Time to be honest about debt, spending and taxation

The US Congress turns its attention to the so-called Build it Back Better (BBB) ​​law. This is a good time to think critically about the political economy of our national debt. It is good to start with some facts and acknowledge what we do and do not know about the economic consequences of high national debt. A big part of this discussion has to be how we tax ourselves to pay this debt.

National debt is not new, and for most of the last half century the US government has spent more taxes than it has collected. Despite our business cycles, we remain the largest rich economy with reasonable long-term growth and a currency that is the most dominant in world history. It is clear that a rich country can go into debt for a long time with no significant consequences.

A nation like ours can also fund major negative shocks like a world war or a global pandemic. We have been able to repay these over long periods of time, financed by so much economic growth that our tax revenues exceed our expenses. Or we can hold debt for decades if what we buy drives long-term economic growth.

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The composition of the debt plays a major role. Spending that makes us more productive because of better public capital or a better educated workforce often pays off in increased GDP, which is then taxed. Still, much of government spending does not and is not designed to stimulate the economy. Social security, military pensions, and much of the direct income support for poor people are programs that don’t pay for themselves through new tax revenue or savings elsewhere.

I honestly believe that there is little disagreement among Americans about these types of programs, or at least the percentage of spending. While we may disagree on the details of how these programs are managed and who receives payments, we most agree on how they should be paid.

A small minority in Congress believes this is a moot point because they hold onto something called Modern Monetary Theory (MMT). The basic idea of ​​MMT is that deficits only play a role when they become inflationary. The only task of taxes is to keep inflation in check. For most people this seems just as implausible as it does for the vast majority of economists.

Today’s economic conditions offer a good thought experiment on the adequacy of MMT. We’re in a time of higher prices for everything from groceries to gasoline to used cars. For example, suppose the price hikes we see due to supply chain disruptions turn into full-fledged inflation early next year. Imagine that consumer prices rise 4.0 or 6.0 percent by early summer. For MMT advocates, there is an opportunity to remedy this through higher taxes for consumers. And this is where the thought experiment gets interesting – imagine how Congress is currently voting to raise taxes when the price of gasoline is $ 4.50 a gallon.

You can stop reading long enough to stop laughing. It has to be said that modern monetary theory is a “hee haw” kit disguised as sound economic policy, and therein lies our problem with talking about deficits. The Build it Back Better (BBB) ​​law has many parts, some of which will appeal to many Americans. The associated tax hikes won’t come close to paying for it, however. If so, the Congressional Budget Office would have been asked for a full analysis months ago.

The difficult fact is that we billionaires or millionaires cannot tax enough to pay that bill. In order to be able to pay the BBB, we need a comprehensive overhaul of taxes. The BBB brings the United States much closer to the Scandinavian countries in terms of social spending. To be clear, this is not socialism; Finland, Norway, Sweden and Denmark are not socialist nations. Still, I believe few Americans want this type of government. I’m old-fashioned and think the best way to prevent something unpopular is to just tell the truth about it.

To pay the BBB’s high social spending, the US needs much higher Scandinavian style taxes. These cannot be levied on the very rich alone, either in the form of income or wealth taxes. We could tax all billionaires 100 percent and not pay the BBB for the first year. In fact, the big difference between the US and nations like Sweden and Norway is not how we tax the rich, but how we tax the middle class and the poor.

Right now the US has a very progressive federal tax. About half of the families do not pay any income tax. They pay wage taxes for Social Security and Medicare, along with state and local taxes, but that brings in far too little income to pay for the big social programs in the BBB. And because people can choose not to work or advocate for a variety of loopholes, we are close to the maximum percentage of revenue we can get from income taxes.

In order to pay the BBB, the US must implement extensive sales tax (VAT). This is essentially a national sales tax that is collected on every exchange, including business-to-business sales. BBB supporters should know that the VAT rate in these four Scandinavian countries is currently 24 and 25 percent, respectively. To catch up with the Scandinavian countries, the average tax rate for the US middle-class family must rise by a third or more. This truth should help shape any future discussion about federal spending.

Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics at Ball State University’s Miller College of Business.

https://www.thestarpress.com/story/opinion/columnists/2021/11/14/michael-hicks-time-honest-debt-spending-and-taxation/6240421001/