It is not a violation of true conservative principles to recognize the American people want a certain level, an increasing level in fact, of public spending for all sorts of things (e.g., Social Security, national defense), many of which cannot be feasibly performed by lower levels of government. We then have a choice: Pretend debt doesn’t matter or try to close the gap between revenue and expenditures.
At some point debt matters a great deal — retarding growth and gobbling up revenue simply to service existing debt, for example. Alas, government is not like a household (or a business) and, therefore, some reasonable level of debt is acceptable. (Unlike the federal government, individuals don’t have the full faith and credit of the world’s largest superpower behind them.) That doesn’t mean any level of debt is acceptable.
What about closing the gap between revenue and expenditures. We’ve seen for decades there is only so much cost cutting and pushing spending onto the states that is politically feasible. Democrats and Republicans alike want a rather large, active government. We can try to increase the growth rate by smarter policies (e.g., more trade, more economic immigration) but let’s not get caught up in fantasies of 5 percent growth. So that leaves the revenue side.
Republicans made matters worse, reducing revenue, by selling the same supply-side chestnut to the American people when they voted for tax cuts. It’ll pay for itself! It’ll permanently hike growth! No, and no. It dramatically increased the debt in exchange for at most a temporary bump in growth, already dissipating before our eyes.
A responsible policymaker would look to the tax code to make it more efficient (lower the rates, broaden the base) and, yes, raise a reasonable amount of revenue to pay for all the things Americans want. (By the way, this is making me nostalgic for the Simpson-Bowles proposal to make spending cuts and add revenue; we’ve spent the last decade doing the opposite.)
Rep. Alexandria Ocasio-Cortez (D-N.Y.) touched off a debate by suggesting a top marginal rate of 70 percent; Sen. Elizabeth Warren (D-Mass.) wants a super-wealth tax to add on a 2 percent tax on Americans with assets above $50 million and 3 percent on those with assets above $1 billion. Neither is a great idea, and not because they’ll create disincentives for rich people and stifle the economy. In fact, they are most likely to lead to tax avoidance schemes and wind up raising comparatively little revenue.
With 20 or so Democrats heading for the presidential primary, maybe it is time to have a reasoned discussion on how much more revenue we think is reasonably required (at least until the baby boomer retirement bubble deflates) and the best way to raise it.
As to the latter, a number of constructive and science-believing conservatives have recommended a carbon tax, which serves the dual purpose of raising revenue and slowing climate change. Others want to go to a consumption tax (e.g., VAT tax).
You’ll find a lot of economists suggesting something more sweeping, but ultimately something that rewards work, which conservatives generally like.
Former car czar Steven Rattner is among those suggesting “increasing the tax rate on capital gains and dividends and closing loopholes.” In other words, we should be diminishing or eliminating the difference in tax rates that apply to salary and that apply to investment income. Rattner explains, “At present, a beneficiary of long-term capital gains or dividends pays 23.8 percent of the profit to Washington. That’s already a good bit less than the 37 percent top rate on so-called ordinary income.” In 2017 Congress increased the gap by lowering the capital gains tax rate from 35 percent to 21 percent.
Rattner points out that “if taxes on capital gains and dividends were raised by those 14 percentage points, we capitalists would be no worse off — and American companies would still be more competitive globally, the theory behind reducing the corporate tax rate.” He recommends:
[W]hile raising those tax rates closer to those on ordinary income would make the system fairer, other changes would be required to prevent owners of appreciated assets from avoiding their tax obligations. For example, the United States should eliminate the provision that forgives unpaid capital gains taxes on assets held at death.
And there are many loopholes that could be closed in the name of greater equity. In 2016, the Obama administration provided a helpful list of candidates: They range from jettisoning the special deductions and credits that producers of fossil fuels enjoy to eliminating the notorious carried interest provision, which allows private equity managers (including me) to pay the lower capital gains rate on what is effectively ordinary income. Of course, if capital gains were taxed as ordinary income, that problem goes away.
In fact, it’s time to eliminate energy subsidies on all forms of energy, something Sen. Tim Kaine (D-Va.) has recommended and something true free-marketers should appreciate.
In any event, there is no shortage of ideas on the tax front. The rest of the Democratic field, I think, can come up with better ideas than the easy, splashy fix of simply raising the top marginal tax rate. They should start with the basics: How much more revenue do we need, and what’s the most efficient, way to do that with the least amount of distortion to the economy that doesn’t increase income inequality? Let’s see if one or more make an intellectually honest and politically viable proposal. We could use some of that.