I began a series here called the “reconnection agenda,” posts targeted at the new House majority and intended to elevate policy frameworks in key areas that have been ignored, at best, and abused, at worst, by our political leadership. My first installment was on policies to promote good jobs for folks left behind. This one is on federal fiscal policy: taxing and spending at the national level.
Obviously, I’m not setting out to write a budget. The goal is to offer progressive policymakers a framework within which to think and later, if they have the votes, to act in this critical space.
First principles: There’s so much opaque and politicized rhetoric around fiscal policy that we’ve lost track of the core purpose of federal taxing and spending: to provide the American people with the government services and public goods they need and want. Of course, the people are not a monolith, and different groups would set taxing and spending at different levels. But there are still broad, first principles that hold for mostly everyone, and not just here, but in all advanced economies. For example:
Fiscal policy must offset market failures, both expected and unexpected: When people age out of their working years, all advanced economies provide some degree of retirement and health-care security. And when the private market fails, whether a national recession or a narrower, regional contraction, we’ve known since John Maynard Keynes that temporary, countercyclical fiscal policy is essential.
Fiscal policy must support public goods: Because there’s no equitable way for private firms to finance roads, bridges, water systems, armies, education and much more, the government must provide these goods. States can certainly carry some of the burden (and largely do so in K-12 education, for example), but national standards and financing are required in most of these cases.
Tax revenue should be progressively collected: There are theoretical rationales for this (“the declining marginal utility of money”: a dollar means more to a poor person than a dollar does to a rich person) as well as practical ones (ability to pay). But more importantly, most people support some degree of progressive taxation (that’s why the Trump tax cuts poll so poorly to this day), with great variation, of course, as to the degree of progressivity.
With those principles in hand, let’s turn to current events.
The old House majority left the new majority an unusual fiscal “gift”: rising deficits in a close-to-full-employment economy. Throughout our fiscal history, when unemployment has been as low as it is today (3.7 percent), the deficit has been about zero as a share of GDP. Today, it’s about negative 4 percent, around $800 billion.
To be clear, this is not an immediate disaster that must be quickly rectified. In fact, policymakers should ignore arguments about deficits and debt being good or bad. There are times, as in a downturn, when you want to worry whether your deficit is large enough to offset the demand shock. Conversely, as the economy closes in on full employment, our revenue inflows should line up more closely with spending outflows, not because the deficit is crowding out private borrowing or juicing inflation that much, but because the conservative project has long been devoted to blocking the fiscal first principles by starving the Treasury of revenue.
I feel for those new members asking themselves: “Why must Democrats always be the fiscal grown-ups?” But the answer is because you believe in well-funded social insurance, the safety net, investments in physical and human capital (infrastructure/education) and being ready to fight the next recession. Therefore, you must begin to introduce a new project, one devoted to an amply funded, functional government sector.
The urgency of this new project is underscored by some recent numbers. The Trump tax cut has broken a critical linkage between full capacity economies and higher revenue collection. The last time we were at full employment, in 2000, revenue was 20 percent of GDP. Today, it is 16.5 percent. That structural shortfall is fundamentally inconsistent with the public sector most Americans want and need.
The new House majority should thus start conceiving the fiscal plan that will reverse some of the high-end tax cuts (e.g., the estate tax cut), and close the egregious loopholes the bill opened up, most notably around pass-through income. The plan should, as I discussed in my earlier post, expand pro-work tax credits for low-income working families. While some Democrats understandably want to repeal the tax bill’s SALT cap, I’d argue for leaving it in place as its repeal would both lose revenue and make the code less progressive. Bold ideas like taxing capital gains as regular income and a small financial transaction tax should also be on the table. Funding the IRS must be a top fiscal priority: Every extra dollar spent on enforcing the tax code raises $18 in new revenue.
Shouldn’t spending cuts also be part of the fiscal plan? I’ll have more to say about that in my health-care post, as this is the key area to seek cost savings. Some Democrats occasionally suggest that an offer of Social Security benefit cuts would be worth bringing to the table in a spirit of compromise with Republicans, to which I say: be careful. While it’s true that high-income households can afford to lose benefits, there’s little fiscal relief to be gained in that income range, and I foresee the danger that deeper cuts essentially break Social Security to “fix it.” If anything, middle- and low-end Social Security benefits are already too skimpy.
Simply put, a coherent fiscal plan capable of supporting the reconnection agenda will progressively raise the revenue needed to offset market failures and invest in public goods. Sounds simple, I know, but we’re many fiscal light-years away from that goal, and it’s going to take some serious commitment to get back there.