Tax and Spend — Please

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Let’s get a few things straight, shall we?

First, people who say they don’t like redistribution of wealth are either ignorant or dishonest. Redistributing wealth is what government does: it taxes people, and then it spends the money to benefit everybody – but some people pay more than others, and some people receive more than others. The question, then, is which way the redistribution tends to go.

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Second, most political talk is just that: talk. The only genuine expression of a government’s priorities is its budget.

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(Click to enlarge.)
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Third, the federal deficit has been cut in half during the Obama years, and growth in federal spending is at its lowest in decades.

Fourth, a huge majority of the discretionary spending in the federal budget – 57 per cent, or nearly a half trillion dollars annually – goes to the Pentagon.

Fifth, short-term deficit spending – even on top of the $16 trillion national debt – has been necessary to pull the country back from the brink of depression, and arguably should have been greater yet.

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Sixth, in the longer term, balancing the budget should be important to liberals, because the federal debt is held chiefly by wealthy people, aggravating already shameful inequities in the distribution of money.

Seventh, interest on the federal debt is a mere 6 per cent of the budget. But that’s because interest rates are at historic lows, and when they go up, so will our payments.

total-debt-as-percentage-of-gdpEighth, the national debt is large but not unmanageable. Measured as a percentage of gross domestic product, it was higher after the Second World War than it is now. We paid it down with high taxes on wealthy people and a strong labor movement that helped build a robust, taxpaying middle class.

Finally, 64 per cent of federal spending is not discretionary, but mandatory, mostly in the so-called entitlement programs. The growth in  spending – 1.4 per cent per year or so, just now – is driven by entitlements, just as the right-wingers loves to say, so they can justify  “reforming” entitlements by killing them off.

More specifically, it is Medicare and Medicaid spending that increases the federal budget. The right wingers think, and constantly shout, that we must, therefore, reduce these services to the poor and elderly. Their logic is impeccable, but the premise is false. It’s a problem of prepositions. Federal money transfers in the healthcare system do not go to the poor and elderly. They go through the poor and elderly, to the biggest profit centers in the country: healthcare providers, many of which are legally nonprofit for purposes of tax avoidance.

Those are some essential and usually overlooked facts concerning the spending side of the ledger. Now let’s discuss some of the equally misunderstood facts on the tax side.

First, considering the redistribution of wealth, let’s look at the question by state. Turns out that many of the states electing Republicans, the ones generally most virulently opposed to federal taxation, are wards of the federal government. Mississippi, for example, gets back almost two and a half times its federal tax effort in federal spending.

Ranked international tax rates (Click to enlarge.)
Ranked international tax rates: the arrow points to the U.S.
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Second, the overall tax effort in the United States, at just over 27 per cent of gross domestic product, is far behind that of most of the developed world, including those countries that are doing quite well economically, such as Germany.

Third, the federal tax effort has been dropping, measured as a share of gross domestic product.

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Fourth, the system has become more regressive over the last 50 years, and yet more so over the last 20. This is largely because the regressive payroll taxes are less meaningful in the upper brackets, where deductions, exemptions and other dodges are more numerous and accessible.

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Finally, when and if the economy ever roars again and we are back to “full employment,” the current tax structure will still leave us with a deficit. This is what is called the structural, rather than cyclical, deficit.

Add to all this the fact that we have already trimmed discretionary domestic spending to the point that many agencies are no longer functional. And we still haven’t addressed massive needs in infrastructure rehabilitation, conversion to renewable power sources, the rebuilding of public education, and means of diverting people from the huge and growing population of our prisons.

Excuse me, Your Honor. All this is moderately interesting, but is there some point to it?

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Yes. Yes, there is. It all points here: we all need to pay more in taxes. Our tax effort is not keeping up with our spending, and cutting spending is stupid for at least two reasons. It will drag the economy down in the short term, and it will not address our needs in the longer term.

That understood, now is hardly the time to raise taxes on a middle class that is already disappearing. Now is the time to raise taxes on the super-rich – that 1 per cent who have run off from the rest of us in their lifestyles and stashed their billions in the tax haven of the Cayman Islands so they don’t waste their money on helping anyone.

In other words, President Obama has it about right on the tax question, but he needs help on the spending side. He needs it from a recalcitrant Congress.