Are Taxes Too Damn High?

The Debate About the Rate

Campaign literature on a table at a "Food for Free Minds Tea Party Rally" (Jessica Rinaldi / Courtesy Reuters)

CUT AND GROW
Grover G. Norquist

Andrea Campbell tips her hand partway through her essay “America the Undertaxed” (September/October 2012) when she writes that “the central debate in U.S. politics is whether to keep taxes, particularly federal taxes, at their current levels in the long term or emulate other advanced nations and raise them.”

So the choice facing Americans is between maintaining the size of the government under President Barack Obama and expanding it further? Who knew? In framing things this way, Campbell posits a Brezhnev Doctrine for U.S. government spending and taxation: what the government takes and spends today is forever ceded by Americans to the state, and that portion of their income not yet taken by the government is negotiable. Such ideological blinders limit the author’s ability to understand or explain how the United States arrived at its present level of historically high spending and taxation -- and what the American people would like its government to do and how much it would like it to cost in the future.

The U.S. government was created to maximize liberty. Unlike the European nations Campbell offers as models for how much Americans should be taxed, the United States was not organized around defending or promoting historical land claims or one religion, tribe, or ethnicity. Americans are a people of the book: the Constitution. According to the founders, government should play a limited role in the lives of Americans, by providing for a common defense, the rule of law, property rights, and a justice system that protects them.

Despite these strict limits, the U.S. federal government has grown enormously in size, cost, and power over the last two centuries, mostly as a result of the country’s engagement in successive wars. With each conflict, Washington increased its spending and powers of taxation under the false flag of temporary necessity and appeals to patriotism. After each war, the government refused to return to its previous size and level of power.

This growth can be seen in the numbers. The federal government consumed less than four percent of GDP in 1930, 9.8 percent in 1940, and 16.2 percent in 1948. By 1965, the number had climbed to 25 percent of GDP, and it hit 30 percent in 2000 (compared with the average among members of the Organization for Cooperation and Development of 37 percent). Today, Campbell claims, raising taxes still higher, “perhaps by a few percentage points of GDP,” would “provide the government with much-needed revenue. And it might not have a detrimental impact on the U.S. economy, perhaps even spurring it.” But the economic crisis in Europe, where taxes and spending are already higher, makes that argument a little difficult to swallow.

The United States’ major political parties are now diametrically opposed on the question of the size of government. Gone are the days when Nixon Republicans and Kennedy Democrats argued about whether the government should get bigger or much bigger, and how quickly. No Republican House member voted for the 2009 stimulus package, and only one Republican member of Congress voted for Obamacare’s 20 tax hikes and massive spending increases (and he is no longer in Congress). Meanwhile, the modern Democratic Party has shifted from one that cast 56 Senate votes for the 1964 Kennedy-Johnson tax cut and 33 Senate votes for the 1986 Reagan tax reform into a high-tax ideological party that cast no votes for the 2001 income tax cut, under President George W. Bush, and only one vote for the capital gains and dividends tax cut of 2003 (and that voter is set to retire this year).

The budget that Obama released in February 2012 shows annual federal spending increasing by $1.5 trillion over the next ten years, producing $11 trillion in additional federal debt. Paying for all that spending will require dramatic hikes in taxes. Obama promised in the 2008 presidential campaign that under his plan, “no family making less than $250,000 a year will see any form of tax increase.” On August 8, 2012, however, Obama changed his pledge, saying, “If your family makes under $250,000 . . . , you will not see your income taxes increase by a single dime next year.” The promise to oppose all tax increases on incomes less than $250,000 was replaced by a promise to prevent only income tax hikes -- and only for 12 months. Obama’s new language opened the door to a value-added tax (VAT) at any time and to income tax hikes starting in January 1, 2014.

Obama’s shift is important, for as Campbell points out, the difference between U.S. and European levels of taxation is mainly due to the prevalence of VATs in Europe. The United Kingdom has a VAT of 20 percent, France one of 19.6 percent, and Sweden one of 25 percent.

Advocates of higher taxes in the United States know that only a VAT or steep taxes on energy can cover the higher levels of spending in Obama’s budget projections. Higher income tax rates do not raise useful amounts of money. The “Buffett rule,” which would raise rates on earnings of more than $1 million a year would, according to the Congressional Budget Office, take in only $47 billion over a decade, less than one-half of one percent of the $11 trillion in debt that Obama’s planned spending would produce.

GROWTH, NOT REDISTRIBUTION

Campbell faults the U.S. government for not using its power to tax and spend to redistribute income earned by some Americans to others who did not earn it. The old argument for the welfare state was that such redistribution would reduce poverty. Yet history has shown that economic growth reduces poverty (see China under Deng Xiaoping) far more successfully than welfare transfer payments (see the U.S. war on poverty or the European welfare state).

Today, the left, as typified by Campbell, has shifted from talking about reducing poverty to pushing for “the reduction of inequality” -- a result of the failure of decades of welfare spending to accomplish its stated goal. One can succeed in reducing inequality simply by damaging the highest-earning citizens -- and without helping the lowest-income earners at all. Recessions and sluggish growth both would accomplish this end. Thus, Obama’s economic policies, which have caused poverty and unemployment to increase, can be reckoned a partial success in the new war on inequality.

Still, it is laughable to argue that the present U.S. tax code does not sufficiently take from those who create income and wealth and jobs and give those dollars to those who don’t. The top one percent of income earners in the United States pay 39.6 percent of all federal income taxes. The top five percent pay 61 percent. The top ten percent pay 72.7 percent. The lower half of income earners pay a mere 2.4 percent.

Speaking of economic classes in the United States, moreover, is a tad disingenuous. Between 2001 and 2007, 56 percent of those in the lowest income group moved to a higher group. Conversely, over the same time period, 66 percent of those in the top income group fell to a lower group.

Think of your own life. How much money did you earn at age 22? How about at 50? And then at 75? Are you at 22 supposed to vote to loot from 50-year-olds? And when you hit 50?

Campbell thinks the country should tax the rich more. Her position, echoed by the present occupant of the White House, is trickle-down taxation. Politicians and pundits who promise to tax the rich have not finished the sentence. They plan to tax the rich first -- and then everyone else. This pattern has been demonstrated throughout history: most new taxes are first imposed on the rich. The Spanish-American War was paid for by a tax on the rich, namely, those who made long-distance phone calls. But that telephone tax lasted more than 100 years and soon hit everyone in the country. Similarly, the personal income tax was imposed in 1913 at seven percent on those earning more than $11.5 million in today’s dollars. Today, more than half of Americans are hit with the tax.

What about the American people -- what do they want? In his recent book The People’s Money, the pollster Scott Rasmussen reports that surveys show that 64 percent of Americans believe that the country is overtaxed; 75 percent believe that Americans should pay no more than 20 percent of their incomes in federal, state, and local taxes; 68 percent prefer a “government with fewer services and lower taxes”; and just 22 percent want more services and higher taxes. Seventy-one percent, moreover, oppose paying higher taxes to “help reduce the federal deficit.” And a McClatchy-Marist poll released this past July found that 52 percent of Americans favor extending the 2001 and 2003 Bush tax cuts to all Americans.

Campbell’s complaint that the American government is insufficiently aggressive in redistributing income overlooks some big numbers. In 2011, of the some 200 means-tested federal welfare programs, the largest were Medicare ($560 billion), food stamps ($77 billion), housing subsidy programs ($50 billion), and various job-training programs ($18 billion). The U.S. government also spends a great deal of time and effort transferring money from average-income Americans to politically advantaged groups by providing higher incomes to its employees. Federal, state, and local governments pay their workers more than the private sector does: average compensation in the private sector is $60,000 a year, whereas for state and local employees, it is $80,000 a year, and for federal employees, it is $120,000 a year. Multiply the higher levels of pay, benefits, and pensions by 2.8 million federal and 19 mil-lion state and local employees and the transfer of wealth totals $548 billion each year.

Campbell devotes just one short paragraph to the budget proposal of Representative Paul Ryan (R-Wis.), the Republican vice presidential candidate, despite the fact that it is the consensus Republican path to reducing government spending and avoiding the tax hikes Campbell claims are desirable and inevitable. The Ryan plan would move to block grants for welfare programs, as President Bill Clinton did with Aid to Families With Dependent Children, and switch from defined-benefit to defined-contribution pensions, as the private sector has done, thereby reducing their cost as a percentage of GDP. Ryan’s plan would also increase economic growth through reducing marginal tax rates -- as was done by President John F. Kennedy in the 1960s and by President Ronald Reagan in the 1980s, with success that frustrates the American left to this day. Ryan’s proposals to reduce both spending and taxation are not radical or new. They are a collection of what works.

Economic growth does more to increase government revenues, create jobs, and reduce poverty than do forcible transfers of income and wealth. If the U.S. economy grew at three percent a year rather than two percent for a single decade, federal revenues alone would increase by $2.5 trillion. Four percent growth rather than two percent for one decade would bring in $5 trillion, enough to erase the debt Obama has run up to date.

That kind of growth requires lower taxes. Look at the states: job creation and income growth are higher in low-tax states than in high-tax ones. According to the 2012 edition of the American Legislative Exchange Council’s annual report Rich States, Poor States, in terms of growth in economic output, the nine states without a personal income tax outperformed the nine states with the highest personal income taxes by 39 percent over the past decade.

Americans can and do vote with their feet against high levels of government spending and high income, property, and sales taxes by moving from one state to another. But no one should have to leave the United States to find greater economic and personal liberty. Whereas Campbell exhorts the United States to become more like Europe, with its collection of unsustainable welfare states, let the country learn from Greece and Spain and move forward to an American future, not the European present.

GROVER G. NORQUIST is President of Americans for Tax Reform.

CAMPBELL REPLIES

Grover Norquist is right on one count: taxes that are too high strangle economic growth. But so do taxes that are too low. And the United States is much closer to the latter situation than the former. Government spending in a variety of areas -- education, infrastructure, scientific research, job training -- is crucial for a robust economy. Sure, Americans have low taxes. But they are eating their seed corn. The lack of investment is eroding the very bases of future productivity.

Consider one important investment: infrastructure. The United States spends just 1.7 percent of GDP on transportation infrastructure, compared with Canada’s four percent and China’s nine percent, and less in real, inflation-adjusted terms than it did in 1968, as a 2011 report of the bipartisan coalition Building America’s Future has noted. As a result, the United States ranks 25th in the world for infrastructure quality, according to a 2012-13 World Economic Forum study. Average commute times are longer in the United States than in many peer nations; the rail system is an international joke. Why? Because these systems are starved for revenue. The Highway Trust Fund is perpetually underfunded by a federal gas tax that has not been raised since 1993; a 2008 congressional commission found that current transportation spending is only 40 percent of the amount needed to keep the system in good repair and to make necessary upgrades. And this is the story across many economically crucial areas. Money can’t solve every problem, but it can solve quite a few: crowded classrooms, mismatches between worker skills and the needs of high-tech manufacturers, collapsing bridges in Minneapolis. Lowering taxes may seem like a good idea, but it is a shortsighted one. In the long term, other nations that are investing fully in their economic capacity and in their people will eat the United States’ lunch. A country can’t achieve robust economic growth if it doesn’t make the necessary investments.

Turning to social policy, Norquist wishes to rout social protections and return risk to individuals. The Ryan budget plan that Norquist extols would raise the Medicare eligibility age from 65 to 67 and turn Medicare into a voucher program that would increase out-of-pocket medical costs for senior citizens. The proposal to privatize Social Security contained in an earlier iteration of the Ryan budget would reduce the guaranteed benefit portion of the program. It is true that these programs must be adjusted to ensure their long-term viability. But there are ways to do so without so endangering seniors’ incomes and the security of their health care. Thanks to Social Security and Medicare, senior citizens are currently one of the few groups in the United States with a low poverty rate. Do Americans really want to turn back the clock on that progress?

As for Medicaid, the health insurance program for the poor and for disabled elderly, the Ryan budget would change it from a program funded on an as-needed basis to a block-grant program, in which federal funding is capped. Past experience shows what happens to block-grant programs. A Clinton-era reform turned Aid to Families With Dependent Children, which is more commonly known as welfare, into block grants to the states, the value of which was frozen at 1996 levels. As a result of this and other changes, currently only 27 percent of children in poor families receive welfare -- half the proportion that did so before the reform. Now consider the effect of changing Medicaid to block grants. Medicaid insures the poor, but it is also the main payer for long-term care for older Americans. Because home health care and nursing homes cost tens of thousands of dollars per year, middle-class families with disabled older relatives quickly exhaust their resources and turn to Medicaid for help. A March 2012 Congressional Budget Office analysis showed that the Ryan budget would reduce federal spending by half on Medicaid and the much smaller Children’s Health Insurance Program (designed to cover children in low-income families that don’t qualify for Medicaid), from two percent of GDP in 2011 to 1.25 percent in 2030 and one percent in 2050. And this at a time when the elderly population will be growing, from 12.8 percent in 2009 to 20.2 percent in 2050, according to a Congressional Research Service analysis of Census data. What would happen to the elderly who need long-term care, which accounts for two-thirds of Medi-caid spending, spending that would surely be cut dramatically? What would happen to their families? Keep in mind how widespread this need is: at age 65, the likelihood of requiring nursing-home care at some point during the rest of one’s life is 49 percent; for home health care, it is 72 percent. If the Ryan budget goes through, the effects of the conversion of Medicaid to block grants will be felt just as the baby boomers are becoming frail.

The public opposes such changes. When asked in isolation whether they prefer small government and low taxes, Americans say yes. A desire for limited government in the abstract is part of U.S. political culture. But surveys show that the very same people who favor small government also want government spending increased in many areas. As the political scientist Kimberly Morgan and I show in our 2011 book, The Delegated Welfare State, data from the American National Election Studies reveal that majorities of Americans want more government spending for the poor and the homeless, for financial aid for college, for child care, for Social Security, and for public schools. According to the data, even majorities of Republicans and conservatives want spending on Social Security and schools increased; and majorities of those with low trust in government, those who say that the government wastes a lot of tax dollars, and those who say that the government in Washington is too strong want spending increased not only on Social Security and schools but also on programs for the homeless, financial aid for college, and child care. The political scientists Jacob Hacker and Paul Pierson have found that in survey questions specifically pitting spending increases against tax cuts, spending wins out.

It is true that high earners pay a large share of federal income taxes. But that is because they earn a high share of all income -- the highest share since the Roaring Twenties and the highest share among the United States’ peers. At the same time, their effective rate of federal taxation is at one of its lowest points in history. And a look at all taxes together -- federal, state, and local -- reveals that the overall U.S. tax system is essentially flat: each income group pays about the same share in taxes as it earns in total income.

Norquist maintains that Americans support low taxes, even on the affluent, because of the possibilities for economic mobility. Yet numerous studies show that economic-mobility rates are quite modest in the United States: the likelihood that an individual worker will move from the bottom 40 percent of the income distribution to the top 40 percent over a year’s span is less than four percent, and the likelihood of moving from the bottom 40 percent to the top 20 percent after 20 years is still less than ten percent, as the economists Wojciech Kopczuk, Emmanuel Saez, and Jae Song have shown. There is less intergenerational mobility in the United States than in peer nations, as Alan Krueger and Miles Corak, also economists, have pointed out. And polls reveal that lower- and middle-income people know that the economic deck is stacked against them. A July 2012 poll conducted by The New York Times and CBS News asked respondents whether it was still possible to start poor and become rich in this country. Over 80 percent of those with incomes above $100,000 said yes; more than 94 percent with incomes over $250,000 said yes. Among those with incomes below $15,000 -- the actual poor -- only 50 percent agreed.

Tax debates ultimately come down to values: What kind of country do Americans want? A republic in which only the affluent prosper while lower- and middle-income groups remain mired in stagnant-wage jobs, face greater insecurity in retirement, and fear for their children languishing in poorly resourced schools? Or a nation in which all hard-working people have opportunities to capitalize on their talents and, later on, retire with confidence and dignity, all along secure in the knowledge that their well-educated children will have even better lives? That latter option is called the American dream.

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