It's doubtful anyone has ever enjoyed paying taxes. In most developed democracies, taxation is a necessary evil that finances the services that make for a fair and dynamic society. Taxes let people take risks with their lives, guarantee a financially secure retirement, educate children, keep our roads drivable, pay police, and help ensure that the benefits of prosperity are broadly shared. But starting in the late 1970s, political entrepreneurs on the right helped launch a broad "tax revolt" that completely changed the public's view of taxation. Before, higher taxes were a price that one might or might not want to pay in order to finance an expenditure. After, taxes became an unmitigated evil, and "to do that, you'd have to raise taxes" became an unanswerable objection to any policy endeavor. Progressive governance efforts came to be centered on trying to find ways to disguise expenditures as "tax credits," with new spending financed by making cuts in other areas.
To some, Barack Obama's successful 2008 presidential campaign points the way out of the box. As Obama described his plan while debating Sen. John McCain, "If you make less than a quarter of a million dollars a year, your taxes will not go up; if you make less than $200,000 a year, your taxes will go down." In other words, there's no reason to fear tax hikes because you won't be paying them -- someone else will.
Obama did not change the framework so much as find a way to survive within it. A platform of no tax increases for the bottom 95 percent can win elections, but it reinforces rather than debunks the right's fundamental view of the tax question -- that public services aren't worth paying for -- and merely suggests that the correct answer is to get someone else to pay for them. This is, to be sure, better than the alternative, which is to provide no public services at all. And amid a cataclysmic recession, there are sound macroeconomic reasons to eschew any kind of tax increase until recovery is underway. Still, it's hard to see how a long-term progressive agenda can be financed with the revenues raised through this method. A March report by the Congressional Budget Office showed that the administration's proposed budget would lead to unsustainably large deficits in which interest payments would steadily grow as a slice of the budget pie. This set off a brief political firestorm, but attention waned once it became clear that neither congressional Republicans nor Democratic deficit hawks had any serious alternative to offer.
For the moment, that's all for the best. The administration argued, correctly, that its proposed increases in spending are vital to transforming the country's health, energy, and education sectors. The mere fact that the 2010 budget document implies unduly large deficits in 2014 or 2017 is not a problem in 2009 when the bleak macroeconomic outlook calls for large short-term deficits. The moderates were not off base in their concerns about long-term deficits. But, having drawn attention to a real problem, they were unwilling to face the only realistic solution: higher taxes.
The flaw in the budget is that the taxes it proposes are too low. Obama would stabilize revenue at about 18.8 percent of gross domestic product, somewhat lower than it was in the final years of Bill Clinton's presidency. That was enough revenue to fund the programs that existed in 1999, but it's not enough to implement a transformative domestic agenda that goes beyond our ambitions of 10 years ago. There is also the question of our aging population. Growth in the over-65 age group is likely to increase the budgetary cost of Social Security by about 2 percent of GDP, and even without medical-cost inflation, demographics would increase Medicare and Medicaid expenses by an additional 2 percent of GDP over the next 30 years. Add the broadly shared progressive goal of creating a universal health-care system and a commitment to increased spending on schools, anti-poverty programs, infrastructure, early childhood education, and other social services, and it becomes clear that the necessary revenue cannot be found exclusively through efforts to soak the rich.
While the United States as a whole is lightly taxed compared to other developed countries, our wealthiest citizens are already paying a pretty high share of the tab. As Clive Crook points out in a recent Financial Times column, "The U.S. income tax collects 45 per cent of its revenues from the highest-income decile," substantially above the 32 percent average in other developed countries. Part of the reason for this is that the richest Americans earn an unusually large portion of the total pie. But it seems unwise to count on ever-growing inequality as the key to financing the progressive agenda.
Higher taxes on the rich are arguably more egalitarian, but they can only raise a limited amount of revenue. This is especially true when you consider that the extremely wealthy are a very small proportion of the population. An extra annual tax of $500 per capita could raise almost $150 billion. Obtaining a comparable amount from the top 1 percent of individuals would require $50,000 from each of them, an amount that the very wealthiest could easily pay but that is probably an unrealistic burden on those near the bottom of the top 1 percent. To get a lot of money you need to be willing to take at least a little from a broad group of people.
The politics of this approach are tricky. Complaints from the right about restoring Clinton-era levels of taxation at the top can be easily rebutted by pointing to the extremely strong growth enjoyed in the 1990s. But to shift federal revenues to unprecedented high levels will require winning a difficult argument about what's economically feasible. That, in turn, will require more detailed attention to tax changes that make a serious effort to be economically efficient.
One extremely promising source of additional revenue is comprehensive reform of the income-tax code. Economists generally agree that the distorting effect of loopholes and deductions is quite large, thus any broad campaign aimed at closing loopholes and lowering tax rates can be made both revenue-positive and pro-growth. What you can't do is close tax loopholes without making some middle-class taxpayers pay more. On the merits, progressives should feel no shame about this. As the richest pay the most in income taxes and have the most ability to exploit loopholes, they are the main beneficiaries of the multiplication of deductions. But as a political matter, a candidate pushing such an agenda can't tour the country promising that 95 percent of the population will see lower taxes.
Another revenue option is taxes that are efficient because they have socially desirable outcomes apart from their revenues -- an idea that is likely to make some progressives queasy, whether for reasons of politics or out of opposition to paternalism. The most-discussed examples have to do with taxing environmental hazards such as carbon-dioxide emissions, or instituting "congestion pricing" on crowded highways or central city districts. Because space on the road during rush hour is valuable, and also free, drivers have a tendency to overconsume it. The result is persistent traffic jams that cost the economy billions of dollars in lost productivity every year. A congestion charge that sorted traffic more efficiently would have more than economic benefits.
Similarly, cigarette taxes have become popular in recent years, but many jurisdictions are approaching the point at which higher fees do more to encourage black markets than to raise revenues. Fortunately for the public purse, and unfortunately for our health, cigarettes are hardly the only thing out there that's bad for you. The inflation-adjusted price of taxes on beer, liquor, and wine has dropped significantly over the years even as incomes have risen. And as Phillip Cook estimates in his book Paying the Tab, a tax of 10 cents per ounce of alcohol would reduce motor vehicle fatalities by 7 percent -- reducing drunk driving and raising revenue to boot. It would also be worth exploring New York Gov. David Paterson's now-rejected idea of taxing soda. If you take the need for more revenue seriously, it makes a lot more sense to raise funds by taxing things that are bad for us than it does to tax people for working. We could also, like most developed countries, implement a nationwide value-added tax -- essentially a sales tax administered in such a way so as to make evasion more difficult.
The United States already does about as much as any other country to curb inequality through the tax code. Where we fall short is in fighting inequality through government spending -- we just don't spend very much. If you care about inequality, in other words, the thing to focus on is not soaking the rich through the tax code but rather ensuring that there's enough tax revenue to finance generous public services. Broad social-insurance schemes like Social Security and unemployment insurance, as well as government operations more generally, are strongly progressive in their impact.
The most important issue is whether or not the government has the revenue needed to finance generous spending on social services. The Scandinavian model of a cradle-to-grave welfare state financed largely through regressive taxation is not regarded as punitive to the poor. By contrast, the pre?New Deal United States had an extremely progressive tax structure -- a simple income tax levied only on the wealthy -- but it resulted in meager revenue and financed no noteworthy social-insurance system or public services.
Are broad-based tax increases politically viable? Nobody can say for sure, but polling during the campaign season consistently showed that despite Obama's promises, around half of the public anticipated paying more taxes if he won the election. And a Rasmussen poll showed in March that 66 percent of the public believed Obama was likely to raise taxes on voters making less than $250,000 a year. Yet his approval ratings are high. Politicians who labor under suspicion of being tax raisers might be better off defending tax hikes on the merits rather than denying the charge. The White House and its allies vigorously contest conservative charges that auctioning off carbon permits amounts to a tax, when they should be acknowledging that conservatives are correct and explaining why such a tax is necessary.
Progressive taxation is an important principle. But the idea that further changes to the tax code should exclusively target the wealthy is ultimately counterproductive. Making the case may be difficult, but refusing to try to make it amounts to conceding defeat. At the end of the day, persuading people to support a more active role for government means persuading all of them that such a government is worth paying for.