How long can Democrats cut the deficit by taxing rich people only? I assume there's still some juice there in the short term, but in the long term, we are going to have to squeeze entitlements or raise middle class taxes substantially. Would love to see a post on how to do this optimally from a policy perspective and another post on how to sell this politically...
As a thought experiment only, with all views welcome - what sort of political conditions would need to prevail for it to be conceivable to return federal personal taxes to their 1945-1980 levels? The driver then was chiefly very high and sustained levels of defense spending - close to 10% of GDP annually in some years. But the tax system in place at the time, with all its complexity and complicated sets of allowances (which reduced significantly most taxpayers' effective rates) did facilitate an expanded defense budget and growing social expenditure, without notable negative impact on economic growth (look at annual growth rates in the 1950s and 1960s). Doable again? If yes, how? If no, why?
Did the lowering of tax rates visibly reduce the taxes collected by the federal government? I'm looking at this (https://fred.stlouisfed.org/series/FYFRGDA188S) and it's not clear, I think.
There are two frameworks to use when engaging on the tax question: (1) economically or (2) as a matter of ethics/morality. You are using the first one.
I think (2) is more dominant in the discourse, even if I would prefer (1).
Oh, I fully agree! Argument (2) was by far the dominant in the EU discourse post-2008 ("Make those lazy PIGS pay their fair share."), but moving to the US (and subscribing to Matt) made me realize how wrong of an approach it was. (Full disclosure: At the time I thought it was a reasonable-ish approach.)
Sort of a side comment to this, but post-2008 has really showed the downsides to tying your economies to German fiscal and monetary policy. They are absolutely scared to death of deficits to a degree that is actually harmful to themselves and the rest of the continent. When there was those devastating floods in Germany in 2021, I listened to a good podcast noting that actually despite it's reputation, Germany has not actually been investing properly in infrastructure, including flood mitigation in part due to their absolute aversion to deficit spending.
Which also speaks to another issue. I honestly think a big reason that the EU and Europe in general were content to let Germany run their monetary policy was sort of this ingrained stereotype about "German efficiency" and "Teutonic steadfastness" which meant they were "very serious people"* who will always do the right thing economically or make the right hard decisions when in fact the last 15 years (until last 18 months) called for way way looser monetary and fiscal policy.
*It's funny, especially lately, Krugman's jibe about "very serious people" is aimed at inside the beltway deficit scolds. But honestly if you read his writing going back like 25 years, the jibe is directed as much at Germany as anyone else.
Also, Germans weren't the only hardliners in the negotiations. They weren't necessarily even the strongest hardliners. They had all this power because a lot (most?) of non-PIGS EU countries agreed with them on the basis of not having the virtuous hard-working Western/Northern Europeans pay for the excesses of those permanently vacationing Southern Europeans. (Yeah, I know that this last part sounds funny from the perspective of American stereotypes of Europeans.)
Finally, I can't take seriously anything Krugman has said on the EU crisis. ("The Germans are mismanaging the EU, so what if we dismantle it instead.")
This is the one case where the Silent Generation (not the Boomers) have a point. The 50s and 60s were fantastic from an economic perspective, and we should only be so lucky. The vast amounts spent on US government-funded research lead to Silicon Valley, the Internet, fuel cells, solar panels, electric vehicles, the list goes on and on.
I'm sure those same Boomers who very decisively voted for Trump (and like vote for him again in 2024) would be very ok with 60s tax rates and 60s levels of unionization.
So problem with internet comments; hard to get across sarcasm which was my attempt in my post. Actually agree with you, those Boomers nostalgic for the 60s are not reckoning with what they are nostalgic for, which would include much higher taxes.
Socially, they were relatively conformist and stultifying in many ways extremely disagreeable to more liberal (in the traditional sense) people. Economically, they were amazing. There's a reason this period is called things like the "Long Boom" and the "Wirtschaftswunder" and "les trente glorieuses" (https://en.wikipedia.org/wiki/Trente_Glorieuses)
After almost 4 decades of world war, depression and world war with major technological advances happening - when peace actually occurred, there was an economic boom. This is no more shocking than watching China have an economic boom for the last 30 years after massive economic malpractice for the previous 40+.
But in terms of wealth, income, living standards, social safety net, education, almost any other category you can imagine, the US is far better off now then it was then. A third of homes in the US didn't have indoor plumbing in 1950 and a sixth didn't in 1960 because so many people were incredibly poor by today's standards!
Yes, totally agree. 70 years later, the country is better off now then it was then. This is true for almost all countries. The growth rates and inequality and government investment then were much better than what we have now. We haven't been able to recapture the growth and investment rates of that period under left-center economics.
The need to keep the commies from taking over made the chamber of commerce more cool with taxes than they are today. They had even been primed for patriotic sacrifice by World War Two
Tax reform that effectively does reduce the deficit ought to shift resources from consumption to investment and so promote growth and more so if we eliminated high dead weigh loss taxes like the wage tax and the corporate income tax. And it could be made more progressive. What political circumstances could permit a pro-growth with equity program? I have know idea. The same one that would permit merit based immigration, cost-benefit based regulations, net taxation of CO2 and methane, and elimination of employer-purchased health insurance. :) The Second Coming of Neo-Liberalism.
I am with you on getting rid of employers part of the payroll tax. It makes no sense that if an employer invests in a machine that does x work he pays no extra taxes but if it is a person he has to pay the payroll tax, so he/she is being punished for providing the positive of work.
I'm not an economist, but I imagine that if all the other major economies in the world have been destroyed in a war and population is growing dramatically, you can afford a lot more inefficiencies in your economy. Those have to be two major factors in addition to many other ones that define that period. Europe taxes its population at a much higher rate across the board, and the trade-off is slower growth. Sure some taxes and spending are better than others, but this trade-off seems to hold generally, at least once certain basic provisions in infrastructure and education are met.
What great inefficiencies do you see in the American economy in the 1950s and 60s? Growth and productivity gains were amazing, and economic inequality decreased. From an economic perspective, it was a golden age.
Growth in the US was that amazing despite inefficiencies at least in large part due to the two reasons I cited (lack of competition abroad but growing global demand). One inefficiency would be the 90%+ marginal tax rate for high income earners before the Kennedy tax cuts. Another would be the wages we were able to pay manufacturing workers because they faced no competition.
In the alternate universe where WW2 didn't happen, America's terms of trade would've been less advantageous in the late 40s and early 50s, which would have translated into more difficulty in terms of acquiring claims on the output of Europe and Asia. But the world as a whole would've been richer—and output of goods and services available to American consumers larger.
The "US economy benefited from WW2's destruction of trade partners" take has always struck me as an obvious example of the Broken Windows fallacy, but admittedly I haven't researched it.
Huge inefficiencies. No merit-based immigration, employer-purchased health insurance, taxation of corporate income (inherently at non-uniform rates), protective tariffs and quotas. It could have been a "titanium" or "diamond" age, not a piddling "golden" age. :)
Taxes will likely increase over the next 100 years. Technology innovations will likely make prosperity increase and that prosperity will have to be shared to maintain social contracts.
Leaving aside the absolutely devastating impact a wealth tax would have on the economy. Warren’s own estimates (from her website), on the impacts of her wealth tax suggest it would raise $1.4 trillion over a 10-year forward estimate. That’s less than 2% of Federal spending.
Rather than a wealth tax which has been discussed below and was abandoned by most of the countries that tried it and at a minimum would be a humongous administrative burden to both government and peopl.e, we dont need to reinvent the wheel.
If the goal is to tax the wealthy more, the low hanging fruit, that would take little administrative action would be to tax capital gains on stock trades as income (currently taxed less so that stock traders pay less in taxes than an upper middle plumber) and increase estate taxes and cut out the "buy, borrow, and die" loophole that allows the very wealthy to pay no capital gains if they hold stocks till they die.
This would be administratively difficult in the early years but should be the second change I would propose to the tax system, after ending the fact that health care premiums paid by an employer aren't taxable income to the employee.
Buy borrow die is a way to avoid estate taxes. My memory might be a little off but I believe it hinges on the ability to, with the debtor’s agreement, agree to inherit a debt. Then the actual estate is the net worth which gets taxed and then you pay off the debt with the assets at the stepped basis (tax free).
Long term capital gains is a bit weird because you're taxed on maybe a decade of gains in the year that you sell, and you're exposed to risk of capital loss and inflation over that whole period. It's not like normal income.
You can argue about the exact rate but the things I'd be looking at to better tax capital gains are:
1) End step up basis, it's bullshit.
2) Create a wider definition of capital gains events. I'd treat any loan secured against the value of an asset as a capital gains event - you have an assessment of the market value of an asset, and you have a bunch of liquid cash being disbursed. This
A) closes the current loophole billionaires use to endlessly just take loans against assets to avoid paying tax by having "real" income
B) solves a lot of the problems of other proposals like yearly assessments of gains - you don't need some mechanism to assess the value of the assets, you just rely on the loan valuation, and you don't run into issues with triggering liquidity issues - the tax bill is aligned with a liquidity event.
I mostly agree, which means that to conform with internet norms I need to nitpick a few things.
My biggest caveat - who are we targetting? Warren likes to talk about billionaires and private jets but her wealth tax kicked in at $50 million, which is more the "flies first class" set. Back in 2019 Ron Wyden had a plan to elimnate stepped-up basis and tax annual market gains; kicked in at a net worth in the $15-20 million range. His 2021 version kicks in at $1 billion. Quite a difference.
*IF* we are talking about actual billionaires I'm skeptical that the liquidity event tax will capture much. Bezos borrows $500 million to buy a super yacht, and we tax it; good for us, but he still has $100 billion untaxed. There is no way he borrows and consumes more than a billion or two in his lifetime. (Fun with numbers - if Bezos and his sig other each spend $10,000 a day on stylish outfits they wear once and another $10,000 on fine wine and food, their annual bill is under $15 million.)
Secondly, if the tax revenue from Bezos is significant (say, $30 billion on $100 billion) *BUT* it doesn't affect his consumption at all, all we've done is convert private savings to public savings (deficit reduction.) No crowding in or out is happening, although explicit interest paid by the gov't will be reduced. I *think* that implies that, as is always the case, what matters is how the money is spent. Investing in a successful cancer cure or better public education is money well spent whether raised by taxes or by borrowing. Conversely, in a tight economy where inflation is a concern (eg, now) then converting Bezos' savings to public consumption by way of transfer payments will boost aggregate demand at an awkward time.
Last thought - for billionaires the basis step-up and the estate tax don't mean much. Their kids inherit the social clout that comes with leadership of a very well endowed foundation. College presidents, senators and the organizers of the Met Gala all take their calls. (And does Bono still tour Africa? That could be a thing too. Fun for the grandkids...).
Good comment, except I'll nitpick that public education is money well spent. The US is already at the very high end in this type of spending, with unimpressive results. Once you get past the prevalent myths about local funding of education and racial disparities in spending, you see that there really is no low hanging fruit in education spending. We have had decades of unmitigated optimism about education spend, and little to show for it.
Presumably capital flight and reduced investment in anticipation of the tax, strongly weighted toward the capitalist class and those who already have Swiss banking contacts. Strongly assisted by the illegiblity of corporate ownership and asset structure, Panama-Papers style.
Even ignoring existing stockpiles, a wealth tax seems like it’s effectively raising inflation (and decreasing real wages) for those persons and/or entities subject to it by whatever the net tax % is.
The need for measures of this kind is one of many arguments against a wealth tax. As the European countries that rescinded theirs realized some time ago.
I don't presume any of that, necessarily. Wealth and wages aren't the same thing, so I don't understand why you are lumping them together. How it is raising inflation if it cuts the deficit, which would lead to lower inflation in the long term?
Assume that I have $100,000 in the bank (or the stock market, or bonds, or whatever, it doesn’t matter), and the interaction of inflation and real returns is such that I have spending power after a year equivalent to $95,000 - this is run-of-mill real inflation of 5%.
(In a (fantasy) world in which my real income maintains pace with real inflation, the only real risk I face from inflation is exactly this evaporative effect on previously-accumulated wealth.)
Now assume that headline inflation exactly matches headline returns such that real returns and real inflation are 0%, but I’m subject to a 5% wealth tax - I’m in exactly the same boat as scenario 1 with respect to spending power, althogh my nominal amount of dollars is lower.
ED: you’re right that wealth and wages aren’t strictu senso the same thing, but the second I save any of my income rather than immediately consuming it, it becomes wealth. In other words, taxing my wealth is taxing my wages on a time delay unless I’m living hand to mouth.
Sanders is the one man who has admitted the massive new middle class taxes that will be required for his proposals. You have to give him credit for that, if not much else.
Yep. I'm a centrist Democrat and I do not fancy Sander's policy vision, but I deeply respect his straightforwardness and honesty.
You get all these David Shor type thought pieces about how the Dems should emphasize "bread and butter economic issues" over "social justice and identity". The elephant in the room is there are deep divisions among Democrats about all this bread and butter. We've got Sanders' small wing wanting to raise taxes and increase spending. Then there is the much bigger Democratic mainstream, that wants to raise taxes only on the 0.1% and also increase spending, but the new taxes can't match the new spending (or the current deficits).
1. Will cause massive amounts of capital flight from the US.
2. Will cause people to need to liquidate assets at tax time each year which will tank asset values - and in the case of stocks likely cause widespread market panic.
3. In any year that growth is less than 2%, you erode people’s asset base and make them actively poorer (effectively an income tax above 100%).
3. How is this new? I have to pay taxes every year even if my salary goes down. That's not a n effective tax rate of over 100%. Similarly, if I buy into a hedge fund or hold significant stocks, I have to pay fees even if my assets go down. I have to pay social security regardless of whether my income went up or down.
On 1 & 2 - what evidence would convo be you. These seems blindingly obvious of you think about a) the incentives and b) the literal logical requirements of the wealth tax.
On 3, that’s totally different. If you’re taxed at 30%of income, and your salary goes down. Your tax rate is still 30%. If you’re taxed at 2% of wealth, and you’re returns are only 1% that year (or heck! Negative at they often are), you’ve been taxed at a rate of 200% of your income for that year.
Evidence, this from WIki. Of the twelve OECD countries that instituted a wealth tax 7 abandoned it mostly for the difficulty in managing it as it involves the valuation of everything and easy to game, and because of capitol flight, This from that source:
"n 2004, a study by the Institut de l'enterprise investigated why several European countries were eliminating wealth taxes and made the following observations: 1. Wealth taxes contributed to capital drain, promoting the flight of capital as well as discouraging investors from coming in. 2. Wealth taxes had high management cost and relatively low returns. 3. Wealth taxes distorted resource allocation, particularly involving certain exemptions and unequal valuation of assets. In its summary, the institute found that the "wealth taxes were not as equitable as they appeared".[83]"
As a follow up to this, a similar statement is made anytime people suggest a millionaires tax in a given state will cause a flood of people moving to low-tax states, e.g., MA or NY to Florida. Yet it never really seems to happen, certainly not in the catastrophic way people maintain it will. Since this is Slow Boring, the thing that does seem to cause people to move is very high housing costs in the blue high-tax states.
1) But if the tax reform of which a wealth tax were a part does in fact reduce the deficit this will increase the growth of the US economy, in effect raise returns on assets.
2) Can accrue/pay quarterly estimates throughout the year. No effect on market movements
3) Encourages people to seek higher returns. :)
4) All said I don't think a wealth tax is worth the trouble relative to income tax reform
1: what does this mean? The wealth of current or former American citizens would be taxed regardless of where they have “flown”
2: this would be painful probably, but I think much less so than the alternatives
3: at the end of the day, somebody is contributing to paying down the debt. The claim is it is both morally better and better long term for the economy for it to be the people with assets that should pay, instead of people working for a living.
If you can accurately calculate all that wealth and if the imposition of such a tax doesn't push wealth from productive investments in the economy into art purchases, Swiss accounts, etc.
Matt's idea for a progressive consumption tax is better, but probably also difficult to calculate and a political non-starter.
We made our bed by choosing an income tax over a consumption tax, I submit that we should lie in it rather than submitting income that has already been taxed coming in to double taxation by also being taxed coming out.
Furthermore, while the talking points in favor of a consumption tax are basically that it incentivizes investment over consumption, I’m not sure that this is necessarily actually a great idea: firstly, because person A’s consumption is what drives person B’s investment decisions (“your spending is my income”), which admittedly more of a hypothesis on my end, and more substantively because I don’t think rational actors should actually forgo consumption under a consumption tax (though it may take a while for this to filter througu due to sticker shock effects, if it ever does).
Specifically, consumption *can’t* be forgone indefinitely under a consumption tax because death is treated as a form of consumption (otherwise you lose formal revenue-equivalence with an income tax). But in that case one is incentivized to spend down one’s estate prior to dying so that one can at least get some rather than zero value out if money to be taxed anyway - it’s otherwose bearing the harms of consumption taxation without even consuming! But weighting your consumption towards the time in your life when you’re least capable and able to enjoy things is facially insane: one should rationally exhibit moderate time preference (certainly on the order of 5-10 years) favoring earlier rather than later consumption.
Given that all the money is going to he taxed sooner or later, smoothing consumption or weighting it earlier in life is a good idea: but this completely runs counter to the nominal advantage of a consumption tax!
Not really. Even using the most extreme proposals and some fairly outlandish assumptions made in support, it’s only about $300 billion a year. And it’s probably unconstitutional anyhow.
You’d be far better off fixing some areas of traditional income taxes (making borrowing against an asset a realized event, ending the gift of stepping up value at death, etc.).
If you look at the history of wealth taxation in Europe most of the countries that tried it abandoned it. Wealth is so hard to evaluate and so easy to hide that it was just hard to do and it also resulted in capital flight. 7 of the twelve countries that tried it abandoned it including Italy, Germany, Austria, Denmark, and Finland (Source Wiki wealth tax).
The real reason a wealth tax is so tempting is because everyone loves panaceas, and everyone hates rich people, which is great for everyone's feelings, even if it is a bad idea.
My main issue with a wealth tax is the huge infringement on liberty and potential for abuse.
Warren's plan is to tax wealth over $50M at 2%. How do we know which households exceed this threshold though? A few possibilities
* We could make every single household report their wealth every year. That's a massive burden on everyone. You'd have to estimate the value of everything you own (cars, furniture, collection of vinyl recordings, etc.). Nightmare. Very few people would be capable of making the kind of accurate assessments that we expect wealthy people to hire accountants and lawyers to produce.
* We could just use the honor system. I don't think this is a serious possibility.
* We could rely on the IRS to "estimate" who is above the threshold and pursue audits for those who are expected of not paying their wealth tax.
The third possibility seems like the only workable one, but it gives way too much power for government to harass ordinary citizens, in my view. It would be too easy for the government to identify some political opponents and hit them with a massive intrusion into their privacy as well as a costly and time-consuming valuation task. Since valuing all of ones wealth would require disclosing tons of personal information, the wealth tax audits could be used to dig up dirt in the hopes of enabling subsequent prosecution of enemies.
There is also the matter, of course, that wealth taxes are extremely inefficient for growth. The "wealth" being discussed here is almost entirely in the form of investments. Wealth taxes cut private investment and redirect largely to social spending priorities that are best characterized as consumption. We will get to consume a bit more today, but we'll be poorer tomorrow and much poorer in the not-too-distant future.
I'm less perturbed by the efficiency issue than the liberty issue, as I think basic freedoms trump money.
There isn't, and the numbers don't work out either in votes (the last Congress didn't pass this proposal) or in revenue terms to cover Medicare's growth. The plan is to raise everyone's taxes, which is what happened when Democrats held the spending key (the House) from 1954 to 1994. They spent indiscriminately on many middle class entitlements, all while cutting outlays from military spending similar to how they plan to use Medicare now. Then inflation pushed people up the tax bracket in the 70s, which is the main reason Reagan came to power. Gingrich took a bit longer to happen, but Reagan was the real deal in that he put an end to %GDP spending going up and up.
The boring answer is they want to raise taxes on everyone and can't say that, so they propose plans that don't make a lot of long term sense until you think about how it's actually going to go down once Medicare's trajectory keeps going. They will raise taxes on working people for Medicare, then they will cut Medicare to even out the CBO score for other new promises they make. That is who they are deep down.
There's a lot there if the political will is there. Certainly you can bring down this debt considerably without going beyond the top 1%.
Its if we ask for a wider provision of social services that we have to look at broader taxation. If we look at countries with higher rates of taxation, they also have a broader taxation that dips into the upper middle class. Although the upper middle class (of which I am one) are not super-yacht rich, they do have all they need for a nice house, healthcare, college, and retirement - they can be leaned on for the working poor or environment or national security or what have you. But these people you will need a good political reason to tax - the top 1% you can just let whine while and people will cheer.
Combination of VAT instead of the wage tax tied to funding social safety net programs: Social Security, Medicare Medicaid, UI, means tested transfers; net taxation of CO2 and methane emissions; and increased personal tax rates, yes including down the income distribution it keep the highest marginal rates no more than around 50%. Revenues would also be raised by taxing indexed capital gains as ordinary income but not stepping up capital gains basis on inheritance and by transforming tax deductions into partial tax credits at less than than the highest marginal rate. Business income and taxes paid on business income would be imputed to personal incomes of owners. Deductions (not partial tax credits) would be increased for retirement savings and SALT deductions restored to shift progressive "income" taxation toward "progressive" consumption taxation.
That depends on what you define as rich and how much you tax. If you only define the rich as the billionaire class as Bernie likes to rail at, the top 1%, not much. But if you look at the top quintile that is a lot of money.
The top quintile makes 52% of the total national income which is about 25 Trillion, so about 13 trillion. If you raised taxes 5% on that quintile that would generate 650 Billion dollars. The average deficit post recession and pre Trump tax cuts (2012-2016) was about 500 Billion, so you would completely eliminate that with some for reduction.
Also, if your goal is to reduce the deficit you dont abandon a policy just because it doesnt eliminate it. The good is better than the best.
Think you meant the good is better than nothing or don't let the best be the enemy of the good. The best is better the good. That's what those words mean
Yes, thanks, I think I was referring to the expression that the good is not the enemy of the best.] What I hear is that people arguing because something doesnt completely solve a problem it is not worth doing.
I find that a single person making $200k/yr with no dependents pays an effective tax rate of 26% (including FICA/payroll taxes). I ran similar calculators for France and Denmark and got numbers in the range of 40%-50% for this same pretax income.
Democrats need to stop lying to Americans that the only reason we can't have nice things is because of Republicans refusal to tax the rich. The math plainly does not add up there. There is a reason why all these social democratic states *don't* have super progressive taxation.
I think it will be politically very difficult for the Dems to pivot to telling the truth here. Biden promised not to increase taxes on <$400k. It will be hard to walk that back and admit that increases on this group have been known to be necessary all along to fund even a fraction of the Dems spending priorities. Taxing the rich more heavily can, at best, address the deficit, but not finance new spending.
Moreover, while a tiny minority of democrats (like Sanders) openly call for higher taxes on all, this is not remotely where the more mainstream Chuck Schumer types are at. They are aggressively seeking tax cuts for the rich via SALT deduction cap increase. One of the funniest videos in political history are those showing Liz Warren respond to the question of whether her healthcare plan would require people to pay more tax. (She hems and haws that their "costs" would go down, while blatantly trying to dodge the actual question).
For those mainstream Democrats, I fear they have spent too long eating their own BS to ever change course. A toxic trend has washed over America where the idea that taking someone rich's money, and spending it how you wish. is somehow virtuous. I'd say it's a valid policy position, maybe even a correct one, but virtue is in self sacrifice, not making demands of others.
I really hated the disingenuous debate Democrats insisted on having in the 2020 primary--how many trillions should we add in spending without any substantial tax increases on the middle class?
I understand Matt's point that in an under-stimulated economy, spending is the right move, but the deficits were/are structural and carry over into new economic conditions like the ones we now have.
You don't mention this--and may well disagree with me--but China's rise means we'll have to spend more on defense too. They get far more for their spending than we do because they have lower costs of production.
"but the deficits were/are structural and carry over into new economic conditions like the ones we now have."
Right. The benefit of borrowing money at zero interest is free money, but if you don't plan to ever pay it back, you will have to later roll that debt over at higher interest and it makes things a lot worse.
Cut student loan interest rates. I’m in the salary wealthy camp ( e.g lawyers, doctors) and my biggest complaint with higher taxes is that I’m already paying the federal government lots of money in the form of student loans. I feel like this is why the student loan conversation is still worth having in the context of deficit reduction.
I mean tax compliance and taxing the wealthiest in society are probably low hanging fruit.
I mean automating tax collection and auditing with NNM could take quite a bit of work too.
So in all seriousness, if you put in a concerted effort… it would say about five years of progress (holding all the else constant) before you have to admit that the bulk of US society is under taxed for all the things they want the state to provide.
Firstly you would have to define rich. You are probably right if you define it as the top 1% as Sanders like to, but if you take the top quintile, that's a lot of money.
And the perfect is not the enemy of the better, so if you dont get all the way, however much more you tax is that much of a reduction which is better than not doing it.,
A big load or revenue could be obtained from simply taxing capital gains on stock sales as income which allows a stock trader to have a lower tax rate than their well paid secretary (remember Romney) or somebody who has a factory. The second would be higher estate taxes and luxury taxes.
A loophole is when a tax provision is used for unintended and unforeseen uses. Lower tax rates on capital gains are not a loophole -- it is well known and a conscious decision.
I'd be fine with raising capital gains rates to equal ordinary income rates. But I would also think long term gains should be inflation-adjusted. Once you take the inflation into account, the actual rates of today are much higher than the headlines.
It makes a ton of sense on fairness grounds, but is generally though to be quite bad for growth. I think there are even some social democratic states that don't tax cap gains.
I still think a small but meaningful financial transactions tax is a great way to make money and also has side benefits as well. There are thousands upon thousands of trades every day, so even a small 0.1% tax on every trade could be a real revenue raiser with not minimal deadweight loss and minimal extra transaction costs which means it's negative economic effects should be pretty negligible.
The side good is if it's done right, it should put a damper on High Frequency Trading since those trades would the ones that would be "harmed" the most and those are the trades that as far as I can tell have basically zero value and essentially represent "rents" to the companies that manage to have server farms slightly closer to the main server farms in Secaucus, NJ.
So first, I should emphasize that my primary point is a very small transaction tax is probably one of the better ways I can think of to raise taxes at minimal economic costs. Given raising taxes on literally anything carries a cost, I thought this was best alternative compared to other options.
Beyond that, I think HFT is itself a solution in search of a problem in its own right. The broader economic benefits of being able to trade in milliseconds instead seconds is basically nothing. So a again it's not so much that a HFT is needed to curb some truly egregious financial practice (unlike say the closing the carried interest loophole or reforming the step up basis for inheritance taxes), but more the costs that come with any tax to economic efficiency seem low to me.
I should mention the actual best way to raise tax revenue is almost certainly a VAT. But I think that would be an extremely heavy lift political. A HFT tax to me is a lot more sellable as a "tax the rich" gambit. Even though technically it would "harm" middle class investors who have 401K, pensions or money in index funds. The primary "harm" would be to "fat cat" wall street. Or at least Biden would much more easily be able to sway the public (and Congress) by framing it as such.
1. If there is a warning article from a decade ago and no real problems have happened between now and then, I think we should update our priors on the dangers of HFT
2. Yeah HFT seems like it's generating little value, but that's why all the value there is being arbitraged away.
3. If we want to tax rich people, we should just tax rich people.
Sometimes the stock market falls quite a bit and then immediately recovers. The only people who lose in that scenario are high-frequency traders themselves. It's not an issue worth solving.
From your link, click the link to the first example, which is where the name flash crash comes from. The authorities found that a click trader was responsible, not HFT.
Financial transaction taxes affect much more than high frequency trading. I'm not sure arguments for its enactment even have anything to do with high frequency trading. It's more like it is a type of VAT for financial services and products.
I think the financial transaction tax would have to replace the capital gains tax, and I'm amenable to the idea.
He's already written about raising alcohol taxes, but someone needs to talk about marijuana taxes as well. It's kind of ridiculous that just because marijuana is illegal to sell at the federal level but legal to use in many states, the federal government isn't able to tap this as a revenue source even as the social harms of widespread marijuana use have become clear.
I'm not sure alcohol taxes would be a rounding error *if* they were set at optimizing levels.
At $1 per half-fluid ounce of ethanol (a standard drink) you'd raise about $270 billion per year at current consumption levels. Of course a tax that high would reduce consumption and bring in somewhat less revenue than that, which is part of the point.
The problem here is twofold: one, tax legal marijuana too high, and people just grow/buy it off the black market (it’s much easier/cheaper to produce a mindbending amount of it illegally than alcohol) and two, people become convinced that the high taxes actually do anything besides fix the rounding referenced below. In Colorado, the drastic underfunding of schools is difficult to change because normies always say, didn’t we raise billions on weed that’s specifically marked off for schools? And the answer was, yes,
but we’re closer to a hundred billion dollars short to making the system actually work after decades of underfunding.
Allan good thoughts and I will take the last three. I am nominally in favor of 1 but also a realist and a physician and know that most years that I have been in practice they have proposed doing this and the health care lobbies- doctors, hospitals, physical therapists, pharma- prevail in Congress and nothing is cut and if you lower Medicare reimbusrsements too much below what commercial insurance pays, and it is already some 10-20% lower, people will just stop treating Medicare patients as most already do with Medicaid which pays less than Medicare.
They largely did reduce charitable deductions by raising standard deductions, but I think that is bad as we want to encourage charity.
The other ones I strongly support. I also favor luxury taxes.
Yes, it is like the person working too few hours and spending too much money, saying they cant get out of debt, as if it is impossible to either work more and/or spend less.
you said "clearly taxes alone can’t get fix the deficit" and I totally don't understand why not. Just math, right? I mean the politics are brutal, but making the numbers match is rather mundane, isn't it?
Spending is growing faster than the economy, so in the long run you really can’t. Especially when you consider that an evening population is going to drive entitlement spending up massively.
Firstly spending as a percentage of GDP from about 1975 to the recession of 2008 did not change, actually decreased and that included the Clinton years where we had a few years of budget surplus. Spending did increase but so did gdp.
And just because spending increases doesn't make it impossible to not have deficits. If spending increases 5% you have to raise revenues 5%, that is a no brainer known as balancing a budget.
We might pay more in taxes but we also earn more, so after tax income has actually risen over this period. If you make 10% more and pay 5% more in taxes, that is not so bad.
I presume you mean an aging population, which does have its downside and I am not opposed to increasing eligibility age b/c people are living longer and healthier longer.
I think his point is that current spending commitments have already baked in future spending increases that are almost certain to outpace economic growth.
Yes spending has increased but so has gdp and national income.
Spending will increase with Social Security and Medicare as people live longer and the over 65 percent of the population increases. Higher life expectancy is a good thing.
That has been going on for a while, but our increasing productivity has led us to absorb this and I have no reason to think we wont continue to be able to do this.
Taxes alone could solve the problem, simple math, though politically probably not achievable. A 4% increase on income for the top quintile would bring in more money than the average pre Covid deficit.
Not that I dont support spending cuts, because to make something politically possible you would have to compromise between the parties and the Rs have the HOR and likely will pick up the Senate.
And to worry about where the cuts will come seems to pale in the light of the Dems wanting to spend say another 400B on student loan forgiveness. Most of the deficit is about new spending rather than legacy programs like Social Security which might just require raising the cutoff point for collecting taxes and/or increasing eligibility age.
This is why Democrats should stop making that type of pledge. If you take it literally it means you're not allowed to raise corporate income taxes if one poor person in America owns one share of stock. It also means you can't raise taxes on alcohol, fossil fuels, et cetera.
The professional-managerial class that, for the most part, makes slightly under that number is now part of the Democratic coalition. That is where the political fight is now.
Agreed. I think the American left has been so nearly powerless for most of my adult life that it's allowed educated people to develop very idealistic views about income redistribution.
That's great as far as I'm concerned, but I think a lot of the support would turn out to be very soft if and when the left became strong enough to start moving the US closer to the Nordic model. To actually make that happen the Democrats will need a lot more working-class support, and that requires toning down some of the party's culture-war positioning.
The culture-war positioning is why the professional-managerial class has migrated to the Democratic Party. As in they, for the most part, support it.
Edit: The American working class isn't like the European working class. The American working class wants to be rich themselves, not eat the rich. The Americans who want to eat the rich are highly-educated "artistic" people who don't make a lot of money.
Sean, quite a bit, the average MD makes 200k, and probably other professionals, lawyers, dentists, make less.
I think a good way of defining the managerial class is the upper quintile or 20%, which turn out to be making greater than 150K.
That group, the upper quintile have well outstripped everybody in terms of grabbing a bigger share of the pie as compared to the middle classes which I define as 20-80 percentile.
The top 1%, the whipping boy on the left, the billionaire class are the convenient enemy. It is true that they have even outpaced the top 20% in gains, but by sheer number it is the top managerial classes that have driven income inequality.
That group has trended to the Dems and their good fortune probably has pushed the working classes away from the Dems as the middle class has not gained economically as much as the professionals.
I don't agree with that framing at all. It's not a zero sum game.
I'm OK with the concept that we fund some broad benefits with progressive taxation, but I reject the idea that anyone fundamentally owes their higher income to the other people they supposedly "took it" from.
Jeff, I think the myth I hear from the left is that it is all about the billionaires, who certainly have gained more than any other group and should be taxed more, but there are not enough of them to make big differences, just a convenient enemy. What really has driven the income inequality in the country is the outlier gains of the professional classes - doctors, lawyers, financial analysts, whose income gains have been much more than the lower 80%. I recommend a good book by Richard Reaves "Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust".
Although I agree Biden should not make that pledge, I read him as referring only to direct taxes like the income tax. Yes, corporate taxes are incident on everyone, but I can accept this fairly subtle marketing conceit.
I guess so, but I am not Joe Biden or a representative. The argument I hear in conservative circles is that you cant pay for social welfare without taxing the middle. The left claims you can do it by only taxing the top 5% or so. Both are wrong.
The inordinate gains in after tax income and wealth have accrued to the entire upper quintile who given higher taxes will still be outpacing the lower 80%.
Define social welfare? If you want Medicare For All taxes will have to go up a lot on everyone, including even those in poverty because it will necessitate a huge VAT. If you want something like a child tax credit, that can be done without raising tax rates at all. See Mitt Romney's 2021 bill.
Yes, the devil is in the details. Actually, I favor just expanding ACA which has largely been done already and we are down to only about 8% of the US population, about 28 M people, without health insurance, so I dont know what a lot means, but a lot less I would guess than say free college. ACA gives a partial subsidy to help people buy insurance and my napkin calculations put the cost if we gave people a 3K subsidy would be 84B. That could be achieved with an increase of maybe 0.5% in taxes on the upper quintile.
No taxes would not need to go up on everyone.
Of course a child tax credit will raise taxes on everybody without children who will make up the deficit. I support it for kids under 5. Over 5 we already are enormously subsidizing education.
I believe we should incentivize having children by paying the child tax credit in one lump sum, upon the birth of the child. More babies for the buck that way.
You don't cut. You increase immigration to expand the labor force and the economy. And you enact family friendly policies to see if you can get Americans to have closer to as many babies as they say they want. Matt discusses this in his book One Billion Americans
Not if you pay for them with tax increases, and the result is a larger work force 25 years down the road to support retirees. It's an investment in the future.
Anyway, the best method of reducing the deficit relative to the economy is economic growth, and an easy way to do that is to allow more immigration to increase the workforce, since we are currently at full employment for the prime age population. We should especially make it easier for trained professionals to immigrate and for foreign graudates of U.S. universities to stay here and work.
As a physician I witnessed the fact that American Medical Schools graduate too few MDs for the physician supply and so 25% of physicians are trained abroad.
Why in the richest country in the world we cant afford to train our own doctors and let our own citizens enjoy these high paying jobs, is beyond me. And we are creating a brain drain from much poorer countries that are much more in need of MDs who don't serve their communities who paid for their education.
I think it is an advantage, particularly in research, to recruit the most talented, so I see exceptions for unique talent, but I see, for example, in Americans who go to the Caribbean it is more that they just couldn't get into US medical schools which should provide enough graduates for all the residencies.
In a broader context, most professionals who come here from abroad are well to do for their countries, and could have a good life, not as rich as here, but they are not struggling. I think it much better to help the poorer people who can raise their families out of poverty and are needed here to do jobs most Americans shun- farmworkers, nurses aides.
>but clearly taxes alone can’t get fix the deficit<
Politically, maybe not. But there's no reason having to do with economics we couldn't fix the economy solely via tax increases. America's public sector is fairly small by rich country standards. Massaging tax collections upwards by, say, 5 points of GDP (maybe less) would probably get the job done without resort to cutting spending on net.
Not the main thrust of the column, but David Brooks' piece last week was lame. It was the same "sympathy for white Trumpists" thing half of all op-ed writers have been writing since November 9, 2016. And the purpose of these columns is to spark the other half of all op-ed writers to bust out their "actually, all Trump support is about race" response columns. I'm pretty sure all opinion writers keep a copy of one column or the other in a small case marked "break in case of three-day weekend."
My spicy twist on this (dumb) recurring debate is that Trumpism’s distinctive/novel appeal is actually to voters with lower than average intelligence— and phenomena like 2016’s sharp increase in education polarization and racial resentment polarization are downstream from that.
This sounds like an excuse for libs to be smug, but it’s actually a huge political problem for Democrats. People with below-average intelligence are disproportionately likely to be politically moderate/persuadable voters. They also have plenty of legitimate political grievances. Increasing economic and institutional complexity, policy changes which require normal people to make more complicated decisions (like the switch from defined-benefit to defined-contribution pensions), the increasingly adversarial information landscape of the internet, and the rising labor market share of high return-to-intellect economic sectors have all made their lives materially worse. Democratic politicians need to get better at appealing to them as voters and fixing their problems— with the full understanding that those are separate challenges — without ever explicitly acknowledging that that’s what they’re doing.
I think that one of the main challenges here is there’s often a tradeoff between “how much internal planning does the program require” and “how simple is the program for end users”?
“Defined benefit vs defined contribution pensions” offers us a good example— the former is both much harder to plan and administer and much easier for end users to take advantage of effectively. Healthcare provision is a similar case.
It’s a bit like software UX— a GUI is going to be much harder to build and debug— and will require more compute to run—than a CLI, but it will also be much more tractable for most of your users.
Yeah, but even taking account of the hourly wages of the people to design it and run it, it probably makes more sense to have a user friendly software or pension plan than otherwise
You’re wrong about the pension. You could have everyone default into a target dated mutual fund that converted to an annuity at 65. The amount you’d get would be based on market returns and annuity rates when you retired.
A pension does not need to be a promise that a 22 new hire will get 70% of their highest 3 years of pay at 65.
But a normal person entering that deal would have no clue what sort of annual income they would be getting at age 65 under this suggested arrangement— and even more financially sophisticated employees could only make an estimate with wide error bars.
Personally I'm to old for tattoos but my recommendation for a tattoo is:
"We want more mutually beneficial market transactions between consenting adults that do not create any untaxed/unsubsidized negative/positive externalities (with some exceptions for transactions in addictive substances) and for some of the income generated from those mutually beneficial transactions to be subject to a progressive consumption tax revenues and used for redistribution and purchase of public goods."
[Would someone one ask Midjourney for an appropriate image?]
Well, it wouldn't hurt Progressives to do a little virtue signaling about policing reforms and how police don't do enough to protect citizens from criminal violence, deficit reduction (by taxing evaders like Trump) in order to spur tradable goods production, blather a lot more about the flag and the Anthem, [in the day about how patriotic it was to get vaccinated] and get caught coming out of church on Sunday. :)
It’s worth noting that high interest rates may not stick around for long— Powell has explicitly said that the Fed believes that current real rates are restrictive and that the Fed wants real rates to be similarly or less restrictive as inflation gets closer to target.
Inflation re-accelerating is certainly a risk (and one which the Fed is clearly keeping in mind), but every cycle is different and there’s no real reason to assume that we’ll repeat the 1980s.
Everyone keeps saying that rates are high now. No, they're only high relative to the recent past. They can go a lot higher. Mortgages were up to 17% in the early 80s. Put that kind of number in and see how the deficit explodes.
Good analysis, though approximately 0% of the conversation around student debt relief focuses on the interest rate side of things (other than in this space) so I'm not sure that's going to convince people to get off the idea.
I just took a peek at the US Treasury interest rates and the 5-, 10-, and 30-year rates are still below the 1-year rates (~4% vs. 5%). Not like 4% is *that* low relative to where we were, but it does seem like investors are still expecting that the Fed is going to lower rates once inflation cools down (which it already has to some extent), and maybe they're expecting we return to the former paradigm of cheap money? It bugged me for a long time that we used to have the opposite problem (people thinking we were about to return to the high inflation/high rates of the late-1970s) but I'm wondering if we've lived through low interest rates for so long now that the business community has the opposite mentality.
Worth noting that Jerome Powell has explicitly said that real rates are in restrictive territory now and that the Fed will want to make them less restrictive as inflation cools— which implies cutting.
“Interest rates come back down as inflation returns to target” is explicitly stated Fed policy, and Powell generally does what he says he’ll do (good trait in a central banker)
That’s true— but a surprising number of people seem to think that the Fed is going to keep rates high until the economy breaks no matter what inflation does.
"Not only does the new debt increase the amount of interest you have to pay, but it tends to push up the rate on the accumulated stock of interest, and the line starts pointing more sharply upward. This is the dynamic that ended Theresa May’s government in the U.K.
In theory, May could have tried harder to fight back and force the Bank of England to keep interest rates low."
I think you are referring to Liz Truss (I briefly forgot her name). 'Interestingly', the UK is now paying around 10% of all revenue out as bond interest, mainly because of high reliance on inflation linked bonds. This is the highest in the developed world.
“to talk Trump-hating educated elites through what the world looks like from the other side and to get people to see the appeal of symbolic backlash politics.”
That’s his job, and yours as well. You need to keep your ears to the ground and let the elites know when they are making mistakes. In this time of elite failure, getting them to recognize that they (have) are creating a peasant revolt would help keep them and you in power.
I don’t buy Brook’s column or Matt’s take on it. It is a feeble attempt at being fair to all of the Trump cultists who some how need to be understood while simultaneously making no attempt to understand anything outside of their ignorant worldview. This is the "we" elected Trump shit that grew old back in 2016. Brooks's wants it both ways: to be a part of the "elite' and to be a populist.
Assuming Trump's supporters are all "cultists" is a dull, smug and ignorant worldview. If I wanted to change your mind, I guess I'd need a columnist who was willing to sympathetically and fairly describe where you're coming from.
Here's my perspective. I have been told for seven years to listen to Trump supporters, and I have, repeatedly. I get where they are coming from: it's not that complicated, really. I completely understand their problems and concerns, as I myself grew up (and am) middle class, spent 15 years working terrible jobs (starting during the Regan years and through the awful first Bush's recession), and lived in borderline poverty before slowly finishing college at a non-prestigious state school. Perhaps Brooks is not speaking to me: I have a non-prestigious degree and work a dull civil service job, and have struggled to pay my mortgage and put three kids through college. Not exactly elite, but I have been paying attention.
I am tired of being lectured to by people like Brooks who are asking me to Listen and Understand, when I absolutely have, and then get shit thrown back in my face by people who I am trying to understand but who do not make any effort to understand me. I have consistently supported candidates and policies that will help people in the Trump "base", and yet they want to spend their whole time triggering the Libs and voting for a man who absolutely doesn't care about them.
Fair enough, those are good reasons for you to be tired of Brooks and similar columns. I feel like I know a few people who are very far from that level of understanding, though, and they might still benefit. Another angle I'm coming from is I think hardcore supporters of any candidate sometimes get too much attention. I feel like understanding the marginal supporter, ie someone who doesn't usually turnout to vote or recently switched parities, etc... is just as important as understanding the "cultists" who are a lot more likely to be straight up A-holes. Thanks for your reply, it was a good one.
Thank you. I definitely harbored my own resentments back in the day...but I would say they were specifically NOT aimed at people who were (ostensibly) trying to help people like me. I was not terribly educated or sophisticated, but the "trickle-down" theories of the time were in particular a slap in the face, and although the Dems may have been on the take and "elitist" in many ways, it was clear to me that they were more aligned with my interests.
What is galling to me is that at the very time I was working multiple lousy jobs and struggling, Donald Trump was running around flaunting his wealth and chasing women, while a LOT of people cheered him on and laughed at his antics. At the time he seemed to me he was the epitome of the obnoxious, heartless rich man, and now...he is a populist? Good grief, it almost too much to bear.
"I have consistently supported candidates and policies that will help people in the Trump "base", and yet they want to spend their whole time triggering the Libs"
Am I wrong to infer that by this you mean that you've supported social safety net policies? If so, you are supporting the policies _you_ want and not the policies _they_ want: you still haven't heard the messages Brooks and others like him are trying to get across.
Your position is analogous to a case conservatives often make: they say that they have consistently supported candidates and policies that help demographic minorities, by creating opportunities and encouraging markets. And so they're bitter that some of those groups - particularly Black Americans - don't return the compliment.
No, you are not wrong. And perhaps you are right, it is, in a way, analogous. But I think that it is pretty clear a social safety net would make the lives of the base less anxious and better.
So what is the message? "Trump understood that there was great demand for a leader who would stick his thumb in our eyes on a daily basis and reject the whole epistemic regime that we rode in on."
So..fine, I understand the anger. But what are the specific alternative policy solutions that are being proposed to a social safety net? What are Trump or his followers proposing as solutions to improve the lives of his Base? Building a wall? Kicking out immigrants? Pulling out of NATO? Tax cuts for the wealthy? Being anti-woke? Other than the dopamine rush of Owning the Libs, how will this make the lives of the Base substantively better or less unstable?
I agree about the safety net, and I certainly don't have all the answers, particularly in the political arena, but I favor curtailing the most noxious pro-elite policies like student debt forgiveness.
As much as anything, though, it would be excellent if our elite media outlets eased off their caricatures of Red America. The most intense antagonisms aren't driven by politicians, but by the relentless, mundane disregard for their legitimate interests as they see them.
Just because someone makes no attempt to understand anyone else doesn’t mean it’s not worthwhile for us to try to understand them. It’s not fair, but fairness isn’t essential to understanding.
No. It is a very good column and has been amplified by top level never-Trumpers like Charles Murray and Seth Mandel. MAGA people would never look to someone like David Brooks for understanding. We know full well that he is a political enemy.
Brooks is trying to get the attention of elites and get them to realize that they created the conditions that created Trump, and if they don’t change their policies, even if they defeat Trump, they will be playing whack-a-mole with his replacements.
I'm not sure if it was the misplaced blame laying or the inaccurate diagnosis of the resentment that annoyed me most about Brook's column. I believe it's been pretty clearly shown that economic anxiety is not the driving force behind Trump's success, and that change in the demographic make-up and loss of default white-Christianity as the norm that accounts for much of it.
More than half the country voted against Trump in both 2016 and 2020. That's not the "elite" imposing its will on the poor beleaguered Trumpers. The hardest core Trumpers are a specific demographic group that resents that it has lost cultural power in a changing world. I'm not sure what policy the elites should change that would somehow return to them the disproportionate deference that used to be paid to them.
Every one of the statements in your second paragraph (which are true!) apply equally to the targets of _your_ scorn. Brooks isn't asking anyone to understand "the hardest core Trumpers", but the bulk of the voters that made up the other half of the country that voted against Clinton and Biden.
The thing is, I'm not sure there's that much difference. I live among and count many friends who are Trump supporters. All of them have the resentment of change in status or change in general as some part of their motivation. I think I do understand them; I'm really not sure what to do about them.
I think it's Brooks that doesn't understand them, because up until Trump he thought they were his people, and it turns out they never gave a shite about deficits, or low tax rates, or the workings of a robust free market. What they wanted was for the government to not give stuff to the wrong people. Brooks wants elites to make some policy change that will mollify these folks, but while I can think of a lot of things wrong with some policy choices we've made over the years, especially the ones that tended to award the elite, in the sense of the owner class, over the rest of us, it's a bank shot that making those things better, which would materially help many Trump voters, would actually make them less distressed by the changes that they dislike.
This is a different kind of argument than the comment I was responding to. I don't have much to say in response, except that, if you think half the country consists of hard core Trumpers, we live in different worlds.
But there is something different about Trump support. Maybe it's a reflection of a more extreme partisanship gripping the country, but I'm not sure the evidence supports that.
There were outward visible signs of support specifically for Trump from the beginning of and continuing throughout his Presidency. There's no equivalent for Biden now, or for Obama previously, or for Bush II, Clinton, Bush I, Reagan, etc. yet most of those Presidents were more popular during their presidencies than Trump ever was.
The author notes that Bush and Trump coupled their large tax cuts on the rich with modest tax cuts for the middle. This was politically astute and in the polling that asks voters which party they favor on taxes, the GOP usually wins just as the Ds win on healthcare and environment.
Now the Dems imo can win with higher taxes on the rich, but it should be accompanied with lower taxes on the middle, rather than their usual approach which is to just spend it on new programs like student debt forgiveness. I do believe in social welfare where appropriate, but sometimes the best social welfare is just to tax the working class less. And politically it will dethrone the GOP as the party that means less taxes for the non rich,
Boomers hold half the nation's $140T in wealth, yet represent 40% of federal spending through SS, Medicare/Medicaid. Healthcare is simply too expensive in this country, and that is especially true for end of life care. The deficit will continue to grow, period.
I would say Social Security is where there's a case for reform also on how outright regressive it is by some of our fellow Anglophone country's standards (1). But it's also very different from Medicare in that the projected shortfall plateaus. Medicare's projected deficit just keeps growing and growing because old middle class healthcare consumption can keep going as far as you'll take it. Focusing Medicare's public component on essentials and requiring Congress to approve any additional services to Medicare's fee codes would help quite a bit in this regard (2).
Healthcare spending in the US has calcified as a percentage of GDP in the US (approx 18%) going back nearly two decades at this point. The problem of healthcare inflation is a myth. What's not a myth is that we're *stuck* paying too much.
The deficit will only grow if we spend more than we tax and don't have the political will to correct it. Demographics present problems, yes, but despite that our median after tax income continues to rise and we are wealthier now than in the past. If only old people died earlier like the old days we would be in much better shape, but you aren't going to find a lot of people to volunteer to die younger. The burden of an aging population will require adjustment, and will require more revenue, which is doable, where solving high health costs and end of life care costs are not easily solved.
Given the current 7% deficit/GDP at historically low unemployment, I just don't see the pathway for reducing spending/increasing revenue. And given the financialization of the economy, with REAL US stock market cap. 4 times higher per capita than in 1987, achieving a more balanced budget is likely bad for equities and therefore bad for revenues. In other words, at a certain point you increase the deficit by trying to reduce it.
Reducing spending probably not though we can certainly avoid massive increases by not doing things like pay off student debt, free college, etc..
Increasing revenue, why is that a problem. It wasn't a problem for Trump to lower taxes, just raise them back. So maybe the S & P will take a short term hit, in the long run it has no effect. They dont collect taxes and then burn the money, they spend it. In fact if you raised taxes on the wealthy and cut them on the middle you likely will grow the economy as the middle spends more of their income.
We had a few years of balanced budget under Clinton from about 1998-2001. It was achieved by raising taxes on the upper. It correlated with a strong rise in the stock market. The world didnt end.
I guess each has its values but in terms of increased gdp I would think that directing more money to the middle would certainly increase the level of goods and services more.
For the well to do, investment is not taxed. If somebody builds factories they are reducing their taxes. On the other hand just sitting on increased stock valuations doesn't necessarily grow the economy.
Matt argued in the article that, when the economy is approximately at full-employment, as it is now, you would not expect directing more money to the middle class to raise the level of goods and services produced significantly. Instead, you get inflation.
You seem to disagree, but it would be helpful (at least for me) if you made it more clear where you think Matt's analysis falls flat for you.
I'm not really following your argument about stock valuations. If I buy some AAPL shares off some guy, that's not really a net investment in AAPL. One guy is disinvesting in AAPL at the same time that I am investing in. Secondary market transactions like this don't produce net investment. If I buy shares in new stock offering, I am directly funding that company. This may not be how most people buy stock, but no one would want to buy shares in this primary market if there were not also a secondary market where they can sell those shares.
Not accusing you, but I read this kind of perspective on the left quite. a lot. Basically, the market is just a casino. There certainly a big element of truth to it, but the casino is the side effect. They seem to ignore that, obviously, investment is what produces virtually all firms, jobs, wages, etc. The fact that there is a casino side effect doesn't undermine that truth in any way.
Productivity growth was also incredible during those late Clinton years, as globalization was in full tilt and supply chains were fully incorporating IT based logistics (Walmart as an example). From 1996-1999 US GDP growth was 4% annualized with a federal surplus... that ain't happening any time soon. We can barely churn out 2% with historically low unemployment and historically high deficit spending.
And as soon as the Dot Com bubble popped, a 2% surplus/GDP became a 3% deficit/GDP.
Thank you for a good article. I am a Democrat on the conservative side and a bit of a deficit hawk, more from a moral standpoint, you should pay for what you buy, than claiming economic savvy.
As you noted, Trump and Bush accompanied the big tax cut bonuses for the rich with mild tax cuts for the middle. Polling on various issues show that voters favor the GOP on taxes even as they favor the Dems on healthcare and other issues.
On the Democratic side, there is imo an appropriate policy of reclaiming the taxes on the wealthy, who continue to outpace everybody else in income and wealth, but the political mistake imo is to offer no tax relief for the middle but rather to spend the money on some new program like college debt forgiveness etc.
If the Dems want to win back the working class which has been going to the GOP, they need to combine higher taxes on the rich with their own middle class tax reduction, and reduce the deficit.
Raising revenue is easy theoretically, if all the deductions in the tax code were eliminated, it would raise hundreds of millions to billions of dollars. The problem is all sorts of special-interest groups would be up in arms about this.
Healthcare costs will never get under control, when we have 60-65% of the population being overweight or obese, 10-15% of the population who smoke tobacco, and another percentage of people who have problems with alcohol or drugs, leading to conditions like hepatitis, HIV, emphysema, heart failure. All of the chronic diseases that kill people in developed countries, are directly caused by lifestyle factors. Japan's life expectancy is something like 84, meanwhile the US is hovering around 75-76.
I still don't believe those drugs are a cure-all, and because the drugs are so new, I wonder whether people keep the weight off or eventually gain the weight back, what the long term side effects are or could be, or whether the medications lose effectiveness over time.
How much could reforming government procurement operations save? Matt has mentioned in passing that he thinks cost-plus procurement is inefficient--could reforming this net any major gains? Likely not enough to avoid making some hard choices but everything helps.
Correction: the UK government that ended due to tax cuts and an interest rate spike was the Liz Truss Premiership, not Theresa May's.
Lettuce not get caught up in this kind of detail nitpicking.
Was just about to make this correction too, @milan!
Fixed
Not to be a pedant, but the next paragraph still refers to "May" instead of "Truss."
On it
How long can Democrats cut the deficit by taxing rich people only? I assume there's still some juice there in the short term, but in the long term, we are going to have to squeeze entitlements or raise middle class taxes substantially. Would love to see a post on how to do this optimally from a policy perspective and another post on how to sell this politically...
As a thought experiment only, with all views welcome - what sort of political conditions would need to prevail for it to be conceivable to return federal personal taxes to their 1945-1980 levels? The driver then was chiefly very high and sustained levels of defense spending - close to 10% of GDP annually in some years. But the tax system in place at the time, with all its complexity and complicated sets of allowances (which reduced significantly most taxpayers' effective rates) did facilitate an expanded defense budget and growing social expenditure, without notable negative impact on economic growth (look at annual growth rates in the 1950s and 1960s). Doable again? If yes, how? If no, why?
Did the lowering of tax rates visibly reduce the taxes collected by the federal government? I'm looking at this (https://fred.stlouisfed.org/series/FYFRGDA188S) and it's not clear, I think.
Now, if you want to visibly raise taxes (and not only tax rates), you might get something like what Greece got post-2008 (https://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS?locations=GR), but I think that most Americans would like to avoid Greek-style austerity.
There are two frameworks to use when engaging on the tax question: (1) economically or (2) as a matter of ethics/morality. You are using the first one.
I think (2) is more dominant in the discourse, even if I would prefer (1).
Oh, I fully agree! Argument (2) was by far the dominant in the EU discourse post-2008 ("Make those lazy PIGS pay their fair share."), but moving to the US (and subscribing to Matt) made me realize how wrong of an approach it was. (Full disclosure: At the time I thought it was a reasonable-ish approach.)
Sort of a side comment to this, but post-2008 has really showed the downsides to tying your economies to German fiscal and monetary policy. They are absolutely scared to death of deficits to a degree that is actually harmful to themselves and the rest of the continent. When there was those devastating floods in Germany in 2021, I listened to a good podcast noting that actually despite it's reputation, Germany has not actually been investing properly in infrastructure, including flood mitigation in part due to their absolute aversion to deficit spending.
Which also speaks to another issue. I honestly think a big reason that the EU and Europe in general were content to let Germany run their monetary policy was sort of this ingrained stereotype about "German efficiency" and "Teutonic steadfastness" which meant they were "very serious people"* who will always do the right thing economically or make the right hard decisions when in fact the last 15 years (until last 18 months) called for way way looser monetary and fiscal policy.
*It's funny, especially lately, Krugman's jibe about "very serious people" is aimed at inside the beltway deficit scolds. But honestly if you read his writing going back like 25 years, the jibe is directed as much at Germany as anyone else.
It's not so simple. Germany was by far the largest contributor to EFSF (https://en.wikipedia.org/wiki/European_Financial_Stability_Facility#Guarantee_commitments), and later to ESM (https://en.wikipedia.org/wiki/European_Stability_Mechanism#Contributions). If Germans had chosen not to participate, I don't think that these entities would have been viable. It would only make sense that they would have a disproportionate ability to control things.
Also, Germans weren't the only hardliners in the negotiations. They weren't necessarily even the strongest hardliners. They had all this power because a lot (most?) of non-PIGS EU countries agreed with them on the basis of not having the virtuous hard-working Western/Northern Europeans pay for the excesses of those permanently vacationing Southern Europeans. (Yeah, I know that this last part sounds funny from the perspective of American stereotypes of Europeans.)
Finally, I can't take seriously anything Krugman has said on the EU crisis. ("The Germans are mismanaging the EU, so what if we dismantle it instead.")
To be fair, Krugman called Germany out for the same reason
What is "fair share"? Everyone wants the rich to pay it, but no one ever says how much it is.
I don't believe anyone would call PIGS rich (okay, technically Italy is G7). That would be Northern/Western EU instead.
There can be tradeoffs, but the two do not fundamentally conflict.
This is the one case where the Silent Generation (not the Boomers) have a point. The 50s and 60s were fantastic from an economic perspective, and we should only be so lucky. The vast amounts spent on US government-funded research lead to Silicon Valley, the Internet, fuel cells, solar panels, electric vehicles, the list goes on and on.
If only the rest of the world could lie in ruins again somehow.
I'm sure those same Boomers who very decisively voted for Trump (and like vote for him again in 2024) would be very ok with 60s tax rates and 60s levels of unionization.
The Boomers kept voting for reduced tax rates and drove the Reagan revolution, so I think I disagree.
So problem with internet comments; hard to get across sarcasm which was my attempt in my post. Actually agree with you, those Boomers nostalgic for the 60s are not reckoning with what they are nostalgic for, which would include much higher taxes.
Fair enough, sorry about the failure of my sarcasm detector. :)
ahh - no the 50s and 60s weren't! Why do progressives keep going MAGA?
edit - they were much better than the 30s and 40s, but that's because those decades really, really sucked!
Socially, they were relatively conformist and stultifying in many ways extremely disagreeable to more liberal (in the traditional sense) people. Economically, they were amazing. There's a reason this period is called things like the "Long Boom" and the "Wirtschaftswunder" and "les trente glorieuses" (https://en.wikipedia.org/wiki/Trente_Glorieuses)
After almost 4 decades of world war, depression and world war with major technological advances happening - when peace actually occurred, there was an economic boom. This is no more shocking than watching China have an economic boom for the last 30 years after massive economic malpractice for the previous 40+.
But in terms of wealth, income, living standards, social safety net, education, almost any other category you can imagine, the US is far better off now then it was then. A third of homes in the US didn't have indoor plumbing in 1950 and a sixth didn't in 1960 because so many people were incredibly poor by today's standards!
Yes, totally agree. 70 years later, the country is better off now then it was then. This is true for almost all countries. The growth rates and inequality and government investment then were much better than what we have now. We haven't been able to recapture the growth and investment rates of that period under left-center economics.
The need to keep the commies from taking over made the chamber of commerce more cool with taxes than they are today. They had even been primed for patriotic sacrifice by World War Two
Tax reform that effectively does reduce the deficit ought to shift resources from consumption to investment and so promote growth and more so if we eliminated high dead weigh loss taxes like the wage tax and the corporate income tax. And it could be made more progressive. What political circumstances could permit a pro-growth with equity program? I have know idea. The same one that would permit merit based immigration, cost-benefit based regulations, net taxation of CO2 and methane, and elimination of employer-purchased health insurance. :) The Second Coming of Neo-Liberalism.
I am with you on getting rid of employers part of the payroll tax. It makes no sense that if an employer invests in a machine that does x work he pays no extra taxes but if it is a person he has to pay the payroll tax, so he/she is being punished for providing the positive of work.
I'm not an economist, but I imagine that if all the other major economies in the world have been destroyed in a war and population is growing dramatically, you can afford a lot more inefficiencies in your economy. Those have to be two major factors in addition to many other ones that define that period. Europe taxes its population at a much higher rate across the board, and the trade-off is slower growth. Sure some taxes and spending are better than others, but this trade-off seems to hold generally, at least once certain basic provisions in infrastructure and education are met.
What great inefficiencies do you see in the American economy in the 1950s and 60s? Growth and productivity gains were amazing, and economic inequality decreased. From an economic perspective, it was a golden age.
Growth in the US was that amazing despite inefficiencies at least in large part due to the two reasons I cited (lack of competition abroad but growing global demand). One inefficiency would be the 90%+ marginal tax rate for high income earners before the Kennedy tax cuts. Another would be the wages we were able to pay manufacturing workers because they faced no competition.
In the alternate universe where WW2 didn't happen, America's terms of trade would've been less advantageous in the late 40s and early 50s, which would have translated into more difficulty in terms of acquiring claims on the output of Europe and Asia. But the world as a whole would've been richer—and output of goods and services available to American consumers larger.
The "US economy benefited from WW2's destruction of trade partners" take has always struck me as an obvious example of the Broken Windows fallacy, but admittedly I haven't researched it.
At what marginal rate is it an acceptable inefficiency?
Huge inefficiencies. No merit-based immigration, employer-purchased health insurance, taxation of corporate income (inherently at non-uniform rates), protective tariffs and quotas. It could have been a "titanium" or "diamond" age, not a piddling "golden" age. :)
“Productivity isn’t everything, but in the long run, it’s almost everything.”
-Krugman
In many respects, those marginal rates were illusory. As a percentage of GDP, our tax rate now is about the same as the 50s-60s.
Taxes will likely increase over the next 100 years. Technology innovations will likely make prosperity increase and that prosperity will have to be shared to maintain social contracts.
This is why a wealth tax is so tempting. There is so much private wealth even a small levy can raise massive amounts
Leaving aside the absolutely devastating impact a wealth tax would have on the economy. Warren’s own estimates (from her website), on the impacts of her wealth tax suggest it would raise $1.4 trillion over a 10-year forward estimate. That’s less than 2% of Federal spending.
Rather than a wealth tax which has been discussed below and was abandoned by most of the countries that tried it and at a minimum would be a humongous administrative burden to both government and peopl.e, we dont need to reinvent the wheel.
If the goal is to tax the wealthy more, the low hanging fruit, that would take little administrative action would be to tax capital gains on stock trades as income (currently taxed less so that stock traders pay less in taxes than an upper middle plumber) and increase estate taxes and cut out the "buy, borrow, and die" loophole that allows the very wealthy to pay no capital gains if they hold stocks till they die.
They don’t pay when they die either is my understanding. The heirs get the step up basis so they have no capital gains tax burden.
This would be administratively difficult in the early years but should be the second change I would propose to the tax system, after ending the fact that health care premiums paid by an employer aren't taxable income to the employee.
I thought that was what the estate tax is for?
Buy borrow die is a way to avoid estate taxes. My memory might be a little off but I believe it hinges on the ability to, with the debtor’s agreement, agree to inherit a debt. Then the actual estate is the net worth which gets taxed and then you pay off the debt with the assets at the stepped basis (tax free).
As someone who is generally leery of tax increases, I could easily be persuaded to get on board with all of these suggestions.
Long term capital gains is a bit weird because you're taxed on maybe a decade of gains in the year that you sell, and you're exposed to risk of capital loss and inflation over that whole period. It's not like normal income.
You can argue about the exact rate but the things I'd be looking at to better tax capital gains are:
1) End step up basis, it's bullshit.
2) Create a wider definition of capital gains events. I'd treat any loan secured against the value of an asset as a capital gains event - you have an assessment of the market value of an asset, and you have a bunch of liquid cash being disbursed. This
A) closes the current loophole billionaires use to endlessly just take loans against assets to avoid paying tax by having "real" income
B) solves a lot of the problems of other proposals like yearly assessments of gains - you don't need some mechanism to assess the value of the assets, you just rely on the loan valuation, and you don't run into issues with triggering liquidity issues - the tax bill is aligned with a liquidity event.
I mostly agree, which means that to conform with internet norms I need to nitpick a few things.
My biggest caveat - who are we targetting? Warren likes to talk about billionaires and private jets but her wealth tax kicked in at $50 million, which is more the "flies first class" set. Back in 2019 Ron Wyden had a plan to elimnate stepped-up basis and tax annual market gains; kicked in at a net worth in the $15-20 million range. His 2021 version kicks in at $1 billion. Quite a difference.
https://budgetmodel.wharton.upenn.edu/issues/2021/11/8/senator-wyden-billionaire-income-tax-budget#:~:text=Under%20Wyden's%20proposed%20tax%2C%20for,%2Dto%2Dmarket%E2%80%9D%20taxation.
*IF* we are talking about actual billionaires I'm skeptical that the liquidity event tax will capture much. Bezos borrows $500 million to buy a super yacht, and we tax it; good for us, but he still has $100 billion untaxed. There is no way he borrows and consumes more than a billion or two in his lifetime. (Fun with numbers - if Bezos and his sig other each spend $10,000 a day on stylish outfits they wear once and another $10,000 on fine wine and food, their annual bill is under $15 million.)
Secondly, if the tax revenue from Bezos is significant (say, $30 billion on $100 billion) *BUT* it doesn't affect his consumption at all, all we've done is convert private savings to public savings (deficit reduction.) No crowding in or out is happening, although explicit interest paid by the gov't will be reduced. I *think* that implies that, as is always the case, what matters is how the money is spent. Investing in a successful cancer cure or better public education is money well spent whether raised by taxes or by borrowing. Conversely, in a tight economy where inflation is a concern (eg, now) then converting Bezos' savings to public consumption by way of transfer payments will boost aggregate demand at an awkward time.
Last thought - for billionaires the basis step-up and the estate tax don't mean much. Their kids inherit the social clout that comes with leadership of a very well endowed foundation. College presidents, senators and the organizers of the Met Gala all take their calls. (And does Bono still tour Africa? That could be a thing too. Fun for the grandkids...).
Regards.
Good comment, except I'll nitpick that public education is money well spent. The US is already at the very high end in this type of spending, with unimpressive results. Once you get past the prevalent myths about local funding of education and racial disparities in spending, you see that there really is no low hanging fruit in education spending. We have had decades of unmitigated optimism about education spend, and little to show for it.
Or to ask a different way, how would a tax that you claim won't raise any money have a devastating impact on the economy?
Presumably capital flight and reduced investment in anticipation of the tax, strongly weighted toward the capitalist class and those who already have Swiss banking contacts. Strongly assisted by the illegiblity of corporate ownership and asset structure, Panama-Papers style.
Even ignoring existing stockpiles, a wealth tax seems like it’s effectively raising inflation (and decreasing real wages) for those persons and/or entities subject to it by whatever the net tax % is.
This is why the wealth tax needs to be paired with a retroactive 100% citizenship-renunciation tax and aggressive enforcement
A 100% retroactive citizenship-renunciation tax?
What are we, the Soviet Union trying to build a wall to keep people in? Sure you can leave, but you have to give up EVERYTHING.
The need for measures of this kind is one of many arguments against a wealth tax. As the European countries that rescinded theirs realized some time ago.
I don't presume any of that, necessarily. Wealth and wages aren't the same thing, so I don't understand why you are lumping them together. How it is raising inflation if it cuts the deficit, which would lead to lower inflation in the long term?
Assume that I have $100,000 in the bank (or the stock market, or bonds, or whatever, it doesn’t matter), and the interaction of inflation and real returns is such that I have spending power after a year equivalent to $95,000 - this is run-of-mill real inflation of 5%.
(In a (fantasy) world in which my real income maintains pace with real inflation, the only real risk I face from inflation is exactly this evaporative effect on previously-accumulated wealth.)
Now assume that headline inflation exactly matches headline returns such that real returns and real inflation are 0%, but I’m subject to a 5% wealth tax - I’m in exactly the same boat as scenario 1 with respect to spending power, althogh my nominal amount of dollars is lower.
ED: you’re right that wealth and wages aren’t strictu senso the same thing, but the second I save any of my income rather than immediately consuming it, it becomes wealth. In other words, taxing my wealth is taxing my wages on a time delay unless I’m living hand to mouth.
Sanders is the one man who has admitted the massive new middle class taxes that will be required for his proposals. You have to give him credit for that, if not much else.
Yep. I'm a centrist Democrat and I do not fancy Sander's policy vision, but I deeply respect his straightforwardness and honesty.
You get all these David Shor type thought pieces about how the Dems should emphasize "bread and butter economic issues" over "social justice and identity". The elephant in the room is there are deep divisions among Democrats about all this bread and butter. We've got Sanders' small wing wanting to raise taxes and increase spending. Then there is the much bigger Democratic mainstream, that wants to raise taxes only on the 0.1% and also increase spending, but the new taxes can't match the new spending (or the current deficits).
Why would it have a devastating impact on the economy?
1. Will cause massive amounts of capital flight from the US.
2. Will cause people to need to liquidate assets at tax time each year which will tank asset values - and in the case of stocks likely cause widespread market panic.
3. In any year that growth is less than 2%, you erode people’s asset base and make them actively poorer (effectively an income tax above 100%).
1. Evidence please.
2. Evidence please.
3. How is this new? I have to pay taxes every year even if my salary goes down. That's not a n effective tax rate of over 100%. Similarly, if I buy into a hedge fund or hold significant stocks, I have to pay fees even if my assets go down. I have to pay social security regardless of whether my income went up or down.
On 1 & 2 - what evidence would convo be you. These seems blindingly obvious of you think about a) the incentives and b) the literal logical requirements of the wealth tax.
On 3, that’s totally different. If you’re taxed at 30%of income, and your salary goes down. Your tax rate is still 30%. If you’re taxed at 2% of wealth, and you’re returns are only 1% that year (or heck! Negative at they often are), you’ve been taxed at a rate of 200% of your income for that year.
Evidence, this from WIki. Of the twelve OECD countries that instituted a wealth tax 7 abandoned it mostly for the difficulty in managing it as it involves the valuation of everything and easy to game, and because of capitol flight, This from that source:
"n 2004, a study by the Institut de l'enterprise investigated why several European countries were eliminating wealth taxes and made the following observations: 1. Wealth taxes contributed to capital drain, promoting the flight of capital as well as discouraging investors from coming in. 2. Wealth taxes had high management cost and relatively low returns. 3. Wealth taxes distorted resource allocation, particularly involving certain exemptions and unequal valuation of assets. In its summary, the institute found that the "wealth taxes were not as equitable as they appeared".[83]"
Entire citation: https://en.wikipedia.org/wiki/Wealth_tax
As a follow up to this, a similar statement is made anytime people suggest a millionaires tax in a given state will cause a flood of people moving to low-tax states, e.g., MA or NY to Florida. Yet it never really seems to happen, certainly not in the catastrophic way people maintain it will. Since this is Slow Boring, the thing that does seem to cause people to move is very high housing costs in the blue high-tax states.
1) But if the tax reform of which a wealth tax were a part does in fact reduce the deficit this will increase the growth of the US economy, in effect raise returns on assets.
2) Can accrue/pay quarterly estimates throughout the year. No effect on market movements
3) Encourages people to seek higher returns. :)
4) All said I don't think a wealth tax is worth the trouble relative to income tax reform
How does reducing the deficit increase growth?
1: what does this mean? The wealth of current or former American citizens would be taxed regardless of where they have “flown”
2: this would be painful probably, but I think much less so than the alternatives
3: at the end of the day, somebody is contributing to paying down the debt. The claim is it is both morally better and better long term for the economy for it to be the people with assets that should pay, instead of people working for a living.
If you can accurately calculate all that wealth and if the imposition of such a tax doesn't push wealth from productive investments in the economy into art purchases, Swiss accounts, etc.
Matt's idea for a progressive consumption tax is better, but probably also difficult to calculate and a political non-starter.
We made our bed by choosing an income tax over a consumption tax, I submit that we should lie in it rather than submitting income that has already been taxed coming in to double taxation by also being taxed coming out.
Furthermore, while the talking points in favor of a consumption tax are basically that it incentivizes investment over consumption, I’m not sure that this is necessarily actually a great idea: firstly, because person A’s consumption is what drives person B’s investment decisions (“your spending is my income”), which admittedly more of a hypothesis on my end, and more substantively because I don’t think rational actors should actually forgo consumption under a consumption tax (though it may take a while for this to filter througu due to sticker shock effects, if it ever does).
Specifically, consumption *can’t* be forgone indefinitely under a consumption tax because death is treated as a form of consumption (otherwise you lose formal revenue-equivalence with an income tax). But in that case one is incentivized to spend down one’s estate prior to dying so that one can at least get some rather than zero value out if money to be taxed anyway - it’s otherwose bearing the harms of consumption taxation without even consuming! But weighting your consumption towards the time in your life when you’re least capable and able to enjoy things is facially insane: one should rationally exhibit moderate time preference (certainly on the order of 5-10 years) favoring earlier rather than later consumption.
Given that all the money is going to he taxed sooner or later, smoothing consumption or weighting it earlier in life is a good idea: but this completely runs counter to the nominal advantage of a consumption tax!
That’s Matt’s idea? Warren Buffet has been urging such a change for decades!
Not really. Even using the most extreme proposals and some fairly outlandish assumptions made in support, it’s only about $300 billion a year. And it’s probably unconstitutional anyhow.
You’d be far better off fixing some areas of traditional income taxes (making borrowing against an asset a realized event, ending the gift of stepping up value at death, etc.).
If you look at the history of wealth taxation in Europe most of the countries that tried it abandoned it. Wealth is so hard to evaluate and so easy to hide that it was just hard to do and it also resulted in capital flight. 7 of the twelve countries that tried it abandoned it including Italy, Germany, Austria, Denmark, and Finland (Source Wiki wealth tax).
Tempting, but likely unconstitutional.
The real reason a wealth tax is so tempting is because everyone loves panaceas, and everyone hates rich people, which is great for everyone's feelings, even if it is a bad idea.
My main issue with a wealth tax is the huge infringement on liberty and potential for abuse.
Warren's plan is to tax wealth over $50M at 2%. How do we know which households exceed this threshold though? A few possibilities
* We could make every single household report their wealth every year. That's a massive burden on everyone. You'd have to estimate the value of everything you own (cars, furniture, collection of vinyl recordings, etc.). Nightmare. Very few people would be capable of making the kind of accurate assessments that we expect wealthy people to hire accountants and lawyers to produce.
* We could just use the honor system. I don't think this is a serious possibility.
* We could rely on the IRS to "estimate" who is above the threshold and pursue audits for those who are expected of not paying their wealth tax.
The third possibility seems like the only workable one, but it gives way too much power for government to harass ordinary citizens, in my view. It would be too easy for the government to identify some political opponents and hit them with a massive intrusion into their privacy as well as a costly and time-consuming valuation task. Since valuing all of ones wealth would require disclosing tons of personal information, the wealth tax audits could be used to dig up dirt in the hopes of enabling subsequent prosecution of enemies.
There is also the matter, of course, that wealth taxes are extremely inefficient for growth. The "wealth" being discussed here is almost entirely in the form of investments. Wealth taxes cut private investment and redirect largely to social spending priorities that are best characterized as consumption. We will get to consume a bit more today, but we'll be poorer tomorrow and much poorer in the not-too-distant future.
I'm less perturbed by the efficiency issue than the liberty issue, as I think basic freedoms trump money.
There’s a super easy way to tax wealth that we never talk about because it’s not done at the federal level: property tax. Property taxes in the US are highly regressive, reversing this would be a huge win for housing and equality. (https://www.strongtowns.org/journal/2021/8/31/5-steps-to-taking-on-assessment-inequities)
There isn't, and the numbers don't work out either in votes (the last Congress didn't pass this proposal) or in revenue terms to cover Medicare's growth. The plan is to raise everyone's taxes, which is what happened when Democrats held the spending key (the House) from 1954 to 1994. They spent indiscriminately on many middle class entitlements, all while cutting outlays from military spending similar to how they plan to use Medicare now. Then inflation pushed people up the tax bracket in the 70s, which is the main reason Reagan came to power. Gingrich took a bit longer to happen, but Reagan was the real deal in that he put an end to %GDP spending going up and up.
The boring answer is they want to raise taxes on everyone and can't say that, so they propose plans that don't make a lot of long term sense until you think about how it's actually going to go down once Medicare's trajectory keeps going. They will raise taxes on working people for Medicare, then they will cut Medicare to even out the CBO score for other new promises they make. That is who they are deep down.
There's a lot there if the political will is there. Certainly you can bring down this debt considerably without going beyond the top 1%.
Its if we ask for a wider provision of social services that we have to look at broader taxation. If we look at countries with higher rates of taxation, they also have a broader taxation that dips into the upper middle class. Although the upper middle class (of which I am one) are not super-yacht rich, they do have all they need for a nice house, healthcare, college, and retirement - they can be leaned on for the working poor or environment or national security or what have you. But these people you will need a good political reason to tax - the top 1% you can just let whine while and people will cheer.
Combination of VAT instead of the wage tax tied to funding social safety net programs: Social Security, Medicare Medicaid, UI, means tested transfers; net taxation of CO2 and methane emissions; and increased personal tax rates, yes including down the income distribution it keep the highest marginal rates no more than around 50%. Revenues would also be raised by taxing indexed capital gains as ordinary income but not stepping up capital gains basis on inheritance and by transforming tax deductions into partial tax credits at less than than the highest marginal rate. Business income and taxes paid on business income would be imputed to personal incomes of owners. Deductions (not partial tax credits) would be increased for retirement savings and SALT deductions restored to shift progressive "income" taxation toward "progressive" consumption taxation.
That depends on what you define as rich and how much you tax. If you only define the rich as the billionaire class as Bernie likes to rail at, the top 1%, not much. But if you look at the top quintile that is a lot of money.
The top quintile makes 52% of the total national income which is about 25 Trillion, so about 13 trillion. If you raised taxes 5% on that quintile that would generate 650 Billion dollars. The average deficit post recession and pre Trump tax cuts (2012-2016) was about 500 Billion, so you would completely eliminate that with some for reduction.
Also, if your goal is to reduce the deficit you dont abandon a policy just because it doesnt eliminate it. The good is better than the best.
Think you meant the good is better than nothing or don't let the best be the enemy of the good. The best is better the good. That's what those words mean
Yes, thanks, I think I was referring to the expression that the good is not the enemy of the best.] What I hear is that people arguing because something doesnt completely solve a problem it is not worth doing.
This. So glad to see this is the most liked comment (after the crucial correction above).
My guess is that the optimal way to do it is with a nationwide VAT and higher marginal income tax rates.
US federal taxes are really pretty low across the board, by developed country standards. To give an example, using this calculator
https://smartasset.com/taxes/income-taxes#jxBgQlc1nb
I find that a single person making $200k/yr with no dependents pays an effective tax rate of 26% (including FICA/payroll taxes). I ran similar calculators for France and Denmark and got numbers in the range of 40%-50% for this same pretax income.
Democrats need to stop lying to Americans that the only reason we can't have nice things is because of Republicans refusal to tax the rich. The math plainly does not add up there. There is a reason why all these social democratic states *don't* have super progressive taxation.
I think it will be politically very difficult for the Dems to pivot to telling the truth here. Biden promised not to increase taxes on <$400k. It will be hard to walk that back and admit that increases on this group have been known to be necessary all along to fund even a fraction of the Dems spending priorities. Taxing the rich more heavily can, at best, address the deficit, but not finance new spending.
Moreover, while a tiny minority of democrats (like Sanders) openly call for higher taxes on all, this is not remotely where the more mainstream Chuck Schumer types are at. They are aggressively seeking tax cuts for the rich via SALT deduction cap increase. One of the funniest videos in political history are those showing Liz Warren respond to the question of whether her healthcare plan would require people to pay more tax. (She hems and haws that their "costs" would go down, while blatantly trying to dodge the actual question).
For those mainstream Democrats, I fear they have spent too long eating their own BS to ever change course. A toxic trend has washed over America where the idea that taking someone rich's money, and spending it how you wish. is somehow virtuous. I'd say it's a valid policy position, maybe even a correct one, but virtue is in self sacrifice, not making demands of others.
I really hated the disingenuous debate Democrats insisted on having in the 2020 primary--how many trillions should we add in spending without any substantial tax increases on the middle class?
I understand Matt's point that in an under-stimulated economy, spending is the right move, but the deficits were/are structural and carry over into new economic conditions like the ones we now have.
You don't mention this--and may well disagree with me--but China's rise means we'll have to spend more on defense too. They get far more for their spending than we do because they have lower costs of production.
Something has to give.
"but the deficits were/are structural and carry over into new economic conditions like the ones we now have."
Right. The benefit of borrowing money at zero interest is free money, but if you don't plan to ever pay it back, you will have to later roll that debt over at higher interest and it makes things a lot worse.
Cut student loan interest rates. I’m in the salary wealthy camp ( e.g lawyers, doctors) and my biggest complaint with higher taxes is that I’m already paying the federal government lots of money in the form of student loans. I feel like this is why the student loan conversation is still worth having in the context of deficit reduction.
Thank you for your sacrifice. We got a true patriot right here! =)
My view is that wealthy people like you should pay back the money you borrowed from the rest of us according to the terms you agreed to.
I mean tax compliance and taxing the wealthiest in society are probably low hanging fruit.
I mean automating tax collection and auditing with NNM could take quite a bit of work too.
So in all seriousness, if you put in a concerted effort… it would say about five years of progress (holding all the else constant) before you have to admit that the bulk of US society is under taxed for all the things they want the state to provide.
Firstly you would have to define rich. You are probably right if you define it as the top 1% as Sanders like to, but if you take the top quintile, that's a lot of money.
And the perfect is not the enemy of the better, so if you dont get all the way, however much more you tax is that much of a reduction which is better than not doing it.,
A big load or revenue could be obtained from simply taxing capital gains on stock sales as income which allows a stock trader to have a lower tax rate than their well paid secretary (remember Romney) or somebody who has a factory. The second would be higher estate taxes and luxury taxes.
This loophole is the great unmentionable and would raise significant revenue.
A loophole is when a tax provision is used for unintended and unforeseen uses. Lower tax rates on capital gains are not a loophole -- it is well known and a conscious decision.
I'd be fine with raising capital gains rates to equal ordinary income rates. But I would also think long term gains should be inflation-adjusted. Once you take the inflation into account, the actual rates of today are much higher than the headlines.
It makes a ton of sense on fairness grounds, but is generally though to be quite bad for growth. I think there are even some social democratic states that don't tax cap gains.
So which taxes should be raised and what spending should be cut?
My opinion:
- cutting medicare reimbursement rates to be in-line with european standards
- abolishing SALT and charitable contribution deductions
- enacting carbon taxes
- treating capital gains as normal income
- massively increasing inheritance taxes
I still think a small but meaningful financial transactions tax is a great way to make money and also has side benefits as well. There are thousands upon thousands of trades every day, so even a small 0.1% tax on every trade could be a real revenue raiser with not minimal deadweight loss and minimal extra transaction costs which means it's negative economic effects should be pretty negligible.
The side good is if it's done right, it should put a damper on High Frequency Trading since those trades would the ones that would be "harmed" the most and those are the trades that as far as I can tell have basically zero value and essentially represent "rents" to the companies that manage to have server farms slightly closer to the main server farms in Secaucus, NJ.
A financial transaction taxes is a solution in search of a problem.
How does high frequency trading hurt anyone?
So first, I should emphasize that my primary point is a very small transaction tax is probably one of the better ways I can think of to raise taxes at minimal economic costs. Given raising taxes on literally anything carries a cost, I thought this was best alternative compared to other options.
As far as harm, it does seem like HFT is not as profitable as it used to be. Nonetheless, Michael Lewis "Flash Boys" does get into possible issues with it. This Vox article from 2014 is a pretty good summation as well and I think holds up reasonably ok. https://www.vox.com/2014/4/15/5616574/high-frequency-trading-guide-real-problems-explained
Beyond that, I think HFT is itself a solution in search of a problem in its own right. The broader economic benefits of being able to trade in milliseconds instead seconds is basically nothing. So a again it's not so much that a HFT is needed to curb some truly egregious financial practice (unlike say the closing the carried interest loophole or reforming the step up basis for inheritance taxes), but more the costs that come with any tax to economic efficiency seem low to me.
I should mention the actual best way to raise tax revenue is almost certainly a VAT. But I think that would be an extremely heavy lift political. A HFT tax to me is a lot more sellable as a "tax the rich" gambit. Even though technically it would "harm" middle class investors who have 401K, pensions or money in index funds. The primary "harm" would be to "fat cat" wall street. Or at least Biden would much more easily be able to sway the public (and Congress) by framing it as such.
1. If there is a warning article from a decade ago and no real problems have happened between now and then, I think we should update our priors on the dangers of HFT
2. Yeah HFT seems like it's generating little value, but that's why all the value there is being arbitraged away.
3. If we want to tax rich people, we should just tax rich people.
If this ended HFT, wouldn't it then be a financial tax on regular trading and investing? Is that what we're aiming for?
Isn’t it one of the main contributors to flash crashes and other similar chaos?
https://en.wikipedia.org/wiki/Flash_crash
Right and my point is that's not a problem
Sometimes the stock market falls quite a bit and then immediately recovers. The only people who lose in that scenario are high-frequency traders themselves. It's not an issue worth solving.
Nope.
From your link, click the link to the first example, which is where the name flash crash comes from. The authorities found that a click trader was responsible, not HFT.
Financial transaction taxes affect much more than high frequency trading. I'm not sure arguments for its enactment even have anything to do with high frequency trading. It's more like it is a type of VAT for financial services and products.
I think the financial transaction tax would have to replace the capital gains tax, and I'm amenable to the idea.
Probably the topic of his next piece.
He's already written about raising alcohol taxes, but someone needs to talk about marijuana taxes as well. It's kind of ridiculous that just because marijuana is illegal to sell at the federal level but legal to use in many states, the federal government isn't able to tap this as a revenue source even as the social harms of widespread marijuana use have become clear.
I'm not opposed to marijuana taxes but this is a rounding error in comparison to the federal budget
I'm not sure alcohol taxes would be a rounding error *if* they were set at optimizing levels.
At $1 per half-fluid ounce of ethanol (a standard drink) you'd raise about $270 billion per year at current consumption levels. Of course a tax that high would reduce consumption and bring in somewhat less revenue than that, which is part of the point.
oh yeah alcohol, gas, and sugar taxes should be much higher than they are now
We already tax sugar through tarriffs (Thanks Florida!)
yes, but we also heavily subsidize a popular substitute - corn syrup.
Am I mathing wrong or are you proposing 50 dollars in taxes on a standard 750ml (about 26 fluid ounces) bottle of spirits?
Only if it were 200 proof
The problem here is twofold: one, tax legal marijuana too high, and people just grow/buy it off the black market (it’s much easier/cheaper to produce a mindbending amount of it illegally than alcohol) and two, people become convinced that the high taxes actually do anything besides fix the rounding referenced below. In Colorado, the drastic underfunding of schools is difficult to change because normies always say, didn’t we raise billions on weed that’s specifically marked off for schools? And the answer was, yes,
but we’re closer to a hundred billion dollars short to making the system actually work after decades of underfunding.
Schools in Colorado need a hundred billion dollars?
There are fewer than six million people there, of all ages. That seems high even if it's a capital budget, not an annual operating cost.
Allan good thoughts and I will take the last three. I am nominally in favor of 1 but also a realist and a physician and know that most years that I have been in practice they have proposed doing this and the health care lobbies- doctors, hospitals, physical therapists, pharma- prevail in Congress and nothing is cut and if you lower Medicare reimbusrsements too much below what commercial insurance pays, and it is already some 10-20% lower, people will just stop treating Medicare patients as most already do with Medicaid which pays less than Medicare.
They largely did reduce charitable deductions by raising standard deductions, but I think that is bad as we want to encourage charity.
The other ones I strongly support. I also favor luxury taxes.
I would probably start by putting all income tax rates back to where they were in 1995. Then do a fairly modest (at least at first) carbon tax.
Entitlement spending (Social Security, Medicaid, Medicare, welfare) is nearly half the Federal Budget at the moment (46%).
Defence is politically difficult to cut - and honestly in the current geopolitical environment it might be necessary to increase it.
Sure you could increase taxes - but clearly taxes alone can’t get fix the deficit. So what is it that we cut?
Why would significantly increasing wealth, inheritance, capital gains, step up in basis, endowment, excise, etc taxes and tariffs not be enough?
Yes, it is like the person working too few hours and spending too much money, saying they cant get out of debt, as if it is impossible to either work more and/or spend less.
you said "clearly taxes alone can’t get fix the deficit" and I totally don't understand why not. Just math, right? I mean the politics are brutal, but making the numbers match is rather mundane, isn't it?
Spending is growing faster than the economy, so in the long run you really can’t. Especially when you consider that an evening population is going to drive entitlement spending up massively.
Firstly spending as a percentage of GDP from about 1975 to the recession of 2008 did not change, actually decreased and that included the Clinton years where we had a few years of budget surplus. Spending did increase but so did gdp.
And just because spending increases doesn't make it impossible to not have deficits. If spending increases 5% you have to raise revenues 5%, that is a no brainer known as balancing a budget.
We might pay more in taxes but we also earn more, so after tax income has actually risen over this period. If you make 10% more and pay 5% more in taxes, that is not so bad.
I presume you mean an aging population, which does have its downside and I am not opposed to increasing eligibility age b/c people are living longer and healthier longer.
I think his point is that current spending commitments have already baked in future spending increases that are almost certain to outpace economic growth.
Federal receipts (taxes) as a percent of gdp have not changed greatly over time since the mid 50s ranging from 15-20% ( https://fred.stlouisfed.org/series/FYFRGDA188S )
Yes spending has increased but so has gdp and national income.
Spending will increase with Social Security and Medicare as people live longer and the over 65 percent of the population increases. Higher life expectancy is a good thing.
That has been going on for a while, but our increasing productivity has led us to absorb this and I have no reason to think we wont continue to be able to do this.
I want to make sure I'm understanding you. It is your view that the status quo taxation and spending policies are sustainable?
That doesn't seem to be what Matt or both major parties think, at least officially.
Your comments are generally quite good so I'm interested to hear more of your take here.
Taxes alone could solve the problem, simple math, though politically probably not achievable. A 4% increase on income for the top quintile would bring in more money than the average pre Covid deficit.
Not that I dont support spending cuts, because to make something politically possible you would have to compromise between the parties and the Rs have the HOR and likely will pick up the Senate.
And to worry about where the cuts will come seems to pale in the light of the Dems wanting to spend say another 400B on student loan forgiveness. Most of the deficit is about new spending rather than legacy programs like Social Security which might just require raising the cutoff point for collecting taxes and/or increasing eligibility age.
Raising taxes on the top 20% would massively break Biden's pledge to not raise taxes on people making less than $400,000 a year.
This is why Democrats should stop making that type of pledge. If you take it literally it means you're not allowed to raise corporate income taxes if one poor person in America owns one share of stock. It also means you can't raise taxes on alcohol, fossil fuels, et cetera.
The professional-managerial class that, for the most part, makes slightly under that number is now part of the Democratic coalition. That is where the political fight is now.
Agreed. I think the American left has been so nearly powerless for most of my adult life that it's allowed educated people to develop very idealistic views about income redistribution.
That's great as far as I'm concerned, but I think a lot of the support would turn out to be very soft if and when the left became strong enough to start moving the US closer to the Nordic model. To actually make that happen the Democrats will need a lot more working-class support, and that requires toning down some of the party's culture-war positioning.
The culture-war positioning is why the professional-managerial class has migrated to the Democratic Party. As in they, for the most part, support it.
Edit: The American working class isn't like the European working class. The American working class wants to be rich themselves, not eat the rich. The Americans who want to eat the rich are highly-educated "artistic" people who don't make a lot of money.
Sean, quite a bit, the average MD makes 200k, and probably other professionals, lawyers, dentists, make less.
I think a good way of defining the managerial class is the upper quintile or 20%, which turn out to be making greater than 150K.
That group, the upper quintile have well outstripped everybody in terms of grabbing a bigger share of the pie as compared to the middle classes which I define as 20-80 percentile.
The top 1%, the whipping boy on the left, the billionaire class are the convenient enemy. It is true that they have even outpaced the top 20% in gains, but by sheer number it is the top managerial classes that have driven income inequality.
That group has trended to the Dems and their good fortune probably has pushed the working classes away from the Dems as the middle class has not gained economically as much as the professionals.
"grabbing a bigger share of the pie"
I don't agree with that framing at all. It's not a zero sum game.
I'm OK with the concept that we fund some broad benefits with progressive taxation, but I reject the idea that anyone fundamentally owes their higher income to the other people they supposedly "took it" from.
Jeff, I think the myth I hear from the left is that it is all about the billionaires, who certainly have gained more than any other group and should be taxed more, but there are not enough of them to make big differences, just a convenient enemy. What really has driven the income inequality in the country is the outlier gains of the professional classes - doctors, lawyers, financial analysts, whose income gains have been much more than the lower 80%. I recommend a good book by Richard Reaves "Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust".
Although I agree Biden should not make that pledge, I read him as referring only to direct taxes like the income tax. Yes, corporate taxes are incident on everyone, but I can accept this fairly subtle marketing conceit.
I guess so, but I am not Joe Biden or a representative. The argument I hear in conservative circles is that you cant pay for social welfare without taxing the middle. The left claims you can do it by only taxing the top 5% or so. Both are wrong.
The inordinate gains in after tax income and wealth have accrued to the entire upper quintile who given higher taxes will still be outpacing the lower 80%.
Define social welfare? If you want Medicare For All taxes will have to go up a lot on everyone, including even those in poverty because it will necessitate a huge VAT. If you want something like a child tax credit, that can be done without raising tax rates at all. See Mitt Romney's 2021 bill.
Yes, the devil is in the details. Actually, I favor just expanding ACA which has largely been done already and we are down to only about 8% of the US population, about 28 M people, without health insurance, so I dont know what a lot means, but a lot less I would guess than say free college. ACA gives a partial subsidy to help people buy insurance and my napkin calculations put the cost if we gave people a 3K subsidy would be 84B. That could be achieved with an increase of maybe 0.5% in taxes on the upper quintile.
No taxes would not need to go up on everyone.
Of course a child tax credit will raise taxes on everybody without children who will make up the deficit. I support it for kids under 5. Over 5 we already are enormously subsidizing education.
I believe we should incentivize having children by paying the child tax credit in one lump sum, upon the birth of the child. More babies for the buck that way.
Left claims it's more like 0.1%
You don't cut. You increase immigration to expand the labor force and the economy. And you enact family friendly policies to see if you can get Americans to have closer to as many babies as they say they want. Matt discusses this in his book One Billion Americans
enacting family friendly policies would cost money and push up interest rates (an aging population at least puts downward pressure on interest rates)
Not if you pay for them with tax increases, and the result is a larger work force 25 years down the road to support retirees. It's an investment in the future.
I agree it would be beneficial in the long run, just wouldn't help with high interest rates in the immediate term
Anyway, the best method of reducing the deficit relative to the economy is economic growth, and an easy way to do that is to allow more immigration to increase the workforce, since we are currently at full employment for the prime age population. We should especially make it easier for trained professionals to immigrate and for foreign graudates of U.S. universities to stay here and work.
This I disagree with.
As a physician I witnessed the fact that American Medical Schools graduate too few MDs for the physician supply and so 25% of physicians are trained abroad.
Why in the richest country in the world we cant afford to train our own doctors and let our own citizens enjoy these high paying jobs, is beyond me. And we are creating a brain drain from much poorer countries that are much more in need of MDs who don't serve their communities who paid for their education.
I think it is an advantage, particularly in research, to recruit the most talented, so I see exceptions for unique talent, but I see, for example, in Americans who go to the Caribbean it is more that they just couldn't get into US medical schools which should provide enough graduates for all the residencies.
In a broader context, most professionals who come here from abroad are well to do for their countries, and could have a good life, not as rich as here, but they are not struggling. I think it much better to help the poorer people who can raise their families out of poverty and are needed here to do jobs most Americans shun- farmworkers, nurses aides.
1– People expect longer retirements and save more
2– Capital per worker rises, so its marginal productivity falls— which also lowers interest rates.
Marginal productivity of capital falls.
>but clearly taxes alone can’t get fix the deficit<
Politically, maybe not. But there's no reason having to do with economics we couldn't fix the economy solely via tax increases. America's public sector is fairly small by rich country standards. Massaging tax collections upwards by, say, 5 points of GDP (maybe less) would probably get the job done without resort to cutting spending on net.
Actually taxes are the best way to fix the deficits. There are not a lot of expenditures with NPV<1 [The NPV of a transfer is ~1.]
Defense spending doesn’t seem to be particularly difficult to cut in any meaningful sense given its long term decline as a share of the economy.
As you can see from the CRFB report linked to, not much. Lots of spending increases, though.
Not the main thrust of the column, but David Brooks' piece last week was lame. It was the same "sympathy for white Trumpists" thing half of all op-ed writers have been writing since November 9, 2016. And the purpose of these columns is to spark the other half of all op-ed writers to bust out their "actually, all Trump support is about race" response columns. I'm pretty sure all opinion writers keep a copy of one column or the other in a small case marked "break in case of three-day weekend."
My spicy twist on this (dumb) recurring debate is that Trumpism’s distinctive/novel appeal is actually to voters with lower than average intelligence— and phenomena like 2016’s sharp increase in education polarization and racial resentment polarization are downstream from that.
This sounds like an excuse for libs to be smug, but it’s actually a huge political problem for Democrats. People with below-average intelligence are disproportionately likely to be politically moderate/persuadable voters. They also have plenty of legitimate political grievances. Increasing economic and institutional complexity, policy changes which require normal people to make more complicated decisions (like the switch from defined-benefit to defined-contribution pensions), the increasingly adversarial information landscape of the internet, and the rising labor market share of high return-to-intellect economic sectors have all made their lives materially worse. Democratic politicians need to get better at appealing to them as voters and fixing their problems— with the full understanding that those are separate challenges — without ever explicitly acknowledging that that’s what they’re doing.
I think that one of the main challenges here is there’s often a tradeoff between “how much internal planning does the program require” and “how simple is the program for end users”?
“Defined benefit vs defined contribution pensions” offers us a good example— the former is both much harder to plan and administer and much easier for end users to take advantage of effectively. Healthcare provision is a similar case.
It’s a bit like software UX— a GUI is going to be much harder to build and debug— and will require more compute to run—than a CLI, but it will also be much more tractable for most of your users.
Yeah, but even taking account of the hourly wages of the people to design it and run it, it probably makes more sense to have a user friendly software or pension plan than otherwise
You’re wrong about the pension. You could have everyone default into a target dated mutual fund that converted to an annuity at 65. The amount you’d get would be based on market returns and annuity rates when you retired.
A pension does not need to be a promise that a 22 new hire will get 70% of their highest 3 years of pay at 65.
But a normal person entering that deal would have no clue what sort of annual income they would be getting at age 65 under this suggested arrangement— and even more financially sophisticated employees could only make an estimate with wide error bars.
I'm going to get a tattoo with this comment.
Personally I'm to old for tattoos but my recommendation for a tattoo is:
"We want more mutually beneficial market transactions between consenting adults that do not create any untaxed/unsubsidized negative/positive externalities (with some exceptions for transactions in addictive substances) and for some of the income generated from those mutually beneficial transactions to be subject to a progressive consumption tax revenues and used for redistribution and purchase of public goods."
[Would someone one ask Midjourney for an appropriate image?]
Well, it wouldn't hurt Progressives to do a little virtue signaling about policing reforms and how police don't do enough to protect citizens from criminal violence, deficit reduction (by taxing evaders like Trump) in order to spur tradable goods production, blather a lot more about the flag and the Anthem, [in the day about how patriotic it was to get vaccinated] and get caught coming out of church on Sunday. :)
It’s worth noting that high interest rates may not stick around for long— Powell has explicitly said that the Fed believes that current real rates are restrictive and that the Fed wants real rates to be similarly or less restrictive as inflation gets closer to target.
Don't ignore what happened to interest rates in the early 80s.
Inflation re-accelerating is certainly a risk (and one which the Fed is clearly keeping in mind), but every cycle is different and there’s no real reason to assume that we’ll repeat the 1980s.
Everyone keeps saying that rates are high now. No, they're only high relative to the recent past. They can go a lot higher. Mortgages were up to 17% in the early 80s. Put that kind of number in and see how the deficit explodes.
Good analysis, though approximately 0% of the conversation around student debt relief focuses on the interest rate side of things (other than in this space) so I'm not sure that's going to convince people to get off the idea.
I just took a peek at the US Treasury interest rates and the 5-, 10-, and 30-year rates are still below the 1-year rates (~4% vs. 5%). Not like 4% is *that* low relative to where we were, but it does seem like investors are still expecting that the Fed is going to lower rates once inflation cools down (which it already has to some extent), and maybe they're expecting we return to the former paradigm of cheap money? It bugged me for a long time that we used to have the opposite problem (people thinking we were about to return to the high inflation/high rates of the late-1970s) but I'm wondering if we've lived through low interest rates for so long now that the business community has the opposite mentality.
Worth noting that Jerome Powell has explicitly said that real rates are in restrictive territory now and that the Fed will want to make them less restrictive as inflation cools— which implies cutting.
“Interest rates come back down as inflation returns to target” is explicitly stated Fed policy, and Powell generally does what he says he’ll do (good trait in a central banker)
Any sane central banker would do that. That's what FAIT means.
That’s true— but a surprising number of people seem to think that the Fed is going to keep rates high until the economy breaks no matter what inflation does.
"Not only does the new debt increase the amount of interest you have to pay, but it tends to push up the rate on the accumulated stock of interest, and the line starts pointing more sharply upward. This is the dynamic that ended Theresa May’s government in the U.K.
In theory, May could have tried harder to fight back and force the Bank of England to keep interest rates low."
I think you are referring to Liz Truss (I briefly forgot her name). 'Interestingly', the UK is now paying around 10% of all revenue out as bond interest, mainly because of high reliance on inflation linked bonds. This is the highest in the developed world.
“to talk Trump-hating educated elites through what the world looks like from the other side and to get people to see the appeal of symbolic backlash politics.”
That’s his job, and yours as well. You need to keep your ears to the ground and let the elites know when they are making mistakes. In this time of elite failure, getting them to recognize that they (have) are creating a peasant revolt would help keep them and you in power.
I don’t buy Brook’s column or Matt’s take on it. It is a feeble attempt at being fair to all of the Trump cultists who some how need to be understood while simultaneously making no attempt to understand anything outside of their ignorant worldview. This is the "we" elected Trump shit that grew old back in 2016. Brooks's wants it both ways: to be a part of the "elite' and to be a populist.
Assuming Trump's supporters are all "cultists" is a dull, smug and ignorant worldview. If I wanted to change your mind, I guess I'd need a columnist who was willing to sympathetically and fairly describe where you're coming from.
So sorry. Some, I assume, are good people.
Here's my perspective. I have been told for seven years to listen to Trump supporters, and I have, repeatedly. I get where they are coming from: it's not that complicated, really. I completely understand their problems and concerns, as I myself grew up (and am) middle class, spent 15 years working terrible jobs (starting during the Regan years and through the awful first Bush's recession), and lived in borderline poverty before slowly finishing college at a non-prestigious state school. Perhaps Brooks is not speaking to me: I have a non-prestigious degree and work a dull civil service job, and have struggled to pay my mortgage and put three kids through college. Not exactly elite, but I have been paying attention.
I am tired of being lectured to by people like Brooks who are asking me to Listen and Understand, when I absolutely have, and then get shit thrown back in my face by people who I am trying to understand but who do not make any effort to understand me. I have consistently supported candidates and policies that will help people in the Trump "base", and yet they want to spend their whole time triggering the Libs and voting for a man who absolutely doesn't care about them.
Sorry if that sounds smug and ignorant.
Fair enough, those are good reasons for you to be tired of Brooks and similar columns. I feel like I know a few people who are very far from that level of understanding, though, and they might still benefit. Another angle I'm coming from is I think hardcore supporters of any candidate sometimes get too much attention. I feel like understanding the marginal supporter, ie someone who doesn't usually turnout to vote or recently switched parities, etc... is just as important as understanding the "cultists" who are a lot more likely to be straight up A-holes. Thanks for your reply, it was a good one.
Thank you. I definitely harbored my own resentments back in the day...but I would say they were specifically NOT aimed at people who were (ostensibly) trying to help people like me. I was not terribly educated or sophisticated, but the "trickle-down" theories of the time were in particular a slap in the face, and although the Dems may have been on the take and "elitist" in many ways, it was clear to me that they were more aligned with my interests.
What is galling to me is that at the very time I was working multiple lousy jobs and struggling, Donald Trump was running around flaunting his wealth and chasing women, while a LOT of people cheered him on and laughed at his antics. At the time he seemed to me he was the epitome of the obnoxious, heartless rich man, and now...he is a populist? Good grief, it almost too much to bear.
"I have consistently supported candidates and policies that will help people in the Trump "base", and yet they want to spend their whole time triggering the Libs"
Am I wrong to infer that by this you mean that you've supported social safety net policies? If so, you are supporting the policies _you_ want and not the policies _they_ want: you still haven't heard the messages Brooks and others like him are trying to get across.
Your position is analogous to a case conservatives often make: they say that they have consistently supported candidates and policies that help demographic minorities, by creating opportunities and encouraging markets. And so they're bitter that some of those groups - particularly Black Americans - don't return the compliment.
No, you are not wrong. And perhaps you are right, it is, in a way, analogous. But I think that it is pretty clear a social safety net would make the lives of the base less anxious and better.
So what is the message? "Trump understood that there was great demand for a leader who would stick his thumb in our eyes on a daily basis and reject the whole epistemic regime that we rode in on."
So..fine, I understand the anger. But what are the specific alternative policy solutions that are being proposed to a social safety net? What are Trump or his followers proposing as solutions to improve the lives of his Base? Building a wall? Kicking out immigrants? Pulling out of NATO? Tax cuts for the wealthy? Being anti-woke? Other than the dopamine rush of Owning the Libs, how will this make the lives of the Base substantively better or less unstable?
Am I missing something?
I agree about the safety net, and I certainly don't have all the answers, particularly in the political arena, but I favor curtailing the most noxious pro-elite policies like student debt forgiveness.
As much as anything, though, it would be excellent if our elite media outlets eased off their caricatures of Red America. The most intense antagonisms aren't driven by politicians, but by the relentless, mundane disregard for their legitimate interests as they see them.
Note it's usually the cultural change much more than any economic change that causes the animosity.
They simply disagree with you about what policies will help them, and which will instead hurt them and the things they value.
>Assuming Trump's supporters are all "cultists" is a dull, smug and ignorant worldview<
Agreed. But his comment doesn't say that!
Just because someone makes no attempt to understand anyone else doesn’t mean it’s not worthwhile for us to try to understand them. It’s not fair, but fairness isn’t essential to understanding.
No. It is a very good column and has been amplified by top level never-Trumpers like Charles Murray and Seth Mandel. MAGA people would never look to someone like David Brooks for understanding. We know full well that he is a political enemy.
Brooks is trying to get the attention of elites and get them to realize that they created the conditions that created Trump, and if they don’t change their policies, even if they defeat Trump, they will be playing whack-a-mole with his replacements.
I'm not sure if it was the misplaced blame laying or the inaccurate diagnosis of the resentment that annoyed me most about Brook's column. I believe it's been pretty clearly shown that economic anxiety is not the driving force behind Trump's success, and that change in the demographic make-up and loss of default white-Christianity as the norm that accounts for much of it.
More than half the country voted against Trump in both 2016 and 2020. That's not the "elite" imposing its will on the poor beleaguered Trumpers. The hardest core Trumpers are a specific demographic group that resents that it has lost cultural power in a changing world. I'm not sure what policy the elites should change that would somehow return to them the disproportionate deference that used to be paid to them.
Every one of the statements in your second paragraph (which are true!) apply equally to the targets of _your_ scorn. Brooks isn't asking anyone to understand "the hardest core Trumpers", but the bulk of the voters that made up the other half of the country that voted against Clinton and Biden.
The thing is, I'm not sure there's that much difference. I live among and count many friends who are Trump supporters. All of them have the resentment of change in status or change in general as some part of their motivation. I think I do understand them; I'm really not sure what to do about them.
I think it's Brooks that doesn't understand them, because up until Trump he thought they were his people, and it turns out they never gave a shite about deficits, or low tax rates, or the workings of a robust free market. What they wanted was for the government to not give stuff to the wrong people. Brooks wants elites to make some policy change that will mollify these folks, but while I can think of a lot of things wrong with some policy choices we've made over the years, especially the ones that tended to award the elite, in the sense of the owner class, over the rest of us, it's a bank shot that making those things better, which would materially help many Trump voters, would actually make them less distressed by the changes that they dislike.
This is a different kind of argument than the comment I was responding to. I don't have much to say in response, except that, if you think half the country consists of hard core Trumpers, we live in different worlds.
But there is something different about Trump support. Maybe it's a reflection of a more extreme partisanship gripping the country, but I'm not sure the evidence supports that.
There were outward visible signs of support specifically for Trump from the beginning of and continuing throughout his Presidency. There's no equivalent for Biden now, or for Obama previously, or for Bush II, Clinton, Bush I, Reagan, etc. yet most of those Presidents were more popular during their presidencies than Trump ever was.
Good article.
The author notes that Bush and Trump coupled their large tax cuts on the rich with modest tax cuts for the middle. This was politically astute and in the polling that asks voters which party they favor on taxes, the GOP usually wins just as the Ds win on healthcare and environment.
Now the Dems imo can win with higher taxes on the rich, but it should be accompanied with lower taxes on the middle, rather than their usual approach which is to just spend it on new programs like student debt forgiveness. I do believe in social welfare where appropriate, but sometimes the best social welfare is just to tax the working class less. And politically it will dethrone the GOP as the party that means less taxes for the non rich,
Boomers hold half the nation's $140T in wealth, yet represent 40% of federal spending through SS, Medicare/Medicaid. Healthcare is simply too expensive in this country, and that is especially true for end of life care. The deficit will continue to grow, period.
I would say Social Security is where there's a case for reform also on how outright regressive it is by some of our fellow Anglophone country's standards (1). But it's also very different from Medicare in that the projected shortfall plateaus. Medicare's projected deficit just keeps growing and growing because old middle class healthcare consumption can keep going as far as you'll take it. Focusing Medicare's public component on essentials and requiring Congress to approve any additional services to Medicare's fee codes would help quite a bit in this regard (2).
(1)https://www.realclearpolicy.com/articles/2023/04/03/jim_crows_welfare_state_891434.html
(2)https://thehill.com/opinion/healthcare/4103372-does-medicares-public-option-still-serve-a-purpose/
Healthcare spending in the US has calcified as a percentage of GDP in the US (approx 18%) going back nearly two decades at this point. The problem of healthcare inflation is a myth. What's not a myth is that we're *stuck* paying too much.
The deficit will only grow if we spend more than we tax and don't have the political will to correct it. Demographics present problems, yes, but despite that our median after tax income continues to rise and we are wealthier now than in the past. If only old people died earlier like the old days we would be in much better shape, but you aren't going to find a lot of people to volunteer to die younger. The burden of an aging population will require adjustment, and will require more revenue, which is doable, where solving high health costs and end of life care costs are not easily solved.
Given the current 7% deficit/GDP at historically low unemployment, I just don't see the pathway for reducing spending/increasing revenue. And given the financialization of the economy, with REAL US stock market cap. 4 times higher per capita than in 1987, achieving a more balanced budget is likely bad for equities and therefore bad for revenues. In other words, at a certain point you increase the deficit by trying to reduce it.
Reducing spending probably not though we can certainly avoid massive increases by not doing things like pay off student debt, free college, etc..
Increasing revenue, why is that a problem. It wasn't a problem for Trump to lower taxes, just raise them back. So maybe the S & P will take a short term hit, in the long run it has no effect. They dont collect taxes and then burn the money, they spend it. In fact if you raised taxes on the wealthy and cut them on the middle you likely will grow the economy as the middle spends more of their income.
We had a few years of balanced budget under Clinton from about 1998-2001. It was achieved by raising taxes on the upper. It correlated with a strong rise in the stock market. The world didnt end.
Shifting money from investment to consumption doesn't grow the economy.
I guess each has its values but in terms of increased gdp I would think that directing more money to the middle would certainly increase the level of goods and services more.
For the well to do, investment is not taxed. If somebody builds factories they are reducing their taxes. On the other hand just sitting on increased stock valuations doesn't necessarily grow the economy.
Matt argued in the article that, when the economy is approximately at full-employment, as it is now, you would not expect directing more money to the middle class to raise the level of goods and services produced significantly. Instead, you get inflation.
You seem to disagree, but it would be helpful (at least for me) if you made it more clear where you think Matt's analysis falls flat for you.
I'm not really following your argument about stock valuations. If I buy some AAPL shares off some guy, that's not really a net investment in AAPL. One guy is disinvesting in AAPL at the same time that I am investing in. Secondary market transactions like this don't produce net investment. If I buy shares in new stock offering, I am directly funding that company. This may not be how most people buy stock, but no one would want to buy shares in this primary market if there were not also a secondary market where they can sell those shares.
Not accusing you, but I read this kind of perspective on the left quite. a lot. Basically, the market is just a casino. There certainly a big element of truth to it, but the casino is the side effect. They seem to ignore that, obviously, investment is what produces virtually all firms, jobs, wages, etc. The fact that there is a casino side effect doesn't undermine that truth in any way.
Productivity growth was also incredible during those late Clinton years, as globalization was in full tilt and supply chains were fully incorporating IT based logistics (Walmart as an example). From 1996-1999 US GDP growth was 4% annualized with a federal surplus... that ain't happening any time soon. We can barely churn out 2% with historically low unemployment and historically high deficit spending.
And as soon as the Dot Com bubble popped, a 2% surplus/GDP became a 3% deficit/GDP.
Thank you for a good article. I am a Democrat on the conservative side and a bit of a deficit hawk, more from a moral standpoint, you should pay for what you buy, than claiming economic savvy.
As you noted, Trump and Bush accompanied the big tax cut bonuses for the rich with mild tax cuts for the middle. Polling on various issues show that voters favor the GOP on taxes even as they favor the Dems on healthcare and other issues.
On the Democratic side, there is imo an appropriate policy of reclaiming the taxes on the wealthy, who continue to outpace everybody else in income and wealth, but the political mistake imo is to offer no tax relief for the middle but rather to spend the money on some new program like college debt forgiveness etc.
If the Dems want to win back the working class which has been going to the GOP, they need to combine higher taxes on the rich with their own middle class tax reduction, and reduce the deficit.
Raising revenue is easy theoretically, if all the deductions in the tax code were eliminated, it would raise hundreds of millions to billions of dollars. The problem is all sorts of special-interest groups would be up in arms about this.
Healthcare costs will never get under control, when we have 60-65% of the population being overweight or obese, 10-15% of the population who smoke tobacco, and another percentage of people who have problems with alcohol or drugs, leading to conditions like hepatitis, HIV, emphysema, heart failure. All of the chronic diseases that kill people in developed countries, are directly caused by lifestyle factors. Japan's life expectancy is something like 84, meanwhile the US is hovering around 75-76.
“ 60-65% of the population being overweight or obese”
When does ozempic go off patent?
Checking….
Fairly soon if I’m reading this correctly:
https://www.fiercepharma.com/pharma/novo-nordisk-teva-ink-victoza-settlement-for-december-2023-generic-launch
I still don't believe those drugs are a cure-all, and because the drugs are so new, I wonder whether people keep the weight off or eventually gain the weight back, what the long term side effects are or could be, or whether the medications lose effectiveness over time.
What the US really needs is a VAT.
How much could reforming government procurement operations save? Matt has mentioned in passing that he thinks cost-plus procurement is inefficient--could reforming this net any major gains? Likely not enough to avoid making some hard choices but everything helps.