Raise Taxes Now!
Sadly I am not being completely sarcastic in this installment of my annual taxes rant.
We must pay more . . . Am I being serious?!? Is this a desperate call for help like in a hostage video? Unfortunately I am being serious, and in a sense it is a call for help. It is just that the help I request is that we come to rational terms with an incompatible situation.
Taxes are simultaneously too high and too low. They are too high in the sense that the real tax burden is the total spending of government--not the amount the government collects in explicit, current taxes. Total government spending is unsustainably high. Thus we need lower implicit taxation—less spending. They are too low in the sense that to pay for all the spending Americans generally across the board insist upon, we need to collect a lot more. Thus we need higher explicit tax revenue.
If we are unwilling to reduce the personal welfare programs known as Social Security and Medicare1 along with the corporate welfare program known as national defense, taxes MUST go up!2
This is compounded by the fact that deficit spending must be financed by debt. Interest on the debt, which at 8% of federal spending is already substantial, is therefore going up. And this is before we factor in the poor position of the debt's term structure making rolling it over even more of an interest expense problem going forward.3 The power of compounding works in both directions.
Keep in mind that the reality of deficits for as far as the eye can see remains even if the discretionary spending is slashed to zero. Currently the non-mandatory portions of both defense and non-defense spending (the discretionary part) is about 20% of the federal budget. This fraction has been and will continue shrinking as the mandatory categories include mandatory growth (along with discretionary additional growth repeatedly appropriated by Congress). The current deficit is about 22% of total spending. To reiterate: mandatory spending is less than the deficit currently and that problem is growing with no projected end in sight.
Both political tribes have their own mythical cures for this problem. For conservatives and occasionally progressives it is to eliminate waste, fraud, and abuse. This magic maybe gets you 1% of the way there.
For progressives and some select groups of conservatives it is to tax the rich making them pay their fair share. Well, I’m not sure what the “fair share” is, but currently the top 1% pay over 40% of federal income taxes, the top 5% pay over 60%, and the top 10% pay over 70%. I guess if we taxed 100% of their income that might help, but just like the waste, fraud, and abuse nonsense, this would not get us very far. Taking 100% of every penny of income for those in the top 1%, we could fund the federal government for about 6 months. Expanding this to those earning above about $160,000, AKA, the rich?), we could fund the federal government for about . . . 1 whole year.
How about we just seize all the assets from billionaires and use those funds into perpetuity? Well, sure. That works if your definition of perpetuity is about 9 months. That’s how long all of their combined wealth would last at the rate the federal government spends money. I’ll leave it to the reader to solve for the equilibrium of instituting or even proposing 100% income or wealth taxes.
We have to tax the middle class. A value-added tax (VAT) is the best alternative (there are others like Hall & Rabushka's flat tax and the Fair Tax4), but unfortunately we will likely end up with a VAT in addition to all the current distortionary, unfair, and bad economic tax policy today.
Rather than starving the beast, the strategy I now reluctantly endorse is gouge the people. Only then might they come to terms with the unsustainable contradiction between what they want and what they are willing to pay for.
Spoiler alert! This is going to happen anyway.
This is where progressives are MUCH more consistent than conservatives. Republicans in particular are absolute hypocrites in this regard. If Democrats are living in la-la land on the idea that government can keep growing, they are paying rent to Republicans who actually own title. Despite how awful the political actors are in their willful lies, the willful innumeracy of the public is where the blame must come to rest.