Tag: Public economics

They Don’t Want a Welfare State; They Want a Plunder State

The strange thing about the 2014 election is that Obama seems to have taken it as a mandate … for more liberal polices. In addition to unilateral immigration “reform”, he has just released his budget proposal, which has massive tax hikes and spending hikes, no hint of entitlement reform and claims it will find $640 billion in deficit reduction (a paltry amount over the time frame) from tax hikes, immigration reform and, I believe, money imported from Narnia. It’s a fantasy budget that is making the hard-core liberals at Vox swoon but has connection to reality. And it puts the lie to the idea that Obama is a “conservative” as one newly-retired blogger has argued.

Here’s the thing, though. Liberals have long said that what they favor is a European-style welfare state (such as the one that imploded in Greece). Obama says this and his budget makes noises in this direction and is being praised as a step in that direction.

But the Democrats do not want a European welfare state. As much as they claim they do, that’s not what they want and not what they are advocating. If they really wanted a welfare state, they would be proposing something very different: huge tax hikes on the middle class.

The United States has one of the most progressive tax systems in the world, being very reliant on the wealthy for revenue. The European welfare states, by contrast, are more regressive, having flatter taxes and relying on VATs and sales taxes that are regressive. They have to be that way because you simply can’t finance a welfare state by taxing the 1%.

A welfare state financed by the rich doesn’t even work politically. When everyone is paying taxes, there is more support for a welfare state because everyone is pitching in. The perception is that you’re getting out something related to what you paid in, which is why Social Security and Medicare are popular in this country (both financed by a regressive tax that is denounced by Democrats for not soaking the rich enough). But a system that is dependent on taxing the rich isn’t a welfare state, it’s a plunder state. And as I’ve pointed out before, most people don’t want that. They don’t want to feel like they’re living on someone else’s dime or on stolen property. The Communists discovered this 70 years ago when they tried to “redistribute” estates to the commoners only to discover that the commoners didn’t want that wealth if it was stolen.

The gripping hand, of course, is that there isn’t any support for a huge middle-class-funded welfare state either, which Vermont discovered when they had to abandon their experiment in single-payer healthcare. And so the Democrats keep trying to sneak their welfare state through the backdoor. First it was taxes on the savings in 529 plans, which was quickly killed. Now it’s a tax on overseas earnings. Tomorrow, it will be more sin taxes.

(And if that fails, I expect them to embrace Modern Monetary Theory, currently being pushed by Bernie Sanders. This theory says that government shouldn’t worry about deficits; it can just print money. Taxes only exist to keep the rich from getting too rich. Seriously, that’s what it says. It’s like a politician’s wet dream: spend whatever you like and never worry about the bills.)

Thankfully, none of this is going to fly with the Republican Congress. But Obama’s absurd tax-and-spend proposal is a sign that we are still running out of other people’s money.

Starving the Budget

With the fiscal cliff looming, Republicans are indicating some flexibility on taxes, at least for the higher income brackets. Naturally, this is generating some opposition:

To start with, Kristol misunderstands the opponents of the tax increases on the rich, whose main goal is not to ensure that the rich get to keep more of their money. Their main goal is to prevent the federal government from obtaining a new source of revenue. Why might that be?

Tax increases can be immediate, but spending cuts must be spread over many years. That provides politicians with plenty of opportunities for change their minds on spending (i.e.: vote for me and I will increase funding for your program). Contemporary Western Europe provides a perfect example of this phenomenon. In the wake of the 2008 crisis, Western European countries have introduced substantial tax increases that, in my humble opinion, are the primary reason for Europe’s double-dip recession.

There is a reasonable point in this, which is that promised spending cuts often don’t happen. But that’s not a fundamental law of the universe. After the tax hikes of the late 80’s and early 90’s, we did get spending restraint. And we got it from the same people who control the purse strings right now … a Republican House of Representatives. If the GOP wants spending cuts to happen, they can make those spending cuts happen, as they did in the 90’s.

Moreover, the Grand Bargain that has to happen is on entitlement spending with Medicare and Social Security. That will involve statutory changes, not budget changes and those are extremely hard to undo. If Congress raises the retirement age or changes the COLA formula or institutes Medicare vouchers, that will be almost impossible to undo (as we’re now seeing with Obamacare).

To be frank, the argument that we should not give the government new revenue cross me as a rehash of one the most fiscally destructive ideas in the last thirty years: the so-called “Starve the Beast” theory.

Starve the Beast was the theory that if we cut taxes, it would force the government to cut spending because the resulting deficit would be unsustainable (this was before people decided that the Laffer Curve was, in fact, the Laffer Line and that all tax cuts paid for themselves). Starve the Beast sounded tempting, especially to faux conservatives who were big on tax cuts and not so big on cutting spending. But it ran aground on several rocks:

First, spending cuts don’t just fall from the sky. You have to actually cut spending at some point. And the people who had to cut spending were the same people trying to force themselves to cut spending. It was like trying to lose weight by eating a box of doughnuts hoping that will force you to go the gym.

Second, the lesson Congress learned from Starve the Beast wasn’t that they couldn’t tolerate big deficits. The lesson they learned was that they could. As a result, we’re now enjoying our fourth straight year of trillion dollar deficits.

Third, and this is a point I keep harping on, Starve the Beast made spending painless for the taxpayer. This was especially true in the Bush years when we started two wars and put in a prescription drug program while removing millions from the tax rolls. The impression given to the taxpayers was that wars and drug programs were free, or at least were paid for by somebody else (somebody rich). It has continued in the Obama years, with spending and taxes being manipulated so that Obamacare appears to decrease the deficit when it, in fact, does not and tax hikes only acceptable if they hit the dreaded rich.

I keep saying this and I am going to keep saying it: the most important aspect of any government budget is that spending should hurt. Spending should hurt either in cutting other services or in raising taxes. If you aren’t doing either of those things, you are giving people government on the cheap. And they will have no incentive, none whatsover, to support spending cuts.

Would you turn down services that are discounted 40-100%?

One of the problems we face in balancing the budget is that spending cuts are popular in general and unpopular in detail. When you ask people what spending they support cutting, the only thing that even gets 50% is foreign aide. But a big reason for that is that, for most Americans, government spending doesn’t hurt them. They can support all these wonderful things confident that the money for it will come out of somebody else’s pocket.

And that leads in to my real point: if we’re going to raise taxes to close the budget deficit, we have to raise them on everyone, not just the evil rich. The obsession the Democrats have with only raising taxes on the rich is a product of class warfare, not fiscal sanity. To balance the budget with taxes — hell, to balance them with any sensible mix of taxes and spending cuts — is going to mean raising taxes on everyone. Alex’s post made this point very well. Look at the breakdown of where the fiscal cliff taxes are coming from: over 80% are from people who are not rich.

If we just raises taxes on the rich that will, once again, give the American people the impression that the budget deficit is something other richer people will cover. It will make it almost impossible to cut spending in the future because, really, how is all that spending hurting 98% of the voters? But if we raise taxes now, raise them on everyone, then the popular support for spending restraint will come roaring back.

That’s not just ivory tower theorizing. We have a historical precedent. From the early 80’s to the early 90’s, Reagan, Bush and Clinton raised taxes eight times. The resultant backlash brought the Republicans into power in 1994 on a platform of fiscal discipline. And they delivered. And as much as the press tried to whine and cry and tell sob stories about how the budget cuts were destroying our country, the Republicans (and Clinton) got re-elected. Because people didn’t want more spending and they saw that, in many cases, the country was better off without it.

The only way to make spending cuts happen and make them stick is to make sure the American public feel it when we spend too much. And they’re not going to feel it because we eliminated a tax break on corporate jets.

There’s another reason to stop kicking the can down the road. Bruce Bartlett:

At the time the tax cuts were enacted, I recall arguing with my longtime friend Grover Norquist that temporary tax cuts were a really bad idea. Supply-side theory has always held that permanent tax changes are vastly more powerful than temporary changes, I told him. He didn’t disagree, but said the Bush tax cuts were de facto permanent because Democrats would never have the guts to permit them to expire; they would be renewed forever. People and businesses will know that, Mr. Norquist said.

That was a foolish position for political and economic reasons. People and businesses don’t make the sorts of changes in their behavior that would give the economy a supply-side boost unless they have confidence that today’s tax regime will be in place when the payoff from increased work, saving or investment is realized.

You know all that stuff we’ve been saying about regulatory uncertainty and how businesses are afraid to invest because they don’t know what the future will bring? Well, these temporary tax cuts, renewed every couple of years, are part of that. Bartlett specifically gets into the R&D tax credit and how its temporary status has created wonderful lobbying opportunities but little economic benefit. He argues that higher but more certain taxes would be better for our economy than lower but more uncertain taxes. And given that Bartlett basically invented supply-side economics, I’m inclined to agree with him.

Obviously, the best scenario would be to burn the entire tax code down and rebuild it, a la Simpson-Bowles. But that would take months, if it happens at all. If you want to create certainty, putting together a long-term budget deal with higher taxes is the way to go. And then, if we do get a tax overhaul, that will be an unexpected shot in the economy’s arm.

Yeah, I know. This is the dreaded compromise. But the idea that we’re going to cut spending 40% is ridiculous, not just in terms of the politics of the possible but in real terms. Cutting spending 40% means we can pay for Medicare, Social Security, the military and veterans. Everything else — from Medicaid for poor seniors to law enforcement to disaster relief would go. Oh, and every state would suddenly find a 30-50% hole blown in their budget.

Moreover, I’ve been thinking of something Ed Morrissey said the other day, in the context of a compromise on immigration:

The insistence on demanding nothing but the hard-line approach creates big problems for the nation and the GOP itself. First, the issue of border security has been left in limbo for more than 11 years after 9/11, and more than seven years after the 9/11 Commission rightly demanded better security on both borders, and the broken visa program that offers no follow-up on expired entries. If we continue to punt rather than compromise, we will be left waiting for at least four more years to get any kind of solution.

In two years, there will be another election. In four years, we will have a new President. If the Republicans have exercised some serious budget restraint by then and our deficit is falling, then we can reopen the issue of returning to Bush tax rates. Until then, however, we have to deal with the situation we have in front of us. And the situation we have is a big deficit that can not be closed by spending cuts alone and Democratic control of the White House and the Senate.

Keep in mind something else: taxes are already programmed to go up. The price of doing nothing is a gigantic half-trillion dollar tax increase on January 1. If we insist on taxes not going up, the result will inevitably be that they will.

Look, I hate taxation. I’m one of those who will get hit pretty hard if we return to Clinton-era rates or something approaching them. But there is something I hate more than taxes and that is debt. And I don’t see any practical way, outside of Fever Swamp La-la Land, to balance the budget without raising taxes.

Yes, the GOP needs to drive a hard bargain. Tom Coburn has identified tens of billions in wasteful defense spending that we should cut. Agriculture subsidies and ethanol subsidies should be on the table. The Ex-Im Bank should have been killed last year. Hell, maybe we could even taken Obama up on his “Department of Business” idea if it means we kill off Commerce, SBA, Ex-Im and some other budget functions. The hardest bargain, of course, has to be driven on entitlements.

But we can not stick to anti-tax orthodoxy. It’s not realistic. It’s not responsible. And, in my opinion, it’s not conservative.

Let me elaborate on that last point: low taxes are not a conservative value; small government is. Low taxes do not create small government, they are the result of keeping government small. Raise taxes to cover the bloated government we have now, hack at it like hell for four years and then we can talk about cutting taxes back.

Update: If you think you balance the budget without raising taxes, there are various budget simulators that can get you there.

Sunday Six Pack

NPR recently had group of economists discuss policies that they think are great for the country but that politicians consider radioactive. The group of economists was actually quite diverse, ranging from George Mason libertarian (and frequently linked Cafe Hayek blogger) Russ Roberts to Cornell liberal Robert Frank. What six policies could that group possibly agree on? And why wouldn’t politicians embrace policies that enjoy such a broad consensus?

One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

One thing they don’t talk about: the mortgage interest deduction is a lot smaller than most people think it is. People see they can deduct $10,000 off their taxable income and think that’s pretty big. But mortgage interest is deducted only if you throw out the standard deduction, which is $12000 for a married couple. For most people, if their home costs less than about $250,000, they are gaining little, if anything. The host says the deduction saves him $5000. Assuming he’s calculating that correctly (i.e,. what it gives him above the standard deduction), that means he’s paying off a half million dollar mortgage.

The home mortgage interest deduction has its destructive aspects, too, distorting the real estate market. As noted above, it mostly subsidizes the purchase of large and expensive homes, driving up that end of the market. But even worse is that by creating the perception that the government is paying up a third of your mortgage, in induces people to buy more home than they can afford. Ironically, this drives up the cost of housing for the poor and middle class.

I don’t think the market can take the shock of an immediate cessation. But phasing it out would be a great idea. Even better, as we’ll see later, would be to scrap the entire tax system.

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Have the tax deduction for all health insurance or have it for none. Encouraging people to get insurance through their employer has been one of the biggest drivers of healthcare cost over the last few decades, pushing consumers further and further away from the actual costs. The Wyden-Bennett bill, one of the things I hope becomes part of the “replace” part of “repeal and replace”, would have done this.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

The Fair Tax is one of the more coherent plans on this subject. I’ve detailed before why I oppose it. A VAT would work much better but only if it mostly replaced the existing system. A lot of libertarians oppose the VAT because they see it as a gateway to big government. My opinion is that we already have big government and, given our commitments to seniors, it’s not going to get small anytime soon. The question is how to pay for it without crippling the economy and a VAT has the minimum of deadweight loss.

I lived in Texas, which does not have an income tax, for four and a half years. It was awesome. You weren’t taxed until you spent money. I would love to see the entire nation enjoy that freedom and empowerment.

Note also something important in the broadcast: the most ardent advocate of eliminating the corporate tax? The two liberals on the panel. They know how destructive corporate taxes are to our economy.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

This is the one that will cause the most disagreement on the blog. I don’t want to open another global warming debate. I would support a carbon tax but if and only if it came with steps three and four of eliminating our current tax system. It is infinitely preferable to the cesspool that would be cap and trade.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

We’ve talked about this before. No need to rehash.

Here’s where the NPR segment falls on its face: they imagine a politician putting forward the above platform and being rejected by the public. There’s some validity to that. If you cornered politicians, they would probably agree that most of these ideas are sensible but fear the public backlash. However, I think that if you polled the American people on that platform, they wouldn’t be too opposed either. Oh, they might have reservations about one or two policies but they would probably accept it over the current system.

No, I don’t think the problem is necessarily one of marketing. I think the problem — a problem that NPR glosses over — is that our politicians and political class are simply too invested in the current mess. Part of it is special interests that would rather have a tax system tailored to them or a booming prison industry or a booming housing market. Part of it is simple inertia in favor of policies we have pursued for decades. Part of it is spinelessness — the unwillingness to propose policies that, as NPR noted, can be easily demagogued.

But the largest problem is that our politicians like the system we have. The system we have — especially the tax system — keeps titans of industry, atlases of production and prometheii of invention groveling to them. The system we have keeps special interests on bended knee, constantly asking for and getting favors from politicians. Remember how, earlier this year, Apple had to start ramping up their political contributions and lobbying under threat of regulation and lawsuit? Politicians love that.

The system outlined above isn’t actually libertarian. It sounds like it, because I’ve cast in libertarian terms. But steps 1-4 would be accomplished by replacing our tax system with a VAT — versions of which have propped up some of the most socialist countries in the world. That and step 5 just detail how taxes are collected, not how much are collected. It would create a tax system that was essentially “Dial a Revenue” — capable of supporting either an expansive welfare state or a limited federalist state. Opposing those changes and supporting the current system is not an issue of big government versus little government. It is an issue of just how much of our lives and our industry Washington can control.

Even step 6 isn’t a necessarily libertarian issue; it’s more a matter of common sense. I’ve heard support for marijuana legalization from all parts of the political spectrum. My mother has never voted Democrat. My best friend from college has never voted Republican. Both think marijuana should be legal.

So, no, it’s not that the above platform would necessarily be Republican or Democrat. Or conservative or liberal. Or libertarian, for that matter. The problem with it is not that it would produce smaller or bigger government but that it would produce less invasive government, less powerful government. It would disperse the groveling lackeys and toadies are politicians have grown used to. It would produce a government less besieged by special interests and lobbyists. It would produce a government that spends a lot less time looking over shoulder and poking through our underwear drawer.

And that’s the reason it can’t happen. Our establishment enjoys the genuflection too much.

Frankensubsidy

Farm subsidies would seem a fairly easy target for budget cuts. They were a bad idea even before farm income boomed in recent years. They encourage bad ideas like monocropping and overuse of fertilizer. A lot of it goes to absentee farmers and big farm corporations.

So naturally, the GOP Congress is going to respond to this flaming budgetary bullseye by creating the illusion that they are cutting them:

It seems a rare act of civic sacrifice: in the name of deficit reduction, lawmakers from both parties are calling for the end of a longstanding agricultural subsidy that puts about $5 billion a year in the pockets of their farmer constituents. Even major farm groups are accepting the move, saying that with farmers poised to reap bumper profits, they must do their part.

But in the same breath, the lawmakers and their farm lobby allies are seeking to send most of that money — under a new name — straight back to the same farmers, with most of the benefits going to large farms that grow commodity crops like corn, soybeans, wheat and cotton. In essence, lawmakers would replace one subsidy with a new one.

The proposal is to cut the direct payment program — which was supposed to be temporary back in 1996 — but then increase crop insurance and expand it to guarantee against price dips. That is, it will guarantee that farm income does not fall below is current record levels. It’s the farm subsidy equivalent of the Democrats using the stimulus-roided-up 2011 budget as their baseline.

In Parliament of Whores, P. J. O’Rourke described farm subsidies as the one program where he could not see the other side’s argument. It’s twenty years later and I still can’t say it. But we’re paying for it, all right.