Reality and Taxes

| Wed Apr. 20, 2011 12:45 PM EDT

Ross Douthat has responded to my post on taxes, and I want to respond back. I know this kind of back-and-forth can get tedious quickly, so I'll try to keep it relatively brief. But I'd like to make five points:

  • I said that federal taxes had averaged 21% of GDP over the past 30 years, and Ross correctly points out that it's federal spending that's averaged 21%. On a macro level this might or might not matter ("to spend is to tax"), but it does matter if we're trying to figure out how voters will react to an increase in the total tax take. However, I continue to believe that the impact would be much less than Ross thinks. The federal tax take was around 20% of GDP during the Clinton era, so here's what we're talking about: letting the Bush tax cuts expire in a couple of years and then raising tax rates by about four or five points of GDP over the next 20 or 30 years. Done reasonably and fairly, I just don't believe that an increase this gradual would be wildly oppressive.
  • In any case, what choice do we have? Spending has averaged 20-21%, and it's just not plausible that we can actually cut that while the nation is rapidly aging. The best we can realistically do is rein in the growth rate. I think we'd be better off facing that reality and planning a decent tax code to handle it, rather than waiting for catastrophe and whatever disastrous tax plan would likely come out of it.
  • Am I happy about asking middle-class families to pay more taxes during an era, as Ross says, of middle-class wage stagnation and growing income inequality. Nope. And obviously I'd like to attack that inequality at its roots. Still, Social Security and Medicare are fundamentally middle-class programs, and I think it's fair to ask the middle class to pay for them. The rich should pay too, but they shouldn't be turned into welfare programs supported by the rich for the benefit of others. That's corrosive in a lot of ways, and like FDR, I don't support this.
  • Should Medicare be means tested so the taxes of the middle class aren't supporting healthcare for the rich? Maybe. I'm wide open to a lot of proposals for reining in healthcare costs, including some conservative ones. But even if we do a great job on this, Medicare costs are still going to go up. There's simply no plausible path that points in any other direction.
  • Would higher tax rates hurt economic growth? Both Ross and Reihan Salam say they would, but the evidence is slim to nonexistent. All taxes carry deadweight losses, but there's very little evidence that they affect growth rates noticeably at the levels we're talking about here. And Scandinavia — small, culturally homogeneous, and well educated — isn't the only reason to think that higher tax rates aren't economically destructive. Countries like Japan, Germany, and France have also done fine, and they're all large countries with widely varying tax rates and rates of ethnic diversity.

Needless to say, a lot of our disagreement is simply irreconcilable. We just have different views of what the social safety net should look like and how it should be funded. But really, the most discouraging part of all this is how pointless the conversation is. If I were put in a room with Ross and Reihan and we had to hammer out some kind of grand Medicare/taxing/spending/deficit plan, we might be able to do it. It would be pretty bloody, but maybe we could come up with something we all preferred to doing nothing. Unfortunately, Ross and Reihan are at the extreme fringe of the conservative movement. Any real-life deal has to go through real-life conservatives, and they're not willing to concede even Ross's modest view that "taxes will probably go up somewhat relative to the post-World War II average." They don't even think taxes should stay where they are today. They want to cut taxes in the face of an aging population, and they're still resolutely dedicated to this fantasy-based proposition, come what may. Liberals just don't have any negotiating partners here.

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