America’s budget problem is a revenue problem

Contrary to warnings by politicians of both parties and by almost all of the mainstream press, America’s biggest fiscal problem is not spending on Social Security, Medicare, and Medicaid; it is our almost complete unwillingness to tax ourselves sufficiently to maintain a modern state.  —Jeff Madrick, “The Entitlement Crisis That Isn’t” Harper’s Magazine

In the November 2012 issue of Harper’s Magazine, Jeff Madrick calls out politicians in both parties for refusing to raise taxes, in a meaningful way, on millionaires and billionaires. He makes a compelling case that America’s budget problem is a revenue problem, not a spending problem.

Cutting social programs is the wrong way to fix the deficit

The United States racked up a $1.1 trillion budget deficit from two unpaid for wars, the 2001 and 2003 Bush tax cuts, and the ongoing 2008 recession. Both Republican and centrist Democrats have embraced the notion that we need to cut social programs to “fix” the deficit problem. They have cooperated in spreading the lie that “entitlements” have to be cut in order to “save” them. Both parties have brainwashed the American people into thinking the deficit problem is from excess spending on social programs we can’t afford. Conservatives in both parties claim that  higher taxes will kill the economy.

Madrick reports that the best, most objective analysis of tax rates finds no relationship between high taxes and reduced rates of economic growth, nor does large government, in any way, diminish economic growth. According to UC Davis professor Peter Lindert, federal spending on things such as affordable education, parental leave and child-care encourages growth.

Tax disinformation started under George W. Bush

In 2006, Joshua Bolten, George W. Bush’s budget director, wrote  that no amount of tax increases could close the gap created by the “unsustainable growth of entitlements.” Bill Keller, executive editor of the New York Times, piled on. Like a good stenographer, he passed on Bolten’s disinformation that we couldn’t afford to keep entitlements in full. Conservative Bruce Bartlett, a Reagan era economics advisor, contradicted both Bolten and Bill Keller, claiming their assessment was “factually wrong.”

It seems that high tax economies in Europe grow just as fast, if not faster, than our own. The average tax among the thirty-four members of the Organization for Economic Cooperation and Development is 38 percent. The average tax American’s pay, including all federal, state and local taxes, is 26 percent. Denmark, Norway and Sweden have high tax rates well above 40 percent, but are among the most prosperous countries in Europe.

Madrick says a tax increase of 10 percent would bring in roughly $1.5 trillion in one year alone and $17 trillion to $18 trillion over 10 years. This enormous sum would more than provide for all possible increases in social expenditure. Even a more modest tax hike of 3 or 4 percent would add $400 billion to $600 billion per year to government revenues, guaranteeing the stability of social programs going forward.

Madrick suggests the following ways to raise taxes:

  • Raise the effective tax rate on the top 1 percent of top earners to 43.5 percent. This would leave the rich with twice what they had after taxes in 1970. Madrick says: “A lot of problems would be solved with that additional revenue of $450 billion a year.”
  • Make Social Security completely solvent by removing the payroll-tax cap from $100,000 to $190,000.
  • Initiate a new tax on financial transactions.
  • Introduce a wealth tax such as that in France.
  • Reduce deductions for home mortgages, charitable giving, and corporate health expenditures which account for about $1 trillion in lost tax revenue.
  • Institute a carbon tax.
  • Raise hundreds of billions a year through a European style, value added tax.

But, of course, none of this is going to happen. Madrick writes that virtually no one in power, Democrat or Republican, is going to put any significant tax increase on the table. It’s easier, and more politically expedient, to blame the vulnerable for the deficit, cut “entitlements” and other important programs. and continue to protect the wealthy.  But that approach is a foolish one.

Better government, not weaker government, is the path to prosperity. The nation requires sophisticated education for all; high-speed, low-cost transportation; universal access to the Web; efficient energy usage; and adequate support for the poor and the elderly—all of which demands more government revenue.

If we are going to thrive as a nation, we need better government. When necessary government services and programs are underfunded, or not funded at all, because of a lack of adequate tax revenue, the entire economy falters. In the end, everyone suffers.

Madrick concludes with the following:

There is no debate of good conscience in America about how to pay for the nation’s most profound needs. If there were, raising taxes would be a major part of it. Instead, the lower and middle classes will bear the brunt of deficit reduction.

Politicians and ideologues are playing a cruel game by keeping serious tax increases off the table, but it is especially hypocritical to do so in the name of fiscal responsibility. America’s budget problem is a revenue problem, not a spending problem. The current national conversation about tax hikes is a fine example of political deference to the rich and powerful. It is not good economics.