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The New York Times Just Wrote One Abysmal Editorial on Raising Taxes

What a misguided yet clarifying editorial on taxes from The New York Times. I think we are going to have to take this one apart sentence by sentence:

To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class.

First, congrats to the NYT for admitting that Democrats eventually will shift their tax-raising sights from billionaires and millionaires and households making over $450,000. To afford the level of spending Democrats desire, everyone will need to pay more (probably with a VAT). As former White House economist Jared Bernstein told the NYT recently, “We’re not collecting the revenue we need to support the spending we want.”

Second, I doubt the good Keynesians on the NYT editorial board even believe that it’s necessary to reduce the deficit during a weak economy. NYT columnist Paul Krugman sure doesn’t seem to think so. Krugman in today’s paper: “America doesn’t face a deficit crisis, nor will it face such a crisis anytime soon. We should be spending more, not less, until we’re close to full employment.” The NYT editorial is using the excuse of deficit reduction to push through more upper-income tax hikes to make it easier to later argue for middle-class tax hikes.

Third, here is how you do deficit reduction, courtesy of economists Alberto Alesina and Francesco Giavazzi: “The accumulated evidence from over 40 years of fiscal adjustments across the OECD speaks loud and clear … adjustments achieved through spending cuts are less recessionary than those achieved through tax increases … spending-based consolidations accompanied by the right polices tend to be less recessionary … only spending-based adjustments have eventually led to a permanent consolidation of the budget, as measured by the stabilization – if not the reduction – of debt-to-GDP ratios.”

Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year. (Wars and a recession also contributed.) It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes.

Wait, what? The Congressional Budget Office says publicly-held debt will increase by $7 trillion over the next decade even though revenue as a share of GDP will average a percentage point more than its post-WWII average. 19% vs. 18%. Tax revenue isn’t historically low, spending is historically high.

And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

Again, we don’t need to raise taxes now. But that point aside, the NYT is wrong that upper-income tax hikes don’t hurt growth. Even the CBO and its static tax scoring said that the recent upper-income tax hikes will likely cost 200,000 jobs and knock a quarter percentage point off GDP in 2013.

As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

This is just bad economics. First, raising investment taxes by 60% means less investment and less growth from a tax code already biased against investment. Second, the 39.6% top rate (actually more like 41%) is high by the standards of the past quarter century. Third, the actual tax burden is headed to an historically high level, 19.1% of GDP by 2023 vs. 18%. Fourth, if the NYT editorial board wants to argue taxes should return to pre-Reagan levels of 70% or higher, I urge it to first read this.

Raising taxes at the top is neither punitive nor gratuitous. It is a needed step, both to achieve near-term budget goals and to lay the foundation for a healthy budget in the future. As the economy strengthens and the population ages, more taxes will be needed from further down the income scale, both to meet foreseeable commitments, especially health care, as well as unforeseeable developments, from wars to technological challenges. But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time.

As I have written, I doubt the US tax burden can stay at its historical average. But the next steps — along with entitlement reform — should be to raise revenue though higher economic growth, not by cranking up marginal rates and further penalizing savings and investment. Tax and spending reform should come first, to show Americans their taxes are being collected and then spent in a relatively efficient manner. But with visions of VATs and surtaxes dancing in its collective head, the New York Times wants tax hikes in the worst possible way. And if it gets its way, taxes will go up in the worst possible way.

  1. Garrett Petersen

    The whole problem is that politicians have one lever for spending and one for taxation.  So long as that is true, they will keep the spending lever all the way in the “on” position, and the taxation lever all the way in the “off” position.  We need some sort of institutional rule that can fuse the two together, then we’ll see what kind of country the voters really want.

    The way I would do it is with a flat tax, in addition to all other taxes, the rate of which is automatically determined by the yearly deficit.  If the deficit for 2013 is 4% of GDP, then everyone pays 4% of their income at the end of the year.  If there’s a surplus of 1% of GDP, everyone gets a 1% rebate.  Enact that policy and voters will think twice before sending big spenders to Washington.

  2. BlueAnt
    And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

    Oh, it’s unlikely, is it?  Who’s the selfish journo at the NYT hogging the crystal ball?

    Someone ask them to shake the magic 8 ball and ask if higher taxes are unlikely to reduce their investment activity instead.  Or to increase their tax avoidance.  Or to change the structure of their capital holdings in any way.

    I understand the misused theory (diminishing marginal utility) behind the idea “taxes won’t change marginal behavior for the rich”.  But I’ve never seen a Keynesian/liberal/leftist theory that explains exactly what behavior a marginal tax increase would trigger in the rich.  

    Surely they don’t think that the rich behave exactly the same under two different tax regimes?  There must be some difference; what does the NYT predict it will be?

  3. Elizabeth Van Horn
    James Pethokoukis

    To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class.

    Growing up, there was one quote that hung on the wall, in every house we lived in.  From my earliest memories, and it hangs there now, in my parent’s house.

    Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves.“  William Pitt the Younger.

  4. Duane Oyen

    Actually, they are sort of correct.   Indeed, “what in time will have to be tax increases on the middle class” because, now quoting James’ paraphrase, “everyone will need to pay more (probably with a VAT). As former White House economist Jared Bernstein told the NYT recently, ‘We’re not collecting the revenue we need to support the spending we want.’”

    We have tried to (quoting Ronaldus Magnus) cutting the kid’s allowance, and because the Left has no interest whatever in fiscal sanity, there is no limit to the willingness to run up debt.  After cutting the allowance fails, the next step is to serve the check along with the food so they cannot convince themselves that the gourmet meal is free.  And a consumption tax such as the VAT is actually not a bad idea- WFB first proposed it in 1965 in his mayoral race.

    The keys, however, are twofold:

    1) Any VAT must replace income tax- most likely the payroll tax, and

    2) reformed program structures must be market-driven.  That is, SS becomes a defined contribution program (as in Sweden), Medicare becomes a premium support program, same for any other health care (combined with certain other reforms).

  5. Neolibertarian

    James Pethokoukis:

    Both you and the NYT editorial seem to be speaking past each other about the black cow in the basement at midnight that isn’t there.

    I think Americans have been playing the tax shell game for so long, it’s impossible to have a rational discussion about rates. Which, from the view point of the populist bureaucracy, was probably always the goal.

    The average effective federal income tax rate in the United States (read: actual average tax rate) is 11.06%.

    The top 50% of wage earners pay an average of 12.5%.

    During my lifetime it’s never, ever, ever, ever mattered what the statutory tax rates were. For top earners, this statutory rate has varied between 91% (Eisenhower) down to 28% (Reagan), and all points in between. 

    Never actual tax rates.

    Of the three eight-year presidents since Eisenhower, revenues under Reagan doubled, revenues under Clinton increased by about 50%, and revenues under the Dubya rose by about 25%.

    Reagan never managed to get one of his budgets passed and the government was shut down briefly several times. Clinton and the Dubya each got eight passed. Government shut down twice under Clinton.

  6. Neolibertarian

    All of which forces me, as rare as that may be, to disagree with your argument.

    And, alas, I’m forced to agree with Romney on the one hand, and Rob Long on the other.

    In other words, if you want to increase tax revenues to the treasury, the best strategy is to lower the rates and eliminate the cutouts (the misnamed “loopholes”) in the tax code (Romney).

    This raises taxes. Actually.

    Currently we’re in the middle of an emergency, so it would be a good idea to raise the effective tax rate from 11% to about 25%. All things being equal, it would be entirely rational for the statutory rates to also be 25%.

    And whatever else you want to say about spending, deficits and the debt, the fact of the matter is the Obama is absolutely correct: we DON’T have a spending problem (Rob Long).

    The past 4 years have proved beyond a shadow of a doubt that most of We the People are willing to complain about spending…over THERE, but fiercely dig in the heels for spending…over HERE.

  7. Neolibertarian

    All politicians know government spending is a significant factor of GDP, and for some reason, most of us idiots think GDP measures actual economic growth. Cut spending, cut the GDP: it’s just a fact. Cut the GDP, and populist bureaucrats will be forced to go back home and start working for a living.

    Which leaves us with a stubborn We the People and a powerless, useless Congress.

    The Obama was able to finish out the Dubya’s last budget (which he left incomplete), tacked on well over $800 billion, and has never seriously attempted to submit and shepherd a budget through Congress since (IIRC, all of his submitted budgets have received zero votes in the Senate).

    And we’ve now gone four years without one.

    This state of affairs isn’t unconstitutional. The requirement for a president to submit a budget package to congress stems from Harding’s 1921 Budget and Accounting act. Congress doesn’t have to even consider the president’s budget. It doesn’t have to pass a single damned budget, as long as it keeps the bills paid (CRs).

  8. Neolibertarian

    This state of affairs may not be unconstitutional, but it is suicide.

    The sequester is like taking aspirin for pancreatic cancer. And look at the wailing and gnashing of teeth over taking that aspirin! All while the cancer continues to grow inside us…

  9. Indaba

    VAT taxes are good at getting anyone who buys something to contribute to the common pot. The problem is that it is such a simple lever for a government to slowly crank it up but never down.

  10. Valiuth
    Indaba: VAT taxes are good at getting anyone who buys something to contribute to the common pot. The problem is that it is such a simple lever for a government to slowly crank it up but never down. · 0 minutes ago

    I think if you make the VAT very clear on peoples bills then political pressure can keep it in check. Also you have to make the VAT universally apply to all items and services sold.  So no one can escape it. 

  11. Indaba

    The VAT deserves a whole post of its own. We have it here in Canada. It was supposed to just to get our debt lowered and our rating raised which was achieved, but the VAT was never removed, although promised when introduced. The Conservatives though, have lowered it and done other more business friendly tweaks to it.

    Valiuth, I am awaiting your guest spot on the HW podcast since you won their competition. Maybe you could choose a tax statement to use for the next competition?

  12. Neolibertarian
    Valiuth

    I think if you make the VAT very clear on peoples bills then political pressure can keep it in check. Also you have to make the VAT universally apply to all items and services sold.  So no one can escape it. 

    “Tee hee.”

           –Your Favorite Populist-Bureaucrat upon hearing your “if.”

    The best tax is an invisible tax. Statutorily supported withholding, for instance, is why we still have an income tax after all these years.

    The most invisible tax of all is the tax on the wealthy.

    “Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories, in tax-sold farms, and in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions of wages, in increased cost of what they buy, or–as now–in broad unemployment throughout the land. There is not an unemployed man, there is not a struggling farmer, whose interest in this subject is not direct and vital.” 

                      —Franklin Roosevelt (1932)

  13. Valiuth

    I think pretty much everyone of our side agrees that really the best solution would be to scrap the tax code as is and replace it with a few smaller marginal rates with less tax exemptions and deductions. I always thought that such a move would be popular with both sides. Republicans get to simplify and cut taxes and int he process you can give Democrats a net revenue increase. Just making the tax code more scruitable would be a win at this point. 

    But, our complicated tax code exists because without the complication how can anyone game the system for personal advantage. Every last congressman gets elected on giving out some sort of tax boon to some group or other. 

  14. Spin

    Most liberals that I know simply stick their head in the sand about the affects of raising taxes on the wealthy.  They claim it won’t affect investment, nor the economy, nor jobs, nor any of the things we claim it will.  When I ask why they believe that, since historically the rich do whatever they can to avoid taxation, they simply shrug their shoulders.  So what are you gonna do?  

  15. Indaba

    Steve, the Washington people live an exciting life with cocktail parties paid for by tax payers. They only need to get through their time which is not too much time in an economy. Washington is awash with cash. Business owners see the amount of money they have to send to the government. It is why I decided to stop running a business and having my employees get their monthly pay check, pay their health care (in Canada, there is employer health care on top of the Govt. health care.) When the best parties are held in the government, that is bad news.

  16. Steve MacDonald

    James, I just finished listening to an interview with Eric Sprott. In it he claimed that, based on the Govt. figures for 2012 just released, the true deficit for the year was $6.9 Trillion (fiscal defect + NPV adjustment in long term liabilities – as any company would have to report). Last year’s number was around $5 Trillion. Thus in two years we have created a deficit roughly = 96% of private sector GDP. 

    At these levels of deficit, a discussion on tax rates becomes essentially irrelevant. You simply can’t get revenues to Govt. via tax rates high enough to achieve any semblance of balance.

    This raises a couple of questions to my mind:

    1. Why is this essentially unreported in the media?

    2. How is it possible that our political leadership can continue to act in such an amazingly irresponsible manner? Even if they were all sociopaths, self preservation ought to kick in at some point.