Deficits, Spending, and the Middle Class

Why don’t Americans get that the middle class is perfectly strong in other first world countries, almost all of which place a higher tax burden on everyone? In Denmark the lowest income tax bracket is 42%. The US has one of the lowest tax burdens in the OECD even on the middle class.

To see why it’s important, consider Ezra‘s quoting Edwards as saying there’s a real dilemma between balancing the budget and having decent anti-poverty programs. In a question and answer session, the candidate said,

I think that, if we’re honest, you cannot it, it’s just common sense in the math, have universal health care, and invest in energy, and make a serious effort to eliminate poverty, to strengthen the middle class, and do some of the work that I think America needs to be leading on around the world, and at the same time, eliminate the deficit. Those things are incompatible. And anybody who claims — politicians who say ‘I’m going to give you a big tax cut, and give you health care, put more money into education, and oh by the way, we’re going to balance the budget in the process,’ it’s just make-believe, it isn’t the truth. So I think there’s gonna be hard judgments that have to be made — my commitment is to have universal health care, to do things that have to be done about this energy situation and global warming, because I think they’re enormous threats, not only to the people of America but to the future of the world, for America to lead on some of these big moral issues that face the world, and I think America has to do something about poverty, I just do. Those are higher priorities to me than the elimination of the deficit. I don’t want to make the deficit worse and I would like to reduce the deficit, but in the short-term, if we don’t take a step to deal with these other issues, it in my judgment, undermines the ability of America to remain strong in the 21st century.

On the one hand, I admire the honesty. It’s time for politicians to stop saying, “We’ll balance the budget while cutting taxes and increasing spending.” Strictly speaking universal health care will reduce government spending if done right, but the right way is probably politically infeasible nationally – Feingold’s plan of steering the states in that direction would’ve been better – and at any rate, the saving is only about 1% of GDP, though the public will get back 8% of GDP in a tax cut equivalent.

On the other, the phrase “strengthening the middle class” is misleading. Even a bad universal health care plan will be more than enough to put money into the hands of the middle class. Making public college tuition free for four years costs a pittance to the government – about $30 billion a year, I think – but will help the middle classes even more. In Denmark and Sweden the middle classes pay more, but they also get back more, and usually have unionized jobs that offer more security than is standard in the US.

Strictly speaking, there is a way to do everything Edwards says is impossible, but it involves federal regulations that are politically infeasible – not necessarily because people will oppose them, but because the Democrats won’t ever have the courage to bring them up. Edwards, who liked the War on Iraq until it became unpopular, certainly won’t.

First, the US spends way too much on defense. A withdrawal from Iraq alone will save $100 billion per year, but spending less on new weapon systems nobody needs, reducing Pentagon procurement, and letting the size of the standing military decrease should save another $150-200.

Second, what Americans don’t realize about education is that the problem isn’t necessarily spending, but equality. The US already ranks near the top in per-student spending and gets mediocre results; within the US, the same applies to New York state. But both of these also have high inequality, due to within-district funding. This a) reduces funding to low-income schools, and b) causes good teachers motivated by high salaries to concentrate in just a few high-income schools.

Third, even if tax increases on the middle class are out of the question, tax increases on the upper middle and upper classes aren’t. Any serious economic populist program should involve reinstating taxes on wealth, like the estate tax, as well as taxes on non-salary income such as dividends and capital gains. Just eliminating the FICA cap will bring in $110 billion per year.

Fourth, although my minimum income proposal costs $550-600 billion per year, anything Edwards wants to pass is a lot more modest, and anything he will be able to pass will cost even less. If he brings back welfare spending per GDP to pre-Welfare Reform levels, it’ll cost $150 billion per year more (see chart 7 here).

Fifth, energy spending pays for itself, subject to immense political constraints. Edwards can trumpet equality in education spending and single-payer health care, and let Republicans and conservative Democrats run against it. He can’t trumpet a $4.00/gallon tax on gas without being immediately demoted to McGovern status, even though, again, countries with perfectly healthy middle classes have gas taxes that make retail price the equivalent of $7/gallon.

And sixth, without a gas tax, energy policy is mostly revenue-neutral. The most important return to pre-Clintonian politics is increasing regulations about emissions. The only things that cost money are grants to researchers, which don’t make a dent in the budget.

To summarize, the only one of Edwards’ policies that will be revenue-negative is poverty elimination, which will likely cost the government about $150-200 billion per year. That’s a lot of money, but compared to a $170 billion saving by eliminating the FICA cap, another $110 billion by rolling back Bush’s tax cuts to people making over $75,000/year, a $100 billion saving by withdrawing from Iraq, and a $100 billion saving by replacing Medicare and Medicaid with a single-payer system, it doesn’t preclude deficit reduction.

(I would’ve posted about this 9 hours ago, but got tired and fell asleep)

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3 Responses to Deficits, Spending, and the Middle Class

  1. Tyler DiPietro says:

    A tax proposal that would simplify many problems with the current system would be to abolish the legal distinction between earned and unearned income, so that there is difference between personal income taxes, capital gains taxes, etc. And then make it steeply progressive.

    One of the ways that conservatives pass off regressive tax proposals like the flat-rate income and national sales taxes is to claim that they are “simpler”, when in reality there is nothing inherently more complicated about graduated taxes. Indeed, even many conservatives have admitted that the former two proposals are just as subject to loophole poking by tax lobbyists as the current system is.

    On gas taxes, I think a better tactical option is to target CAFE standards and implement trade-able emission permits first. That will at least start a program to deal with global warming without setting off populist outrage right out the door.

  2. Alon Levy says:

    I’m with you on gas taxes. CAFE standards are an easier thing to do, which even Congressional Democrats are trying to improve. Once the national dialogue is about regulations, it’ll be relatively simple to have a more aggressive regulation than CAFE, which doesn’t do much when an auto maker’s best selling car is an SUV. Another relatively painless thing to do is support research into alternative energy, and perhaps offer a tax rebate for solar panels. That wouldn’t be revenue-neutral, but it costs little enough to be drowned in improvements in public health due to environmental legislation.

  3. SLC says:

    1. As I have stated earlier on this blog, a flat tax coupled with a large exemption will be nearly as progressive as a proposed progressive tax. As an example, the original Steve Forbes proposal was for a flat 20% tax with an exemption of $7500 per dependent. Thus a family of 4 with an income of $30000 would not pay a nickel in taxes under this proposal.

    2. Instead of a gas tax, impose an engine displacement tax, payable once a year like the current state license fee. This would encourage the development of hybrid cars, particularly hybrid cars with rechargeable batteries. For instance, the current battery pack in a Toyota Prius can be replaced with a rechargeable battery pack which can power the vehicle for some 32 miles in stop and go driving without starting the gasoline engine. For a commute of, say 15 miles, such a vehicle could be driven indefinately without ever fueling. The burden on electricity generation capacity will be minimal as the vehicle can be recharged overnight when electricity demand is lowest.

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