Posted by: Jeff | August 25, 2009

Raise Our Taxes Already

The Associated Press has a report out today on the mounting debt the country will be facing over the next decade:

Both the White House Office of Management and Budget and the nonpartisan Congressional Budget Office predicted the budget deficit this year would swell to nearly $1.6 trillion, a record, and far above the then-record 2008 budget deficit of $455 billion.

But while figures released by the White House foresee a cumulative $9 trillion deficit from 2010-2019, $2 trillion more than the administration estimated in May, congressional budget analysts put the 10-year figure at a lower $7.14 trillion.

As Paul Krugman points out, these numbers are bad, but they aren’t apocalyptic. We faced an even worse budget outlook after WWII, and came out the other side intact. And in the short-term, the high deficit spending is justified. We’ve just had a major recession in which the government had to step in as the buyer of last resort, we have a crumbling national infrastructure, and we have a health care system desperately in need of reform. If ever there was a time to go on a spending spree, this is it. But the long-term deficits (roughly one trillion annually for the next decade) are another matter. A problem that isn’t apocalyptic is still a real problem, and that’s what we’ll have if the current forecast holds true.

But the current forecast almost certainly won’t hold true. A decade is an eon in political terms. Lots of things can and almost certainly will happen in that time to alter the budget outlook. As the AP article points out, we’ll have five congressional elections over the next ten years. That’s a lot of chances to fix things.

And when it comes to fixing things, we basically have two options: Cut spending or raise taxes. The problem with the first option is moral. America is already the stingiest of all the developed nations when it comes to domestic spending. Even with smart entitlement reform – of things like Medicare and Social Security – there just aren’t that many cuts that can be made without significantly increasing the suffering that will be endured by large numbers of Americans. So that approach should be off the table a priori, for obvious reasons.

But the problem with the latter option is not moral. It’s merely political. Americans, especially in the aftermath of the Reagan presidency, have deeply ingrained anti-tax sentiments. Which is why Obama made that pledge to hold on to the Bush tax cuts for families making under $250,000 a year. He’s trying to find the sweet-spot between Americans’ distaste of taxes and their populist resentment of rich people.

But while soaking the rich may make for good politics, it also makes for a lousy budget. Even accounting for how profoundly skewed America’s wealth distribution is towards the top of the economic ladder, taxing the rich can only provide so much revenue. It’s worth pointing out that other developed nations actually have a less progressive tax code than we do. On average, they only get 32 percent of their tax revenue from the highest income earners, versus the 45 percent America takes in from that group. The reason America’s social and economic infrastructure remains far more regressive and punitive to the poor than those other nations is that they take in a far higher amount of tax revenue overall. Those revenues in turn finance much larger welfare states and higher levels of domestic spending, the benefits of which accrue overwhelmingly to those at the bottom of the income distribution. This is made possible, in no small part, by the broader tax base which comes with more a regressive tax code.

This is all a problem particularly when you’re dealing with the kind of quasi-transformational shift in domestic priorities that Obama seems to be gunning for. Transformation costs money. So does progressive domestic policy. If Obama supporters, Democrats, liberals, and the left more generally, really want such a change to stick – and that means making it financially sound – then sooner or later their going to have to stop trying to work around Americans’ opposition to broad tax increases and confront those sentiments head-on.

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