Posted by: Jeff | November 23, 2010

You Do the Best You Can With What You’ve Got to Work With

This post by Reihan Salam is extraordinarily odd. It’s in reaction to another post by Paul Krugman, explaining why he’s not all that opposed to the VAT — basically a national sales tax — included in the Rivlin-Domenici deficit reduction proposals. (One of several packages of proposals released in the wake of the Simpson-Bowles report last week.) Here’s Krugman:

[P]eople are right, sales taxes are regressive taxes. But while I haven’t had time to evaluate the whole thing, the sales tax itself isn’t a killing point in my view.

Why? Because we know that countries with strong social safety nets generally rely a lot on consumption taxes…

More generally, it does seem that countries with strong welfare states have less progressive tax systems than those with weak safety nets; see this, from the Luxembourg Income Study (pdf).

And there’s a substantial literature suggesting that this is no accident: that in the United States, because we don’t have a national sales tax, politics ends up being about tax brackets, which in the end can’t do much to reduce inequality, while in Europe you have broad-based taxes, and politics ends up being about who gets helped, which matters much more, especially for the less fortunate.

Salam has apparently been harping on this point himself. I don’t know what he’s written on it, but I do know Joe and I have discussed it. (Yay, self-promotion.) Anyway, what struck me as odd was Salam going on to say, “[T]his reality-based stance contradicts much of what Krugman has been writing about tax cuts for the rich for years and years, but I won’t hold my breath for a mea culpa.”

Uhm, how exactly does it do that? I mean, I’d say the driving moral priority for a liberal like Krugman (or myself) is making sure our federal taxing-and-spending system as a whole does all it can to help the least fortunate. I’d prefer the European approach of a broad-based and more regressive tax structure, built around a VAT, and then offset by a large and generous welfare state. Under such a system, I think the least fortunate in our society would come out much better in the wash. And I bet Krugman would agree with me.

But we don’t have that system in America right now, and we’re unlikely to move towards it anytime soon. What we do have is a modest-sized welfare state and an income tax. Under that set-up, helping the less fortunate means pushing to increase the size of the welfare state while also pushing for a more progressive income tax. (In other words, higher taxes on the rich.) It’s not an optimal strategy for fighting inequality and raising up “the least of these,” but it’s the best we can do under the system we currently have.

Point being, the policy approach may change depending on which overall taxing-and-spending set-up you’re working under, but the underlying moral goal remains the same. So there’s no contradiction here. Conversely, the fact that Salam does see a contradiction means he’s either extremely obtuse, or he doesn’t share that underlying moral goal.

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