Wednesday, October 08, 2014

THE ULTIMATE QUESTION: Just How Big do the Obama Democrats Want to Grow Government?

By James Pethokoukis

Just how big do Democrats/left-liberals/progressives want to grow government? And how high are they willing to raise taxes? If only there were a left-wing version of Paul Ryan’s famous long-term budget blueprint that would outline a multi-decade path for taxing and spending (including how to deal with the coming entitlement tidal wave).

Instead, pretty much all you can find are 10-year budgets showing taxes a bit higher here, spending a bit high there. After that, however, it gets pretty fuzzy. It’s almost as if the pols and wonks on the left are avoiding the subject of what’s beyond the near horizon.

But there are clues. Democrats continue to dream up new entitlements. To Medicare, Medicaid, and Social Security, we now have Obamacare. Next up on the wish list is universal pre-K. After that, perhaps a universal basic income. On taxes, some prominent left-wing economists are arguing the US economy would be just fine with sharply higher top tax rates of at least 70%. Put it all together, and it seems like the left is quietly working toward a future America where government spends more, intervenes more, taxes more. A whole lot more.

One honest, straight-forward thinker on the left is University of Arizona sociologist Lane Kenworthy. In his recent book “Social Democratic America” he actually outlines a progressive “path to prosperity” modeled on the generous Nordic welfare states. “Over the course of the next half century, the array of social programs offered by the federal government of the United States will increasingly come to resemble the ones offered by those countries,” Kenworthy wrote in a Foreign Affairs essay earlier this year.

And how much will this cost? Kenworthy offers a rough estimate of 10% of US GDP, or around $1.5 trillion a year, raising total government spending from 37% of GDP to 47% of GDP. And here is the payment plan:

1.) As a technical matter, revising the U.S. tax code to raise the additional funds would be relatively simple. The first and most important step would be to introduce a national consumption tax in the form of a value-added tax (VAT), which the government would levy on goods and services at each stage of their production and distribution. Analyses by Robert Barro, Alan Krueger, and other economists suggest that a VAT at a rate of 12 percent, with limited exemptions, would likely bring in about five percent of GDP in revenue — half the amount required to fund the expansions in social insurance proposed here.

2.) Relying heavily on a consumption tax is anathema to some progressives, who believe additional tax revenues should come mainly — perhaps entirely — from the wealthiest households. Washington, however, cannot realistically squeeze an additional ten percent of GDP in tax revenues solely from those at the top, even though the well-off are receiving a steadily larger share of the country’s pretax income. Since 1960, the average effective federal tax rate (tax payments to the federal government as a share of pretax income) paid by the top five percent of households has never exceeded 37 percent, and in recent years, it has been around 29 percent. To raise an additional ten percent of GDP in tax revenues solely from this group, that effective tax rate would have to increase to 67 percent. Whether desirable or not, an increase of this magnitude won’t find favor among policymakers.

3.) A mix of other changes to the tax system could generate an additional five percent of GDP in tax revenues: a return to the federal income tax rates that applied prior to the administration of President George W. Bush, an increase of the average effective federal tax rate for the top one percent of taxpayers to about 37 percent, an end to the tax deduction for interest paid on mortgage loans, new taxes on carbon dioxide emissions and financial transactions, an increase in the cap on earnings that are subject to the Social Security payroll tax, and a one percent increase in the payroll tax rate.

Now I am not judging whether this vision, whole or in part, is a good idea or would make America a better place. Rather, this post is plea for candor and transparency. Americans deserve know where both parties want to take America in the 21st century. Demographics, globalization, and automation will prompt big changes in national economic policy. And those changes should be made within the context of broader vision — forthrightly presented — about the next stage of the American Project.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

2 comments: said...

How big do fascists want to grow government? Until they secure complete control of everyone and everything.

The democrat party is now a fascist movement. Anybody who would argue against that fact is either a cult-democrat or a fool.

Boon Vickerson is out there said...

Got that right @ TheFineReport, a cult of idolaters', a cargo cult of freeshit, other peoples freeshit that is. And the idea that the only people you can really trust in this world are politicians. Its not only Democrats, its the whole lousy lying thieving meddling no good lot of them and their army of entitlement.