Archive for November 10th, 2019

I give Bernie Sanders and Andrew Yang credit for a bit of honesty. Both of them have proposals to significantly – indeed, dramatically – expand the burden of government spending, and they actually admit their plans will require big tax increases on lower-income and middle-class voters.

Their numbers are still wrong, but at least they recognize you can’t have French-sized government financed by just a tiny sliver of rich people.

This makes them far more honest than other candidates such as Elizabeth Warren and Kamala Harris.

In the past, I’ve pointed out that there’s no nation in the world that finances a big welfare state without high tax burdens on ordinary people – generally steep value-added taxes, along with onerous payroll taxes and high income tax rates on middle-income earners (see, for instanced, this horrifying story from Spain).

And I’ve also periodically shared analysis from honest leftists who admit major tax hikes on the broader population will be inevitable if politicians in the U.S. create European-sized redistribution programs.

Today, we’re going to add to this collection of honest leftists.

There’s an explicitly pro-socialist magazine called Jacobin, in which Doug Henwood has a lengthy article explaining – from his statist perspective – that it’s necessary to have higher taxes on everybody.

We should be clear about what it will take to fund a decent welfare state: not just soaking the rich, but raising taxes across the board… I’m defining social democracy as a large and robust welfare state that socializes a lot of consumption through taxation and spending, compressing the income distribution, …insulating people from the risks of sickness and unemployment, and…it’s a lot bigger than Medicare for All and free college.

He compares the U.S. to other nations, especially the Nordic nations.

For those who want bigger government, America doesn’t spend nearly enough.

In 2017 (the vintage of most of these stats), the US government at all levels (aka general government in fiscal jargon) took in 34 percent of GDP in taxes and spent 38 percent. …Denmark, Norway, and Sweden — spend an average of 50 percent of GDP and take in 53 percent. None is very far from those averages, which are twelve and nineteen points above US levels, respectively. …The fourth graph is where American exceptionalism really comes in — the share of GDP spent on “social protection,” that is, classic welfare state programs. In the OECD’s words, these include “sickness and disability; old age (i.e. pensions); survivors; family and children; unemployment; housing; social exclusion n.e.c. [not elsewhere classified]; [and] R&D social protection.” The United States spends under 8 percent of GDP on these things, less than half the OECD average and a third what the Scandinavians spend.

Here’s a chart from the article showing how the U.S. doesn’t keep pace.

And how do the northern Europeans finance their big welfare states?

Henwood is very honest about the implications. You can tax the rich, but the rest of us need to have our wallets lightened.

How do the Scandinavian states — and others that are more generous social spenders than the United States — finance that spending? Not…by borrowing. Countries with more generous welfare states than ours borrow far less. Instead, they tax. …On some things, like Social Security and personal and corporate income taxes, the United States isn’t an outlier. On others, we are. …At 5 percent of GDP, our taxes on goods and services — mostly value-added taxes (VATs) in other countries… — are less than a third the Scandinavian share of GDP (16 percent)… The difference between the United States and the Scandinavians is over 10 percent of GDP.

In other words, big government means a punitive value-added tax.

That means higher taxes on the poor, as well as the middle class.

But he argues that’s okay because government will take care of everybody.

Yes, VATs are regressive. They’re taxes on consumption that hit the poor harder than the rich because the further down the income scale you go, the larger a portion of your income you consume. But their regressivity is more than compensated for in the Scandinavian countries by spending, which not only takes from the rich and gives to the poor, but takes from the masses and gives it back… It’s a way of socializing consumption to some degree, of taking things out of competitive markets.

Here’s another chart from the article, this one showing that the United States ostensibly doesn’t collect enough taxes from consumption (“goods and services”).

Now let’s take a closer look at the budgetary numbers.

Henwood points out that the usual class-warfare taxes would only finance a portion of the statism wish list.

Peter Diamond and Emmanuel Saez published a widely cited paper arguing that the optimal top tax rate for soaking the rich is 73 percent — optimal in the sense of pulling in the most revenue. …Bernie Sanders’s freshly released wealth tax plan would raise $435 billion a year, according to its designers, Saez and his Berkeley colleague Gabriel Zucman… Combine those two and you get a revenue increase of $520–755 billion, or 2.4–3.5 percent of GDP. Scandinavian revenues are 19 percentage points higher as a share of GDP than the United States’. …these taxes, which are probably what lots of contemporary American leftists have in mind, come only an eighth to a fifth of the way toward closing the gap with the Scandinavians.

His conclusion is very frank and honest.

Some might find it impolitic of me to say all this, but you have to be honest with people, otherwise they’ll turn on you for selling a bill of goods. …if we want a seriously better society of the sort outlined in the Green New Deal, then it’s going to take a lot more — and it won’t “pay for itself.”

My conclusion is that Henwood has profoundly awful policy preferences (Europeans have much lower living standards, for instance), but doesn’t believe in make-believe budgeting.

P.S. The Democrat presidential candidates have embraced one big levy – the carbon tax – that would grab lots of money from lower-income and middle-class people. But they seem to have successful convinced themselves (and maybe voters) that it doesn’t lead to higher tax burdens (even though proponents of such levies, such as the International Monetary Fund, openly acknowledge that consumers will bear the cost).

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