. Unless we want to drastically alter the role of the fed’s in the role of medical insurance this growth is inescapable. Higher taxes or euthanasia are the options for fiscal rectitude.

    • Unless we want to drastically alter the role of the fed’s in the role of medical insurance this growth is inescapable. Higher taxes or euthanasia are the options for fiscal rectitude.

      The current system is not sustainable. The role of government will have to change or you will have to create an even bigger police state to keep order.

  3. No mention of raising taxes on the rich? By a whole lot? And raising taxes on giant corporations? By a whole lot? And taxing the hell out of offshore accounts?

    Then maybe we can think about taxing the group whose income is falling.

    • No mention of raising taxes on the rich? By a whole lot? And raising taxes on giant corporations? By a whole lot? And taxing the hell out of offshore accounts?

      The rich pay most of the taxes and a higher proportion of taxes. If you are rational you will suggest the end of using taxpayer funds to bail out the reckless. That would include the rich, middle-class, and poor. Those that need help should be helped by family, friends, churches, and the community, not ineffective and unaccountable federal bureaucracies.

      Then maybe we can think about taxing the group whose income is falling.

      Why tax income at all?

  4. I have a crazy data driven countercase. How about we implement policies to create an environment that will increase the employment rate back to historical norms? Doing that is worth ~$500B a year in annual federal tax revenue.

    This is the obvious first step. It is extremely nauseating when government policy causes millions of people to be out of work and the only answer the “smart and serious” people come up with is to raise taxes on those who still have a job.

    Pethokoukis is becoming just another left wing economic joke.

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