Can’t the US economy tolerate higher taxes?

We are edging towards a soak-the-rich economy. To borrow from Winston Churchill: Rarely would so much be taken from so few.
To be sure, the United States is undertaxed in the sense that people want more government spending than they are willing to pay for with higher taxes. Here are the numbers. In 2019, federal taxes equaled 16% of the economy (gross domestic product), while spending was 21%. In cold cash, the deficit totaled nearly $1 trillion, or 5% of GDP.
The argument — made by many Republicans — that the economy can’t tolerate higher taxes is overkill. It’s refuted by history. As a share of GDP, federal tax revenues have been higher in all but six years since 1990, according to the Office of Management and Budget. The Trump tax cut of 2017 sacrificed many billions of much-needed revenues.
The truth is we need higher taxes as part of a political bargain to reduce and ultimately eliminate endless deficits, which pose long-term political and economic dangers. No deal is possible unless it includes a sizable contribution from new taxes. The trouble is that many Democrats view higher taxes as a vehicle to fund new social programmes.
The bruising primary fight for the Democratic presidential nomination has left two survivors: former Vice President Joe Biden and Senator Bernie Sanders. Both advocate agendas that would pay for new social programmes with higher taxes, as did the other candidates.
The amounts are dizzying. In a new study, the non-partisan Tax Policy Center (TPC) estimated that Biden’s proposed tax increases would raise $4 trillion over the next decade, which is a lot of money but not enough to cover $13 trillion in deficits projected by the Congressional Budget Office under existing programmes for the same period.
Virtually all of the Biden tax increases would fall on the rich, the nearly rich and businesses. By the TPC’s estimates, the richest 1% of taxpayers would see a 17% drop in their after-tax income, worth $299,000. (Included in this group are the richest 0.1%, who would experience a 23% decline in after-tax income, equal to an average of $1.8 million.) The poorest 80% of taxpayers would essentially see no loss of income.
Unfortunately, the TPC study doesn’t show how Biden would spend these tax revenues. But some insights can be gleaned from other sources.
Biden’s plan to expand health insurance to another 15 million to 20 million people would raise budget deficits by about $800 billion over a decade, says the nonpartisan Committee for a Responsible Federal Budget. Another $850 billion would cover universal pre-kindergarten for 3- and 4-year-olds, plus more funds for schools in poor neighborhoods.
All this casts Biden as a big spender, but compared with Sanders, he’s a piker. Some weeks ago, I wrote a column estimating the costs of Sanders’ proposals, based mainly on the candidate’s own cost estimates. His plan includes: free public college and cancellation of student debt; higher Social Security benefits; the “green new deal” proposal; Medicare-for-all; universal preschool. This list omits a job guarantee, because there are no reliable cost estimates.
Still, the total cost came to a staggering $55 trillion over the next decade. The $55 trillion is so much money that it’s difficult to describe. If entirely covered by taxes, it would nearly double the existing level of taxes. If covered exclusively by borrowing, the federal debt held by the public, now $16.8 trillion, would roughly quadruple to $71.8 trillion.
Most Americans — including me — believe in progressive government. That is: The rich and well-to-do share their good fortune with others who haven’t had it. They pay more in taxes and receive less in benefits. This reduces hardship and poverty. That’s the way it has long been. In 2019, the top 1% paid 24% of all federal taxes, and the next 4% of taxpayers paid 16% of all federal taxes. Those at the bottom paid virtually nothing.
But too much of a good thing invites abuse. Democrats’ governing philosophy is to create all manner of social benefits that would be financed by tapping the wealthy and well-to-do. The political incentives are obvious: Tax the few and distribute to the many. Why would any self-respecting “progressive” resist the temptation? Under the rubric of improving equality, progressives promote a society that seems compassionate but, in reality, is increasingly guided by bureaucratic rules.
Just what the long-term economic and political effects of this would be is anyone’s guess. But they would probably emerge only after several decades. Granted, there are practical difficulties in deciding what are effective government interventions and what are exercises in political self-interest. Still, assuming either Biden or Sanders is the next president, the difficulties can be minimised by dealing with budget deficits before constructing a vast array of new programmes.
Sadly, the odds are against that happening.

—The Washington Post

Robert J. Samuelson is a journalist for The Washington Post, where he has written about business and
economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 2011