Arnold Kling  

The Default Path for Taxes

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Greg Mankiw points to a letter from the Congressional Budget Office which says that with no change in tax law we will be able to finance higher health care spending by the government. Greg writes,


For the median married taxpayer with two kids, the average effective tax rate (including both income and payroll taxes) rises from 20.0 to 37.6 percent. The marginal tax rate for this taxpayer rises from 30.3 to 50.3 percent.

In other words, to keep tax rates where they are would require, relative to current law, ginormous tax "cuts." (And comparably ginormous spending cuts.)

The proponents of huge government do not need to enact a revolution. All they have to do is preserve the status quo.

Meanwhile, Brink Lindsey writes,


hopes for a grand new era of progressive activism and the long-delayed arrival of something like European social democracy are confronted by formidable obstacles.

I think he is on crack.


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CATEGORIES: Tax Reform



COMMENTS (10 to date)
Matt writes:

I am not so sure our economy will support greatly increased federal government. It is not entirely up to the voters, our trading partners have a lot to say about this, especially China.

Bruce G Charlton writes:

Well, Brink Lindsey is taking a long term view, and I think he is probably correct (and I am not 'on crack'!).

I think BL is talking about modernization generally - not just libertarianism - and my feeling is that if modernization needed to depend either on people's understanding or their motivations then it never would have happened.

Clearly, powerful forces that we don't really grasp are driving modernization (including libertarianism) over the long term - and I think they will probably continue to do so.

spencer writes:

In an economy with a graduated income tax and nominal income growth a given share of taxpayers will drift into higher tax brackets every year even if their real income growth is zero. Back in the 1970s inflation made this a major issue and everyone was aware of bracket creep. We regularly adjusted the tax bracket to offset it, but it gave politicians the opportunity to claim they were cutting taxes. In the 1980s the supply-siders took position of this issue and called it the Laffer Curve.

But according to Vice President Cheney we do not have to worry about financing expanded public expenditures on health care. He says Reagan proved that deficits did not matter, so that implies that we can use deficits to finance expanded health care with no concern that the deficit will have an adverse impact.

jult52 writes:

The rate of automatic increases to both tax rates and things like soc security benefits is one of those covert "wonk" issues that are key to the future but generally ignored.

My understanding is that the soc security income threshold is set to the inflation rate, while workers at or above that level of income have generally enjoyed real income growth. So that works in the opposite direction.

Thanks for highlighting this issue.

8 writes:

There will be ginormous spending "cuts" when retirement ages are raised and wealthy people are kicked off SS and Medicare. Anything less and I'm sure many of my fellow Americans will join me in saying, "Zaijian Meiguo!"

Lord writes:

You can thank your legislators for making taxes as uncertain as everything else. They are working death too (a la Shivo).

Shawn writes:

Why not simply leave Iraq and save $2 billion per week. That savings alone would allow the government to lower income tax rates AND enact universal healthcare. What a concept!

Buzzcut writes:

I think he is on crack.

Generally speaking, type M arguments should be avoided.

Paul French writes:

"hopes for a grand new era of progressive activism and the long-delayed arrival of something like European social democracy are confronted by formidable obstacles."

He is mad indeed. "European social democracy", especially in its French form, with its revolutionary overtones, is Hell: high taxes, low cash, high government intervention, general irresponsibility, lobotomized minds, controlled prices, frequent strikes and daily moral lessons.

Here's the English translation of an excerpt from an article written by one of the greatest [maverick] specialists of French Social Security (public health-care), Claude Reichman. It's a good summary of what the "European social model" really stands for:

"The French Social Security (public health-care) is based on general irresponsibility. Admittedly, the Parliament has been voting each year
a funding law since 1995, but this law is only pious hope because it [the Parliament] has no tool of intervention at its disposal. Incidentally, you cannot intervene by law in mechanisms which rest on billions of individual decisions or on the undertow of age groups. The French social security is a sort of huge safe which is open to the four winds and where everybody helps himself. When the shelves are empty, the government hastens to borrow money and to restock them in order to avoid riots. Because it does the same with the State's accounts, the public debt increases at a breathtaking rate, and brings us ever closer to bankruptcy."

You can read the rest if the article (in French) here:

www.claudereichman.com/articles/regimeasaperte.htm

shamus writes:

Inflation is the tax of choice these days. The real rate probably runs at 10% or more, although it's not possible to tell using anything produced by the government. This changes the game because the unit of accounting has become elastic.

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