The Ridiculousness of a “Liberal Endgame” on Fiscal Policy
Last night, the American Enterprise Institute’s Jim Pethokoukis, with whom I occasionally agree on matters of fiscal policy, took to Twitter to “clarify” the fiscal implications of many progressive priorities.
Basically, Pethokoukis is arguing that federal spending levels as high as some (slightly-caricatured version of) progressives have called for would require a broad-based tax hike on all Americans.
There’s plenty to dislike about this claim, but the most important issue is that no progressives I know are arguing for a specific federal spending level for all occasions. Instead, we want federal spending levels that are consistent with our policy priorities. So, for example, in times of weak aggregate demand, spending should temporarily rise to finance safety net programs, aid to state and local governments, and public investments to put people back to work. When the economy gets going again and we are near full employment, federal spending should then pull back. Over the longer run, spending levels should be sufficient to preserve the social insurance programs we have (which are not particularly generous), as well as finance needed public investments, vital safety net programs, and the efficient running of government. (So no phony savings like slashing the budget of the IRS.)
The liberal end game is 30% of GDP spending, financed by a VAT and other taxes.
— James Pethokoukis (@JimPethokoukis) October 6, 2014
Can we pay for spending levels that do this only by taxing the very top? That mostly depends on what health-care costs do in coming decades. If the recent declines in projected costs continue, then, well yes, we can. The very top is where lots of the money is, and the total federal tax rate for those in the top 1 percent is lower than it was in much of the past two decades. We’ve documented plenty of places (here, here and here) where lots of progressive revenue can be found.
Pethokoukis also mocked a 2011 EPI long-term budget proposal for insufficiently reducing the deficit despite raising a lot of progressive revenue. That proposal had spending in 2035 at 27.8 percent of GDP and revenue at 24.1 percent of GDP—resulting in a deficit of 3.7 percent of GDP.
However, a deficit of 3.7 percent of GDP in 2035 is actually lower than what the Congressional Budget Office projected at the time. In 2011, CBO’s long-term “current law” budget baseline foresaw 2035’s spending at 27.4 percent of GDP and revenue at 23.2 percent—a deficit of 3.8 percent of GDP even assuming all the 2001/03 Bush tax cuts would expire. The “alternative fiscal scenario” estimated by CBO that year (which, among other things, assumed the Bush tax cuts would continue) projected 2035’s deficit at a whopping 15.5 percent of GDP. So EPI’s 2011 plan was in line with CBO’s current law baseline, which CBO saw as projecting unrealistically small deficits. And since then, we’ve put out other plans that lead to smaller out-year deficits mostly by raising revenue progressively.
In the end, the main point is that we can indeed raise a lot of revenue by increasing taxes primarily on the top of the income and wealth distributions, as shown in the Congressional Progressive Caucus’s alternate budget proposal and other EPI budget blueprints. Yes, if the recent decline in health care spending increases reverses itself, then one could imagine needing to raise taxes on those outside of the very wealthy. But there already is a coming middle-class tax increase on the books that will kick in if health costs explode (and thus if more revenue is genuinely needed): the tax on “Cadillac” insurance plans, which, if health costs increase quicker than expected, could be levied on down-market Chevy plans as well.
In any event, long-term budget projections are notoriously cloudy. But grossly mischaracterizing one’s political opposition doesn’t clear anything up.