Tuesday, November 27, 2012

The Debate About Tax Rates

I've been reading the November/December issue of Foreign Affairs, and Grover Norquist's got an essay therein, which is timely, considering how much he's in the news. See, "Are Taxes Too Damn High?":
Andrea Campbell tips her hand partway through her essay “America the Undertaxed” (September/October 2012) when she writes that “the central debate in U.S. politics is whether to keep taxes, particularly federal taxes, at their current levels in the long term or emulate other advanced nations and raise them.”

So the choice facing Americans is between maintaining the size of the government under President Barack Obama and expanding it further? Who knew? In framing things this way, Campbell posits a Brezhnev Doctrine for U.S. government spending and taxation: what the government takes and spends today is forever ceded by Americans to the state, and that portion of their income not yet taken by the government is negotiable. Such ideological blinders limit the author’s ability to understand or explain how the United States arrived at its present level of historically high spending and taxation -- and what the American people would like its government to do and how much it would like it to cost in the future.

The U.S. government was created to maximize liberty. Unlike the European nations Campbell offers as models for how much Americans should be taxed, the United States was not organized around defending or promoting historical land claims or one religion, tribe, or ethnicity. Americans are a people of the book: the Constitution. According to the founders, government should play a limited role in the lives of Americans, by providing for a common defense, the rule of law, property rights, and a justice system that protects them.

Despite these strict limits, the U.S. federal government has grown enormously in size, cost, and power over the last two centuries, mostly as a result of the country’s engagement in successive wars. With each conflict, Washington increased its spending and powers of taxation under the false flag of temporary necessity and appeals to patriotism. After each war, the government refused to return to its previous size and level of power.

This growth can be seen in the numbers. The federal government consumed less than four percent of GDP in 1930, 9.8 percent in 1940, and 16.2 percent in 1948. By 1965, the number had climbed to 25 percent of GDP, and it hit 30 percent in 2000 (compared with the average among members of the Organization for Cooperation and Development of 37 percent). Today, Campbell claims, raising taxes still higher, “perhaps by a few percentage points of GDP,” would “provide the government with much-needed revenue. And it might not have a detrimental impact on the U.S. economy, perhaps even spurring it.” But the economic crisis in Europe, where taxes and spending are already higher, makes that argument a little difficult to swallow.

The United States’ major political parties are now diametrically opposed on the question of the size of government. Gone are the days when Nixon Republicans and Kennedy Democrats argued about whether the government should get bigger or much bigger, and how quickly. No Republican House member voted for the 2009 stimulus package, and only one Republican member of Congress voted for Obamacare’s 20 tax hikes and massive spending increases (and he is no longer in Congress). Meanwhile, the modern Democratic Party has shifted from one that cast 56 Senate votes for the 1964 Kennedy-Johnson tax cut and 33 Senate votes for the 1986 Reagan tax reform into a high-tax ideological party that cast no votes for the 2001 income tax cut, under President George W. Bush, and only one vote for the capital gains and dividends tax cut of 2003 (and that voter is set to retire this year).

The budget that Obama released in February 2012 shows annual federal spending increasing by $1.5 trillion over the next ten years, producing $11 trillion in additional federal debt. Paying for all that spending will require dramatic hikes in taxes. Obama promised in the 2008 presidential campaign that under his plan, “no family making less than $250,000 a year will see any form of tax increase.” On August 8, 2012, however, Obama changed his pledge, saying, “If your family makes under $250,000 . . . , you will not see your income taxes increase by a single dime next year.” The promise to oppose all tax increases on incomes less than $250,000 was replaced by a promise to prevent only income tax hikes -- and only for 12 months. Obama’s new language opened the door to a value-added tax (VAT) at any time and to income tax hikes starting in January 1, 2014.
Obama’s shift is important, for as Campbell points out, the difference between U.S. and European levels of taxation is mainly due to the prevalence of VATs in Europe. The United Kingdom has a VAT of 20 percent, France one of 19.6 percent, and Sweden one of 25 percent.

Advocates of higher taxes in the United States know that only a VAT or steep taxes on energy can cover the higher levels of spending in Obama’s budget projections. Higher income tax rates do not raise useful amounts of money. The “Buffett rule,” which would raise rates on earnings of more than $1 million a year would, according to the Congressional Budget Office, take in only $47 billion over a decade, less than one-half of one percent of the $11 trillion in debt that Obama’s planned spending would produce.
Continue reading.

The Campbell essay is here: "America the Undertaxed."

And for the debate on Norquist and congressional Republicans, see Robert Stacy McCain, "Retire #Taxby Chambliss."

BONUS: At NewsBusters, "Grover Norquist: 'Warren Buffett Should Write a Check and Shut Up'." And also, "Greg Mankiw, "A Master of Tax Avoidance."


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