Slate‘s David Weigel responded to my article about the S&P downward revision of U.S. federal debt by making arguments that strengthen my point and demolish his own position.
Let’s take his so-called rebuttal head-on because Weigel’s assertion, while not a strawman (as he incorrectly termed my points), is simply wrong.
I argued that both data and common sense suggest that no amount of tax increase will prevent entitlements from bankrupting the country. (One would think the implication is clear that I was talking about tax hikes in the absence of massive entitlement cuts. After all, I was responding to Weigel’s correct assertion that “Democrats won’t give on entitlements.”) Weigel responds with an IMF report which suggests that the U.S. “can restore fiscal balance by raising all taxes and cutting all transfer payments immediately and for the indefinite future by 35 percent. “
My usual response to something as preposterously hypothetical as this is “And if my aunt had balls, she’d be my uncle.” But rather than just discarding the IMF argument as rapidly as it deserves to be circular-filed, let’s explain why it’s so misguided.
On the revenue side, the IMF suggests increasing taxes by 35%. They have particular venom for the Bush tax cuts but — strangely for an organization with so much research power on their own — they “borrow from the CBO” for their estimates of the budgetary impact of the Bush tax cuts. The CBO famously uses “static” modeling, meaning it assumes that people do not change their economic behavior when the tax environment changes. But nobody except Congressional Democrats and perhaps David Weigel could honestly believe that to be a reasonable assumption.
As economist Kurt Hauser has shown, the total tax collected by the federal government as a percentage of GDP has fallen within a fairly narrow range between about 16.5% and just under 21% for sixty years whether tax rates were raised or lowered. However, lower taxes cause more economic growth, so the total tax collected by the government in real dollars rather than as a percentage is always much better following tax cuts than the CBO’s modeling predicts. And the tax revenue collected following tax hikes is almost always less than predicted. (Yes, economic downturns after tax cuts or upturns after tax hikes can alter the outcome, but those events are the exception not the rule.)
In other words, the IMF lazily and, in my opinion, ideologically, chooses unrealistic assumptions for the revenue to be gained by increasing tax rates by 35% since there is absolutely no chance that doing so would increase tax revenue by 35%.
Although the IMF report is already rendered worthless by their bogus revenue assumptions, let’s debunk it a little further:
The idea that governments will spend less money if revenue increases is pure fiction. Politicians ever and always use the public treasury to buy votes. So even if transfer payments were cut by 35% as the IMF calls for (to which I say “that’s a good start”), and even if tax revenues were raised by 35% (which is all but impossible without crushing economic growth and turning us into Europe — which Weigel, President Obama, and the IMF clearly wish for), we would still end up with large budget deficits until we limit Congress’ broader spending capacity.
Milton Friedman put it best: “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” So even if the US could raise 35% more tax revenue as a share of GDP (a political impossibility, fortunately), and even if entitlement spending was cut 35%, nobody who has studied actual rather than theoretical economic history would believe that the U.S. would actually achieve a balanced budget in the absence of enforceable spending caps and/or a Balanced Budget Amendment to the U.S. Constitution. “So,” as Friedman continued, “my view has always been: cut taxes on any occasion, for any reason, in any way, that’s politically feasible. That’s the only way to keep down the size of government.”
While European nations certainly haven’t made large strides toward reducing transfer payments, we can at least look at the tax side of the ledger and their historic economic growth. Data from the Heritage Foundation’s 2011 Index of Economic Freedom include tax burden as a percentage of GDP. The U.S. comes in at 26.9 percent. The IMF apparently would like that to go up 35% to 36.3 percent of GDP. Now let’s look at some of the bankrupt or near-bankrupt nations of Europe. The tax revenue as a percentage of GDP for Greece is 35.1%, the UK 38.9%, Spain 33.9%, Portugal 37.7%, and France an astounding 44.6%. In other words, the IMF wants us to be European.
Last year’s GDP growth for these same nations was: USA 2.9%, Greece -4.5%, the UK 0.8%, Spain, -0.1%, Portugal 1.4%, and France 1.6%. For the sake of discussion, let’s agree that 2010 was an unusual year, with European governments regrouping and instituting austerity budgets following the economic turmoil of late 2008 through 2009 while George W. Bush and Barack Obama embarked on a reckless spending spree. So, let’s look at data over a longer period.
According to IMF data, the U.S.’s average GDP growth rate during the 15 years from 1996-2010 was 2.55%. Greece and Spain were both slightly higher at 2.76%, while France, Portugal, and the UK were lower at 1.73%, 1.86%, and 2.10%, respectively. (Greece’s growth is entirely due to massive spending of money it didn’t have, which is now causing its economic collapse. And Spain’s growth was due to a now-imploding real estate bubble that took construction to 16% of its GDP by 2006-2007. By comparison, during those same real estate boom years in the U.S., construction accounted for about 4.4% of GDP.)
Since it’s extremely hard to eat GDP, however, perhaps a more instructive data set is unemployment. During that same 15 year period, the U.S. had the lowest average unemployment rate at 5.6%. The UK was second best at 6%, then Portugal at 6.8%, France at 9.5%, Greece at 10.1%, and Spain at a dismal 14%. Greece and Spain also had the highest inflation rates among the group during those years, making life even harder for their citizens.
And we’re supposed to look favorably at becoming more like Europe as the IMF, Obama and Weigel propose?
There are many factors figuring into the various economic data, but the data show somewhat lower GDP growth and much higher unemployment correlating with the IMF’s suggested higher tax rates. And that’s because — let me put on my big surprise face — people do change their behavior when tax rates rise.
It bears mentioning that I said that there is no amount of tax increase that will keep entitlements from bankrupting America. Weigel says that the IMF report proves I’m wrong. But the IMF report calls for a 35% increase in tax revenue and still requires 35% cuts in entitlements to achieve “fiscal balance.” So Weigel is actually proving my point. There is no actually achievable tax increase that can save the nation from bankruptcy-by-redistribution without massive reductions in entitlement spending.
Beyond that, the IMF’s revenue assumptions are ridiculous. Yes, it is possible to extract much more tax revenue from an economy (though not without a VAT or national sales tax), but not without harming the citizens who have to live and work in that society through weaker growth and higher unemployment. Increasing revenue by 35% will require increasing tax rates substantially and introducing a crippling and impoverishing national sales tax.
Weigel completely fails to address my argument that tax hikes to fund bloating entitlement liabilities rest on a “fundamentally Marxist premise…the same premise a mugger might use to redistribute your income.” At the end of the day, ideas matter and I found it informative that Weigel refused to engage on that most basic idea about the proper role of government in America.
He then says that my point about the French opposing tax hikes and favoring spending cuts is irrelevant because French tax rates are already higher than ours. So what is his implication? That our government should raise taxes until tax hikes are as unpopular here as they are in France?
It is true that polls in the U.S. show less opposition to tax increases than the polls in France, but that’s in large part because almost half of the U.S. pays zero or nearly zero income tax. So you would expect half of the respondents in a poll to favor taking more of other people’s money… and they do just that.
If we had a national sales tax, however, which is the only way to get where the left wants to go in terms of tax revenue as a share of GDP, you can bet that the poll results would change dramatically when a question of raising a tax rate that impacts everyone were to arise. Indeed, a recent blog by Casey Mulligan at the NY Times shows that those in the lower end of the earnings scale in France pay far more of their income (in percentage terms) in taxes than do “poor” Americans. (Mulligan’s detailed discussion on the topic is an interesting read.) This makes perfect sense because despite the cries by Obama and friends to soak the rich, it is impossible to balance a bloated federal budget that way. The government has to reach into the pockets of the middle and lower economic classes — which is exactly what France does — and even then because of the nature of politicians, they will still run large budget deficits.
If my arguments were a strawman as David Weigel suggested, he should have easily been able to demolish them. Instead, he makes barely relevant points which strengthen my statement that tax increases cannot keep entitlements from bankrupting our nation while he neglects to touch the fundamental question of whether it is OK for government to play Robin Hood who, despite claims of righteous motives, was still a thief.