Tuesday, October 06, 2009

Progressives being so progressive they come out regressive. 

Last week "progressive" economists and policy makers collected together to discuss the subject, “Progressives and the National Debt”. Well, being that it is the progressives' social spending programs that are driving the national debt to totally unsustainable levels, it's about time for them to start discussing what to do about it.

Diane Lim Rogers attended and reported back on her Economistmom blog (read the whole story). The progressives' consensus remedy for the coming surging deficits? A new national Value Added Tax (VAT), a type of sales tax -- which, as she observes, might seem a bit odd...

That a bunch of experts all at-least-slightly left-of-center would recommend a VAT is notable, because the VAT is known to be a “regressive” tax.
Indeed. A VAT is regressive because it falls on consumption, and poorer people consume more of their income than richer people, so the tax falls more heavily upon the poorer. A strange policy for liberals to endorse.

But today's progressives have a problem. To cover rising entitlement costs with the existing progressive income tax would require rate hikes so large as to be implausible. And if such hikes were enacted, they would seriously damage the economy through the "deadweight cost of taxes", which rises not with tax rate but by the square of the increase in the tax rate -- so if a tax rate doubles, the deadweight cost of the tax on the economy quadruples.

What's a progressive to do? Apparently, give up being progressive about taxes.

as Bill Gale emphasized in his presentation, we have to stop insisting that every single component of our tax system has to satisfy some overall ideal standard of progressivity. Some parts of the tax system can be regressive...
Still, it leaves a puzzle: Why are so many progressives endorsing closing the budget gap with regressive tax increases instead of progressive spending cuts?

Here's how the Iron Logic of Arithmetic applies as of today:

Entitlement benefits are greatly underfunded going forward. We all know that in our progressive world, as things stand now, the bulk of the cost of this is going to land on the rich, one way or another — either by paying the bulk of the taxes needed to make up the shortfall, or by having their benefits cut by means test. Thus, either…

1) Income taxes on the richest go up a lot, or

2) The benefits of the richest go down a lot (or a combination thereof)

But being that there is nothing either efficient or “progressive” about raising income taxes so high to pay transfers to the rich; and that progressives apparently just don’t like the idea of cutting benefits, even to the rich, period; they are now coming around to favoring a new option…

3) A VAT that will act regressively as a consumption tax on the poorer to fund transfers to the richest -- to save the benefits of the richest.

Can somebody please explain to me how, by measure of progressiveness, #3 isn’t the worst option of the lot?

Doesn't this make it look like the defining trait of contemporary “progressivism” is a drug-addict’s-like refusal to consider any spending cuts whatsoever?

Today, Warren Buffett’s employees at Dairy Queen have payroll tax taken from the first dollar of their wages to pay his Medicare and Social Security benefits. Now, on top of that, they would also have to pay a VAT to make sure Warren’s benefits won’t need to be cut? And this is progressive??

Why do progressives reject progressive means testing? Ms. Rogers expressed the conventional wisdom of the left in an earlier post....

I am genuinely torn about the issue of means testing. On the one hand, we cannot afford to honor our current commitments via the entitlement programs, and it seems that means testing is one at least socially-efficient way to trim government spending...

On the other hand, means testing the entitlement programs means there will be fewer Americans who will directly benefit from the programs, and I do see how that tends to undermine public support for those programs.
But is this true?

Has public support for the Earned Income Credit been undermined by its not being available to the rich? Is Medicaid spending dropping anywhere? Has federal assistance for higher education has been undermined by the FAFSA form that means tests the parents of every college student (by value of home, total savings, amount of income, everything) before the college sets its price discriminated “need based” tuition charge for the student?

Society is *so* means-tested today — from income tax to EIC to Medicaid to Section 8 housing vouchers to assistance for low-income public school students and on and on, that multiple studies show lowest-income individuals can face effective marginal tax rates exceeding 100% due to the loss of benefits with rising income, and that this is significant perpetuator of poverty.

How many of these programs have been undermined by not being available to the well off? If the honest answer is “none”, how does this square with the progressives' professed concern?

And, of course, progressives have been the driving force behind all of this mass of explicitly means-tested programs and policies. So why is it that they are so concerned about means testing only Social Security and Medicare??

(Someone a bit cynical about the politics of it all might think the reason is this: A major, if not the #1, driver behind the progressives’ ride into political power has been feeding ever-more entitlement benefits to all seniors -- AARP as the progressives’ #1 constituent. Blowing up that political base by suddenly telling AARP, “Hey, you are a special interest that we’re cutting back on the basis of need and merit”, would amount to a political self-nuking. Being how that must be avoided, progressives need a progressive-sounding rationale to avoid it … “if we cut back helping the rich, we will become unable to help the poor”… but enough of that, let nobody accuse me of cynicism regarding politics.)

For progressives to say, “if we don’t raise taxes on the poorer to pay the richer we’ll become unable to help the poorer” seems to me something of a ‘just so story’ sitting on a scale somewhere between “convenient” and “gross hypocrisy” — and I have no idea what could possibly be behind such a thing.

Anyway, here again is Keith Hennessey’s picture of the bottom line (especially that last chart). As Gene Steuerle (one of the few budget mavens fully respected on both left and right) put it, “If spending is always growing faster than the economy, you never catch up”.

Even progressives who can do that much arithmetic must admit that there is no way tax increases alone will ever close that gap — not even if you add a VAT, and a head tax, a Georgist 100% land value tax, and whatever else you want.

So, it seems to me, “progressives” have two good reasons to start saying the words “cut spending” as of today.

#1) It is the progressive option compared to raising taxes to protect the benefits of the rich — especially compared to rasing taxes on the poor with a regressive VAT.

#2) Reality. It is going to impose itself in the end. Dealing with it sooner is better than later.

The only realistic, effective program that can be adopted to close the coming future monster budget gap, by those concerned about it today, is to start preparing for, lobbying for, a future deal of: “tax increases for spending cuts … spending cuts for tax increases” — as we saw in closing Social Security insolvency crisis in 1983.

Yet still, among progressives the courage to say “spending cuts” remains missing — even when the only alternative is regressive.