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.