I’m really looking forward to that post. Democrats have been saying they’re going to raise taxes on the 1% — basically reverse Trump’s tax cuts — for years. I want to know what the effect of that would be.
How much money gets raised simply by making taxes go back to how they were in 2016? How does it affect private investment? How does that, in turn, affect employment? Is that money “creating jobs?” Or is that money in “safe investments” like fossil fuel industries and junk food?
And should taxes on the 1% be even higher than the 2016 rate? Do we even need billionaires at all? What would the impact be of 1955 tax rates of 90% on income above 10 million dollars? —Or a wealth tax, as Bernie Sanders and Elizabeth Warren endorse, to eliminate billionaires?
I sense probably 150 million Americans — maybe more — think this would have no negative fiscal impact. It would only make it possible to pay for infrastructure and public service, like education and policing. Or reduce the tax burden on everyone else.
Personally, I’d like to see reforms to the justice system so all trials get started within six months and wrapped up within a year. Trump’s trials are just the tip of the iceberg. That’s likely going to require hiring more judges, updating legal computer systems (jury duty!), and maybe building more courts.
I’d like to see a West Point for training Police Officers who can rise through ranks faster than those who have not attended and clean up shop: fire bad apples, teach better practices, lead by example, etc. That would likely be fairly affordable.
With the climate crisis, we are likely going to see even more intense immigration pressure around the world, so we’re going to have to increase expenditures on detainment facilities and staff. We may even need international investments to mitigate impacts in other countries — such as renewable energy projects and grids and heat pumps to make surviving in hotter, wet countries possible — so people don’t leave in the first place.
I am eager to see the fruits of the Inflation Reduction Act, rather than the roots of the fruit trees, which is where we’re at now: the signs that things are going to get better soon, based on investments. I want added to the IRA mandates that landlords replace gas appliances with electrics and install 220V outlets in renter parking spots for EV charging. Make it cheap for these business owners, so their primary “cost” is the time and effort of managing this work. Exposure to gas appliances is bad for people’s health, and we are about to start seeing long lines at public charging stations, which will be a protracted nightmare — and a “time tax” on poorer people who cannot charge anywhere else.
And I’m still not seeing all federal and municipal vehicles replaced with EVs. The US Postal fleet is supposed to start deploying them this year. But also all police vehicles should be electric. And school buses and metro buses! No doubt it doesn’t help that EVs are still more expensive than combustion vehicles, but that should change soon. (Maybe GM will reach price parity later this summer with its “ultium” platform.) Battery costs are supposed to halve from where they were a year ago in another couple of months.
And, of course, we need some serious renovation of the grid everywhere. Last mile investments are going to be expensive, and we need like 5X the number of electricians as we currently have. (Hello high school vocational classes, which lead to good-paying jobs upon graduation!)
A lot of these investments will pay for themselves fairly quickly: as we clean up pollution inside and out with EVs and electric appliances, health care costs will come down (children with asthma, for example). Municipal EVs have fewer parts that can break down, so there will be less money spent on maintenance, less down time, more productivity, and less money spent on fuel. A speedier judicial system will remove a drag on our economy, assuming it works. And if better policing is possible, we’d see less social strife and the costs that result from it, as well as fewer lawsuits and payouts to families victimized by bad cops.
I think these public costs are all extremely worthwhile. But I don’t want to trash the economy and steer us into a recession. If taxing the 1% is ineffectual we need to know. It needs to be broader knowledge. This presumption has been the bedrock of the Left’s advocacy for decades now. And I rarely see good, straightforward analysis like yours, Noah Smith.
The effect is a rounding error in the deficits (will still be trillion a year and rising). And the idea that we should and can spend this “windfall” rather than use it for deficit reduction is insanity.
Ask a European how social democracy is funded. 20-25 pct VAT. 40pct tax rates starting at 50k in income with no deductions. $8 gallon gasoline. And they still run massive deficits. The rich don’t pay for social democracy anywhere in the world- not even in countries with tiny populations and massive natural resources like Norway, Canada and Australia’s
Social democracy is best thought of as transferring spending decisions (and income) from individuals to the government. The theory being the government can do this more efficiently or more justly. What this means is that you largely pay for your own benefits and safety net via regressive taxation. There is no rich uncle carrying you. Now, the US does have more rich uncles than Europe has (and maybe we should ask why this is, and whether that would still be the case if those in favor of heavy taxation and regulation were running things unopposed), so maybe things need not be as regressive as they are in Europe. For sure, though, any sort of fiscal sanity in the US will have to tax the middle and working classes more heavily. The rich just don’t have enough income and assets to sustainably fund what we are spending.
Not everyone has rich uncles. And rich uncles don’t always share their wealth. It seems like having government benefits is better for healthy, happy lives.
It’s a shame the Republican platform is just to cut government programs, rather than make them more efficient. Noah has written about how dysfunctional our military procurement system is, for example. And we spend about a trillion dollars a year on various national security agencies / services.
Speaking in abstract values, it’s hard to get a sense of how much money taxing the 1% heavily would generate and what you are proposing to cut. I see lots of studies and articles suggesting that the cuts passed by Republicans while Trump was president will cost the US $10 trillion over ten years. That doesn’t seem like a rounding error to me.
In contrast, my sense is that the Inflation Reduction Act will essentially pay for itself over ten years, as it drives the economy, generating tax revenue, as well as lowering costs for Americans on energy, transportation and prescription medicines, freeing up more money for consumption, which also generates tax revenues.
If Democrats change tax laws in 2025 to recoup the $10 trillion in cuts and direct that money at US debts starting in 2026, will we stave off the cost of our debt increasing with interest?
The GOP's overarching purpose is to cut taxes for the rich and corporations. Period.
Discussions about taxing earned *income* is a just a red herring designed to confuse the rubes, as the very wealthy make their money almost entirely through capital gains and unearned income. Why do ultra-elites like Bezos pay virtually nothing in taxes relative to their wealth? Because they *borrow* tens of millions annually against the value of their assets, then pay zero, zip, zilch tax on these *debts*.
Adequately fund the IRS--against strenuous GOP objection, btw--and repeal the Trump/GOP 2017 tax cuts, and federal revenues increase by nearly $200 billion annually. Or to put it another way, trim $200 billion annually from the deficit.
I'll write again when Noah posts but as my teaser on tax changes:
1. Net emissions of CO2, rebated in whole or in part if that would facilitate passage
2. Substitute a VAT for the wage tax for fully financing social insurance transfers for stage of life/life circumstances: old age, unemployment, sickness, child rearing.
3. Progressive consumption tax for general revenue raising and income redistribution purposes. In practice this means higher personal income tax rates with much greater deductions for savings.
4. Elimination of taxes on business income. Business income would be imputed to the personal incomes of owners which would be taxed as ordinary income. (Said “ordinary” “preferential” rates would disappear.) [Income would continue to be taxed at source for owners who do not file US taxes.]
5. Index realized capital gains but taxed as ordinary income. No basis increase on inheritance but not deemed as realized on inheritance.
6. Partial tax credits instead of deductions for categories of preferred consumption: medical expenditures, charitable contributions, state and local taxes and mortgage interest (if considered "preferred.)
It seems the title of your post feeds right into the narrative that deficit SPENDING is the whole problem. It implies we have to cut our way back to balance. We need a new term since our policy is really deficit TAXING.
The related question I hope you'll tackle is what the chances are that deficit reduction will work politically. I don't have a lot of faith in either party on this topic. Maybe you could do a collaboration with Matt Yglesias on that.
The reason politicians don't talk about tax rates is because people already feel they don't get value for money from the taxes they pay already. Governments prefer to borrow our cut spending because it avoids focusing voter attention on whether the government is delivering value on the scale people are used to from the private sector.
This it also what informs the Republican strategy I guess. Spend political capital on getting taxes lowered and compromise in the short term on letting the spending stay high, whilst relying on the fact that deficit spending can't continue forever (plus trying to force spending lower Vis debt brakes).
We need to raise effective tax rates by eliminating the deductions and loopholes available to the .01% that aren't available to the rest of us. By doing this, we probably could lower the gross rates and raise the standard deduction. This would benefit the majority of taxpayers and would be an easier sell politically. Raising rates on the wealthy without going after their deductions and loopholes is a waste of time because they will just find ways to weasel out of claiming income subject to the top brackets. My ultimate goal would be putting everyone on the 1040EZ form. It would solve a lot of problems. We could use one of those deficit spending programs to retrain all of the newly unemployed lawyers and accountants into more productive areas of the economy.
How about we also go to the Japanese approach and have tax returns done in reverse? The IRS sends us the tax returns and we taxpayers audit their work.
First, adequately fund--and modernize--the IRS, to bring in $90 billion annually by simply enforcing *existing* tax codes. Politically, there is only one party fighting to prevent this.
Secondly, because taxing *wealth* is problematic if not impossible, there needs be serious discussion by qualified Economists on taxing unearned income, short and long term capital gains, and even financial transactions. Taxing large (>$10million) inheritances should also be in this discussion.
Is it even possible to tax all of the above in a way that would not harm economic growth? In a way that is *fair* to taxpayers in all income brackets? And exactly how much revenue could realistically be raised from such measures? As we collectively descend into America's Third Gilded Age we need to at least research how we can level the economic playing field in a way that floats all boats, not just those of the 0.01%
Agreed that taxing wealth is really hard! Most of that wealth is highly illiquid. I suppose you could force the likes of Zuckerberg to sell shares in their own company in order to fund their taxes, but even forcing the largest shareholders of a huge company to sell their shares is going to have ripple effects for the whole business.
Maybe such downsides are worth it. Personally I think they would be, even if not for the money they raised directly (which wouldn't be that much in the bigger scheme of then) it would worthwhile solely for the trust such a scheme might restore to western societies. However, I think far too many people think that political will is the only obstacle to taxing extreme wealth, and it just isn't.
Sweden supposedly taxes wealth. How they actually do it...I dunno! They've also got, like us, a very high number of multi-millionaires per capita. They also have an extremely simple personal income tax code.
The reason Bezos and friends pay proportionally tiny amounts of personal tax, is that they borrow large amounts of $$$ against their assets. By borrowing, they pay no income taxes on said funds. All the very rich are now doing this. It's all the rage.
Capital flight by *individuals* is always a risk. Which is why finding a way to equitably tax their business holdings is essential, through increases to capital gains unearned income and pass-through income. And further close loopholes available to the ultra-rich and corporations to stash their assets in offshore tax havens.
When the Trump tax cuts expire next year, there will be a big tax increase on the highest earners. Biden talks about not i creasing taxes on anyone making less than $400K, but hasn’t said much beyond that. It doesn’t make sense to talk about raising taxes during an election year. As soon as the election is over, the fight about what parts of the expiring tax cut to keep will begin in earnest.
That state tax - 17% total - seems higher than things I can find online. Maybe I'm not understanding what you mean by a "high earner" tax versus just the top marginal rate?
But in defense of your point, here's a breakdown on how a $1m income in California pays a 50% marginal rate. Note that the 4% investment tax might actually put it over 50%, if that's how the income is earned.
I'm much in favour of eliminating CO2-reduction subsidies in favour of carbon taxes.
OK, but all in all, the cuts you list are only a fraction of the size of the deficit, and the new individual transfers would tend to grow far larger than your cuts.
Buzen, I think you are suggesting a more honest conversation than our politicians are willing to have! I would agree with the core framing there: we either need to raise taxes or cut benefits to the elderly. (Or do a bit of both.)
Fidgeting with other parts of the budget might be worthwhile but you can't really move the needle that much.
One nit I would pick is that you refer to income taxes, but don't forget payroll taxes (which are basically flat taxes on income) were close to 30% of govt revenue, so the burden is actually spread a bit more than your first line suggests. But still a net progressive income tax rate, of course.
Social Security is currently 100% funded through taxes every American starts paying from the time they land their first job. Whereas only 55% of Medicare funding comes from payroll taxes and insurance premiums.
The reality is we’ll probably have to raise the retirement age, aggressively negotiate down health care costs for Medicare (Biden has already experimented with it), and uncap the social security tax. 2 out of the 3 of these things are politically unpopular, but I imagine that could change like it did in the 90s when debt became all consuming. In Congress could pass it in the dead of night and never talk about it, like they do other legislation
I've always been sceptical about the idea that borrowing is fine as long as interest rates remain low. Because those interest rates don't remain low forever. I think you alluded to people getting confused between debt and deficit, and this is prime example; interest is paid on the former, not the latter. If you borrow heavily during periods of low interest rates, you can't just stop the borrowing when interest rates climb; you have to pay the interest on that accumulated debt.
In the UK, we spend more on servicing our debt than we do on education. And it's because our debt ballooned after the Great Recession while our economy has barely grown at all. We are now stuck in a fiscal trap.
Noah, can you write a piece on our Federal Reserve, specifically its' rate-setting policy? And give us some juicy numbers on exactly how much interest payments on federal and state debt have increased? The functions and functioning of any nation's central bank are an essential factor in national prosperity, and it seems ours is like some Higher Power shrouded in mists of unknowing.
Well, there's a difference between borrowing for investment (which leads to growth), versus borrowing because voters don't want to pay the taxes that fund everything the government does.
There is a trade off in writing between brevity/impact and increased specificity/accuracy. I considered substituting the "three lower income quintiles" in place of "everyone," but decided against it.
On the other hand, If I were to answer your comment with an emphasis on brevity, I might say: “Well, aren't you special?"
I might also think to myself: "Chooses to present himself to the world as a poisonous snake . . ."
But again you’re wrong the lower income folks have done the best with their incomes outpacing the rise in inflation. It’s the top income folks who haven kept up.
While that might be true for some lower income people, it is absolutely not true for many millions, A fact that higher income people just would not be thinking about. Also, for the lowest quintile income recipients, even a 10% increase net in income simply lifts them from desperation to misery. Again, this is a fact at higher income people would just not be thinking about.
People think they their big raise is due to their own good conduct and savvy. Rising prices (that have risen less than their increased incomes) are cutting into the raise they so clearly deserved.
That's a good reason for affluent and successful people to hate inflation, but it does not explain the hatred and terror felt by low-income people. As I have said, you seem to be only able to imagine reality from a high-income perspective.
I also feel like I locked in my biggest costs (housing & car payments) before inflation, and now I can watch my income & investments rise with inflation and I'm pretty confident I'm coming out ahead.
Or at least, the inflation doesn't really BOTHER me, even if I find it annoying to pay over $10 for a burrito.
I think Noah is overlooking the politics of the issue here. Today's congressional Republicans will never, ever, ever support tax increases of any kind.
Being philosophically opposed to higher taxes isn't a problem in itself. If America had a normal system of government the GOP would advocate deficit reduction based on spending cuts alone, the Democrats would favor tax increases alone, and Congress would pass a compromise package that included a mixture of the two.
But the Republican Party in its current avatar just isn't able to do that. In practice you'll never even pass a balanced package of deficit reduction measures (much less one that's completely tax-based) unless the Democrats have a trifecta. Since that's only going to be true a fraction of the time, the debt keeps piling up.
Every GOP politician knows that the safest way to tax the non-rich while not seeming to tax them is through increases in usage "fees", which is most effectively carried out at the state and local level.
True, but there are things that won’t necessarily require legislation (letting the 2017 tax cuts expire). And imagine republicans would get in bored with raising the retirement age
Fund/modernize the IRS, rescind the Trump tax cuts, reform the Inheritance Tax: That adds roughly $250 billion in annual revenues, which is not chump change. Good place to start, eh?
That's what high capital costs are for. Pay heavily now to pay a lot less in the future.
Capital costs also have the benefit of being spread out over a long time horizon. So, the capitalization of the electrification of the economy would primarily be spent on creating energy infrastructure that is some or all of: lower unit costs than fossil fuel equivalents; lower volatility in energy unit costs; lower risk of supply shock or demand surge of electricity.
Remember that the money spent on capital isn't put in a vessel and burned, it's recirculated in the economy by paying construction and maintenance wages, buying material, research and development, etc.
Ten men in $1,000 suits in a smoky back room determining national economic policy by deciding the prime rate is...unsettling. And doing things like, you know, picking which banks and which didn't get bailouts during the Great Recession, cannot really be compatible with concepts like democracy and free market economics.
I think the explanation on mechanics here is done well, but the why seems simpler and more problematic, Congress. The GOP's insane level of tax hate with a desire to lower or eliminate virtually all taxes especially on higher eaeners prevents any basis to reach any compromise. Dems do love spending, and they don't seem particularly worried about deficit running to fund their loans (and during low rates this was less problematic.) in reality we need a Congress that's willing to increase some taxes where needed (the mix is fairly debatable) and exam our spending programs and be willing to actually cut or eliminate some. Right now we have too many extreme safe outside the primary politicians who don't have an incentive to do what's best for the country because it will cost them in their safe district.
The IRS’s use of AI going forward will result in more efficient collection of taxes. Tax cheaters beware: you will eventually get caught, fined, and be added to an audit list. Congress can try to underfund the IRS, but the efficiencies at scale of auditing are in place. Personally, I pay a large five-figure sum in income taxes. This doesn’t bother me. I figure (hope) the money is going to people who need it more than me. I take pride in paying my taxes. However, I want the government to collect all taxes due, by law, from citizens and business at all levels. And the Biden administration should let the Trump tax cuts expire. I’ve yet to see a corporate tax cut that paid for itself. All business sectors receive generous subsidies, which should be more than enough. Corporate welfare needs to be significantly reduced. I say this as a person who has significant investments in public companies (spoiler: they don’t need the tax cuts).
The reduction business taxes is the only part that should not expire, indeed they should be eliminated entirely. Business income taxes are just less fair way to collect revenue from owners who have differing marginal personal tax rates.
That's $130 billion, yes BILLION a year in revenue lost. Nearly one trillion dollars of our current national debt can be ascribed to it. How would you offset just the cost of just the 2017 cuts, much less eliminating the corporate tax entirely?
“ Obama then unleashed a massive stimulus to fight the Great Recession.”
Massive? Too-small or inadequate is more accurate. Unnecessarily, the recession was prolonged and millions of Americans suffered irreparable financial harm. The executives of the Big Banks walked away from fraud charges, while selling toxic paper to their “clients.” A container-ship-load of evidence was available in the form of emails, texts, and recorded phone calls (required by the SEC) in re sham trades/paper sales. What good is it for the SEC to require recording phone calls if the evidence isn’t going to be used?
I don’t invest in “sentiment,” “surveys,” or other theoretical nonsense. The trend is decades long: incumbent presidents get re-elected in good economies. The U.S. economy is the envy of the world. Biden is running for re-election; Trump is running from the law. Biden will beat Trump by an even wider margin in 2024. Trump will not succeed in beating four cases and 91 felony indictments.
Biden has put in play an excellent investment in the future of business growth that will play out for the next 10 years. The carrot of matching federal monies will entice business borrowing for expansion, no matter the interest rates. Cripes, some of the largest and most successful corporation issued corporate bonds paying 1-1.5%, in a variety of terms. When we look back, we’ll see that the coin-operated Congress was fighting stupid culture wars when it should have been refinancing U.S. debt at 1-1.5%. Did they seriously think interest rates would drop below a real 0% interest rate? No, they simply wanted to get re-elected by fighting meaningless culture wars. Both sides of the aisle should be held responsible for this fiscal incompetence. They focus their attention on personal stock portfolios. Pelosi had the gall to defend insider trading by members of Congress.
“U.S. government is borrowing almost entirely short-term debt right now, instead of long-term debt.”
I do hope that is correct. However, during the periods of virtual zero interest rates, the US was still relying on shorter term debt. I believe average duration of the stock of US debt outstanding is around 5 years, and more than a quarter of outstanding debt is in T-bills? Even when rates really bottomed, there was not a shift to longer term debt (although I did read a nerdy article recommending the issuance of consol bonds). Of course, the issuer of debt, whether a company or sovereign, has to consider the market into which they are selling. Perhaps the US Treasury views the market as more willing or better able to absorb a steady stream of zero coupon bills, which would be in line with market segmentation or preferred habitat theory. However, if so, that might mean the Treasury would be between a rock and a hard place should rates stay higher for longer.
But they did. The Federal debt market was pretty stable before the rate hikes. Which can only mean that the big-wigs in government finance currently selling short-term debt are confident that the Fed will once again lower the prime to pre-pandemic rates.
Per the major economic indicators we're in a boom. Yes, must qualify that, especially distribution-related; see eg https://wealtheconomics.substack.com/p/new-wealth-accumulation-during-covid But still. Population growth can be excluded from consideration using GDP/capita etc. Growth of capital stock is *part of* a boom.
Why can't we have nice things? Because people like you believe that the fiscal position of the monopoly supplier of dollars -- the federal government -- is identical to that of the households and businesses, who can only spend as much as they earn or borrow. You are the problem here.
Yes, my mere observing why politicians do so much deficit spending makes me the problem. I made no comparison or federal government fiscal position versus that of households and businesses. Project much?
Your "observation" that politicians engage in deficit spending to buy votes is a ludicrous proposition unsupported by even the tiniest bit of evidence. It's not even wrong.
Underlying your "observation" is the assumption that "deficit spending" is a problem. It can't be a problem because politicians use it to buy votes, because that idea is ludicrous. Can you offer a less ludicrous reason for thinking that "deficit spending" is a "problem"? That would make my day.
Everything politicians do is to curry favor with enough of the electorate to stay in power or move to higher office. The article is about deficit spending. With respect to deficit spending, whether it's tax cuts, tax increases, or, most of all, increased spending on [fill in the blank such as student loan write offs, Ukraine, whatever, does not matter]. That's it.
I did not say deficit spending is a problem. I said that's why they do it. Try to focus on what I actually say, and not make up shit about what you think I must believe.
Because the unelected and very much Not Democratic entity known as the Federal Reserve Bank can arbitrarily and summarily increase borrowing costs that make deficit spending massively painful. Going from 0% to 5% makes any form of deficit spending untenable.
It's also worth pointing out a distinction made by an earlier poster that spending on revenue-increasing or saving-increasing projects like those in the Infrastructure and IRA bills, are investments that will yield substantial future revenues.
Criticizing so-called "Entitlement" spending on Social Security is actually an utter GOP canard, as existing SocSec outlay already is 100% bought and paid for through past and payroll taxation. Medicare is only 55% funded by payroll/premiums, and is thus fair game for discussion.
I was educated in that 1990s New Keynesian framework, and it’s been a pretty good way to understand the world over the last 30 years. I think you should cut the deficit as you get close to full employment, maybe even run a surplus, and that extends the boom.
No, the deficit is just an excuse for bad people in government to hurt poor people. It’s meaningless because the government has a money printer and the ability to tax.
It should zero out the accounts of billionaires every so often, though, just for funsies
Still can't explain why a government that is the monopoly supplier of dollars needs to tax and "borrow" to pay for its spending, can you? You are still incapable of acknowledging that fiscal position of the monopoly supplier of dollars is in no meaningful way analogous to that of individuals, households, and businesses that must acquire dollars in order have dollars to spend and to pay their taxes. You are the problem here, not MMT.
Now, I understand that you desperately want to believe in it as the realities of economics are fatal to your desire for limitless spending and no taxes, but you’re just the flip side of the goldbugs/Austrian economists. You and the OP are the problem. This is your time to admit that you are stupid and deserve to be talked down to.
Oh, good grief. You suggest that MMT reflects a "desire for limitless spending and no taxes" and you think that I'm the one who is stupid and deserves to be talked down to? That's rich.
I think I've read most, if not all, of what Noah has written about MMT. Noah's certainly a very smart guy, but, like many other smart guys who write about economics -- Paul Krugman comes to mind -- the silliness of much of what he says about MMT suggests that his animus towards it is rooted in something other than mere intellectual disagreement, or a sober assessment of the threat that MMT poses to the foundations of civilization as we know it. What is it that drives that animus? Heck if I know. I suspect it may have something to do with science envy, and the notion that lots a fancy math can make economics look something like science even though it clearly isn't.
Life is to short for me to critically review the essays you've cited. I was, however, particularly struck by this parenthetical nugget from "Nutty Macroeconomic Theories":
"(In fact, this is how you know [MMT] not a real theory. Real economic theories make testable predictions, and they inevitably get some of these wrong — after all, no theory is perfect, especially about something as complex as the macroeconomy. So the fact that MMT admits no empirical misses is a sure sign that it never made any actual predictions.)"
This might be a trenchant critique were it not for the fact that the macroeconomic predictions made by "real economists" are almost always wrong -- as even the "real economists" themselves have been repeatedly forced to admit. Think of, say, the Fed repeatedly struggling to to explain why its's been completely incapable of explaining anything about the trajectory of the post-pandemic economic.
The idea that it might even be possible to make non-trivial predictions about the trajectory of stochastic systems like the macroeconomy -- an entity that effectively encompasses all human activity -- seems itself to be simply delusional. Which is why -- it seems to me -- that the central focus of MMT clearly is not really to make predictions, but to refocus discussions of federal spending away from the asking of stupid questions -- "How will we pay for it???" -- and towards the only ones that actually matter-- "Is this a good idea? Do the material human and material resources exists to bring the projects that are being funded to fruition? Might this spending give rise to inflation, and, if so why? If it is, might there be ways to mitigate the consequences of inflation on the populations most likely to be adversely effected? Might this spending create perverse incentives that have negative economic and social consequences.
I obviously can't stop you from whining and gnashing your teeth about the mostly imaginary horrors of federal deficit spending, or the issuance of federal debt instruments that exist largely to provide people and corporate entities with places to safely park long and short savings. If you need a hanky to wipe away your bitter tears, I'd be happy to lend you.
Noah, do you have any thoughts on whether the massive post-COVID deficit binge is a big reason why the US isn't having the same doldrums that the rest of the wealthy parts of the world are experiencing? Its notable that the other wealthy state with good per capita growth state is Italy, who is also having a >5% national government deficit.
Agree on a coming age of austerity, and that will probably be the way inflation gets back to 2pct and interest rates (and mortgage rates) come down.
The pattern in the US is that after a big spending blowout (GFC, Covid, Biden) a lot of the supposed one-off expenditures seem to leak into the baseline.
Compare department by department expenditures with estimates for 2024 done in 2019 pre-Covid and the results are pretty shocking (inflation certainly a part of it, but not all of it).
Lots of people talking about social security and Medicare being the problem, but that isn’t particularly true (they will be a massive problem - but there current deficits on their own wouldn’t be much of an issue if all non-Medicare/Soc Sec spending and revenues were brought into balance).
Moreover, because of reconciliation rules, the pattern has been to raid social security and Medicare to “pay” for new (largely unfunded) spending. Obama did this with Obamacare (used alleged Medicare “savings” to justify spending even more on Obamacare) and Biden did it with the IRA (projected Medicare “savings” were used to justify deficit spending on new handouts/subsidies). The obvious risk (and pattern to date) is that any future “savings” in old age programs will simply be more than spent on new giveaways and “investments” elsewhere. Once pols (and markets) get used to running trillion+ deficits the temptation is to continue them to please more constituents (whether with tax cuts or new spending).
I would love to see a plan where non- Social security and Medicare spending has to be brought into balance (spending cuts and tax hikes) over the next five years, with plans to keep it balanced for a succeeding ten years. That would great breathing room to cut social security and Medicare (tax hikes, means testing, increased retirement ages, etc) and fix the old age entitlement problem.
If we were to focus on old age entitlements first without some sort of overall budget discipline, the pols would simply use cuts in Medicare or social security to spend more elsewhere.
Of course, I don’t see budget sanity coming anytime soon (certainly not from Biden or Trump). That will only come after a crisis. Meanwhile, what I would love to see is each party being required to submit their theoretical proposals for how they would balance non-soc sec/Medicare spending over the next five years and keep it balanced for a succeeding ten.
This would be very informative for the general public, who have no idea of the size of the hole the US is in and the massive amount of tax hikes and spending cuts required to restore sanity.
It would certainly (or should) eliminate any talk of tax cuts and the fantasy that the “rich” Can not only cover our deficits but can fund lots of new freebies for everyone.
The reality is the middle and working classes will be much more heavily taxed (as happens in European social democracies) just to pay for existing spending, even if we raise upper income tax rates and raise capital gains taxes and reduce deductions (especially deductions for gifts of appreciated but untaxed assets to charity).
You are probably overestimating the chances that the concern about deficits will stay if there's a change in administration after the election. There's enough precedence for that type of partisan lack of concern. Not to mention, many of the people arguing that the Fed should keep the Fed Funds rate elevated will switch to arguing for cuts in that rate. There's precedence for that too.
Yeah, considering how during the 3 pre-Covid years of the Trump administration, the GOP Trifecta gave us deficits >1 $trillion, without any meaningful GOP attempt to cut spending or raise revenue.
It's "Tax and Spend Dem" vs. "Borrow and Spend GOP".
Isn’t the answer to tax billionaires and multi millionaire?
Maybe. I'll write another post about how we could tighten budgets if we wanted, but it deserves a longer post.
I’m really looking forward to that post. Democrats have been saying they’re going to raise taxes on the 1% — basically reverse Trump’s tax cuts — for years. I want to know what the effect of that would be.
How much money gets raised simply by making taxes go back to how they were in 2016? How does it affect private investment? How does that, in turn, affect employment? Is that money “creating jobs?” Or is that money in “safe investments” like fossil fuel industries and junk food?
And should taxes on the 1% be even higher than the 2016 rate? Do we even need billionaires at all? What would the impact be of 1955 tax rates of 90% on income above 10 million dollars? —Or a wealth tax, as Bernie Sanders and Elizabeth Warren endorse, to eliminate billionaires?
I sense probably 150 million Americans — maybe more — think this would have no negative fiscal impact. It would only make it possible to pay for infrastructure and public service, like education and policing. Or reduce the tax burden on everyone else.
Personally, I’d like to see reforms to the justice system so all trials get started within six months and wrapped up within a year. Trump’s trials are just the tip of the iceberg. That’s likely going to require hiring more judges, updating legal computer systems (jury duty!), and maybe building more courts.
I’d like to see a West Point for training Police Officers who can rise through ranks faster than those who have not attended and clean up shop: fire bad apples, teach better practices, lead by example, etc. That would likely be fairly affordable.
With the climate crisis, we are likely going to see even more intense immigration pressure around the world, so we’re going to have to increase expenditures on detainment facilities and staff. We may even need international investments to mitigate impacts in other countries — such as renewable energy projects and grids and heat pumps to make surviving in hotter, wet countries possible — so people don’t leave in the first place.
I am eager to see the fruits of the Inflation Reduction Act, rather than the roots of the fruit trees, which is where we’re at now: the signs that things are going to get better soon, based on investments. I want added to the IRA mandates that landlords replace gas appliances with electrics and install 220V outlets in renter parking spots for EV charging. Make it cheap for these business owners, so their primary “cost” is the time and effort of managing this work. Exposure to gas appliances is bad for people’s health, and we are about to start seeing long lines at public charging stations, which will be a protracted nightmare — and a “time tax” on poorer people who cannot charge anywhere else.
And I’m still not seeing all federal and municipal vehicles replaced with EVs. The US Postal fleet is supposed to start deploying them this year. But also all police vehicles should be electric. And school buses and metro buses! No doubt it doesn’t help that EVs are still more expensive than combustion vehicles, but that should change soon. (Maybe GM will reach price parity later this summer with its “ultium” platform.) Battery costs are supposed to halve from where they were a year ago in another couple of months.
And, of course, we need some serious renovation of the grid everywhere. Last mile investments are going to be expensive, and we need like 5X the number of electricians as we currently have. (Hello high school vocational classes, which lead to good-paying jobs upon graduation!)
A lot of these investments will pay for themselves fairly quickly: as we clean up pollution inside and out with EVs and electric appliances, health care costs will come down (children with asthma, for example). Municipal EVs have fewer parts that can break down, so there will be less money spent on maintenance, less down time, more productivity, and less money spent on fuel. A speedier judicial system will remove a drag on our economy, assuming it works. And if better policing is possible, we’d see less social strife and the costs that result from it, as well as fewer lawsuits and payouts to families victimized by bad cops.
I think these public costs are all extremely worthwhile. But I don’t want to trash the economy and steer us into a recession. If taxing the 1% is ineffectual we need to know. It needs to be broader knowledge. This presumption has been the bedrock of the Left’s advocacy for decades now. And I rarely see good, straightforward analysis like yours, Noah Smith.
Can’t wait!
The effect is a rounding error in the deficits (will still be trillion a year and rising). And the idea that we should and can spend this “windfall” rather than use it for deficit reduction is insanity.
Ask a European how social democracy is funded. 20-25 pct VAT. 40pct tax rates starting at 50k in income with no deductions. $8 gallon gasoline. And they still run massive deficits. The rich don’t pay for social democracy anywhere in the world- not even in countries with tiny populations and massive natural resources like Norway, Canada and Australia’s
Social democracy is best thought of as transferring spending decisions (and income) from individuals to the government. The theory being the government can do this more efficiently or more justly. What this means is that you largely pay for your own benefits and safety net via regressive taxation. There is no rich uncle carrying you. Now, the US does have more rich uncles than Europe has (and maybe we should ask why this is, and whether that would still be the case if those in favor of heavy taxation and regulation were running things unopposed), so maybe things need not be as regressive as they are in Europe. For sure, though, any sort of fiscal sanity in the US will have to tax the middle and working classes more heavily. The rich just don’t have enough income and assets to sustainably fund what we are spending.
Not everyone has rich uncles. And rich uncles don’t always share their wealth. It seems like having government benefits is better for healthy, happy lives.
It’s a shame the Republican platform is just to cut government programs, rather than make them more efficient. Noah has written about how dysfunctional our military procurement system is, for example. And we spend about a trillion dollars a year on various national security agencies / services.
Speaking in abstract values, it’s hard to get a sense of how much money taxing the 1% heavily would generate and what you are proposing to cut. I see lots of studies and articles suggesting that the cuts passed by Republicans while Trump was president will cost the US $10 trillion over ten years. That doesn’t seem like a rounding error to me.
https://www.brookings.edu/articles/donald-trumps-tax-plan-could-land-america-10-trillion-deeper-in-debt/
In contrast, my sense is that the Inflation Reduction Act will essentially pay for itself over ten years, as it drives the economy, generating tax revenue, as well as lowering costs for Americans on energy, transportation and prescription medicines, freeing up more money for consumption, which also generates tax revenues.
If Democrats change tax laws in 2025 to recoup the $10 trillion in cuts and direct that money at US debts starting in 2026, will we stave off the cost of our debt increasing with interest?
The GOP's overarching purpose is to cut taxes for the rich and corporations. Period.
Discussions about taxing earned *income* is a just a red herring designed to confuse the rubes, as the very wealthy make their money almost entirely through capital gains and unearned income. Why do ultra-elites like Bezos pay virtually nothing in taxes relative to their wealth? Because they *borrow* tens of millions annually against the value of their assets, then pay zero, zip, zilch tax on these *debts*.
I haven’t suggested cutting or taxing anything, though I suspect a lot of both will be needed.
I try to avoid fantasy numbers, though. 10 trillion in free savings just for the taking! 😂🤪. Imagine that!
Adequately fund the IRS--against strenuous GOP objection, btw--and repeal the Trump/GOP 2017 tax cuts, and federal revenues increase by nearly $200 billion annually. Or to put it another way, trim $200 billion annually from the deficit.
I'll write again when Noah posts but as my teaser on tax changes:
1. Net emissions of CO2, rebated in whole or in part if that would facilitate passage
2. Substitute a VAT for the wage tax for fully financing social insurance transfers for stage of life/life circumstances: old age, unemployment, sickness, child rearing.
3. Progressive consumption tax for general revenue raising and income redistribution purposes. In practice this means higher personal income tax rates with much greater deductions for savings.
4. Elimination of taxes on business income. Business income would be imputed to the personal incomes of owners which would be taxed as ordinary income. (Said “ordinary” “preferential” rates would disappear.) [Income would continue to be taxed at source for owners who do not file US taxes.]
5. Index realized capital gains but taxed as ordinary income. No basis increase on inheritance but not deemed as realized on inheritance.
6. Partial tax credits instead of deductions for categories of preferred consumption: medical expenditures, charitable contributions, state and local taxes and mortgage interest (if considered "preferred.)
It seems the title of your post feeds right into the narrative that deficit SPENDING is the whole problem. It implies we have to cut our way back to balance. We need a new term since our policy is really deficit TAXING.
The related question I hope you'll tackle is what the chances are that deficit reduction will work politically. I don't have a lot of faith in either party on this topic. Maybe you could do a collaboration with Matt Yglesias on that.
I mean, duh. It frustrates me the way this debate has often been depicted as a false dichotomy between borrowing and spending cuts.
That said, I suspect tax rates would have to be broader-based than just billionaires.
Agreed.
The reason politicians don't talk about tax rates is because people already feel they don't get value for money from the taxes they pay already. Governments prefer to borrow our cut spending because it avoids focusing voter attention on whether the government is delivering value on the scale people are used to from the private sector.
This it also what informs the Republican strategy I guess. Spend political capital on getting taxes lowered and compromise in the short term on letting the spending stay high, whilst relying on the fact that deficit spending can't continue forever (plus trying to force spending lower Vis debt brakes).
We need to raise effective tax rates by eliminating the deductions and loopholes available to the .01% that aren't available to the rest of us. By doing this, we probably could lower the gross rates and raise the standard deduction. This would benefit the majority of taxpayers and would be an easier sell politically. Raising rates on the wealthy without going after their deductions and loopholes is a waste of time because they will just find ways to weasel out of claiming income subject to the top brackets. My ultimate goal would be putting everyone on the 1040EZ form. It would solve a lot of problems. We could use one of those deficit spending programs to retrain all of the newly unemployed lawyers and accountants into more productive areas of the economy.
How about we also go to the Japanese approach and have tax returns done in reverse? The IRS sends us the tax returns and we taxpayers audit their work.
First, adequately fund--and modernize--the IRS, to bring in $90 billion annually by simply enforcing *existing* tax codes. Politically, there is only one party fighting to prevent this.
Secondly, because taxing *wealth* is problematic if not impossible, there needs be serious discussion by qualified Economists on taxing unearned income, short and long term capital gains, and even financial transactions. Taxing large (>$10million) inheritances should also be in this discussion.
Is it even possible to tax all of the above in a way that would not harm economic growth? In a way that is *fair* to taxpayers in all income brackets? And exactly how much revenue could realistically be raised from such measures? As we collectively descend into America's Third Gilded Age we need to at least research how we can level the economic playing field in a way that floats all boats, not just those of the 0.01%
Agreed that taxing wealth is really hard! Most of that wealth is highly illiquid. I suppose you could force the likes of Zuckerberg to sell shares in their own company in order to fund their taxes, but even forcing the largest shareholders of a huge company to sell their shares is going to have ripple effects for the whole business.
Maybe such downsides are worth it. Personally I think they would be, even if not for the money they raised directly (which wouldn't be that much in the bigger scheme of then) it would worthwhile solely for the trust such a scheme might restore to western societies. However, I think far too many people think that political will is the only obstacle to taxing extreme wealth, and it just isn't.
Sweden supposedly taxes wealth. How they actually do it...I dunno! They've also got, like us, a very high number of multi-millionaires per capita. They also have an extremely simple personal income tax code.
The reason Bezos and friends pay proportionally tiny amounts of personal tax, is that they borrow large amounts of $$$ against their assets. By borrowing, they pay no income taxes on said funds. All the very rich are now doing this. It's all the rage.
Between borrowing and taxing, but not just taxing "billionaires."
Not enough bot those out there to close the gap. Besides they can move.
The pain will likely need to be born by $100k-$500k households.
Capital flight by *individuals* is always a risk. Which is why finding a way to equitably tax their business holdings is essential, through increases to capital gains unearned income and pass-through income. And further close loopholes available to the ultra-rich and corporations to stash their assets in offshore tax havens.
When the Trump tax cuts expire next year, there will be a big tax increase on the highest earners. Biden talks about not i creasing taxes on anyone making less than $400K, but hasn’t said much beyond that. It doesn’t make sense to talk about raising taxes during an election year. As soon as the election is over, the fight about what parts of the expiring tax cut to keep will begin in earnest.
no
Soak the rich - share the wealth - every man a king!
Heh.
Trump tax cuts expire at the end of 2025. Let it be.
Shout out for carbon taxes disguised as taxes on oil companies and electrical utilities.
Do the math and let us know
Yes! But that won't get us as much deficit reduction as wee need
“ I pay over 50% in taxes and I'm no Bill Gates.”
No, you don’t.
Why are you such a brat?
average or marginal?
That state tax - 17% total - seems higher than things I can find online. Maybe I'm not understanding what you mean by a "high earner" tax versus just the top marginal rate?
But in defense of your point, here's a breakdown on how a $1m income in California pays a 50% marginal rate. Note that the 4% investment tax might actually put it over 50%, if that's how the income is earned.
https://www.talent.com/tax-calculator/California-1000000
Because no one ever gets specific about which "spending" to cut.
My list is
Farm price supports in all the variable guises
Ethanol subsidies
Subsidized hazard insurance.
Non-uniform pricing of water from federal water projects and full cost pricing of other federal infrastructure services like river traffic control.
Subsidies for CO2 reduction [IRA, EV subsidies, solar panel subsidies, etc. (because we are taxing net CO2 emissions).
But I have spending increases in mind, too:
Much higher support for R&D
Higher EITC and made more like a wage subsidy
Transfers for child rearing (not for "daycare)
Unemployment insurance that replaces a substantial % of income lost.
I'm much in favour of eliminating CO2-reduction subsidies in favour of carbon taxes.
OK, but all in all, the cuts you list are only a fraction of the size of the deficit, and the new individual transfers would tend to grow far larger than your cuts.
Buzen, I think you are suggesting a more honest conversation than our politicians are willing to have! I would agree with the core framing there: we either need to raise taxes or cut benefits to the elderly. (Or do a bit of both.)
Fidgeting with other parts of the budget might be worthwhile but you can't really move the needle that much.
One nit I would pick is that you refer to income taxes, but don't forget payroll taxes (which are basically flat taxes on income) were close to 30% of govt revenue, so the burden is actually spread a bit more than your first line suggests. But still a net progressive income tax rate, of course.
Social Security is currently 100% funded through taxes every American starts paying from the time they land their first job. Whereas only 55% of Medicare funding comes from payroll taxes and insurance premiums.
SS isn’t in the fed budget. It’s paid for by a special payroll tax, although it’s possible thing will change soon.
The budge is the budget and the deficit is the deficit.
The reality is we’ll probably have to raise the retirement age, aggressively negotiate down health care costs for Medicare (Biden has already experimented with it), and uncap the social security tax. 2 out of the 3 of these things are politically unpopular, but I imagine that could change like it did in the 90s when debt became all consuming. In Congress could pass it in the dead of night and never talk about it, like they do other legislation
I've always been sceptical about the idea that borrowing is fine as long as interest rates remain low. Because those interest rates don't remain low forever. I think you alluded to people getting confused between debt and deficit, and this is prime example; interest is paid on the former, not the latter. If you borrow heavily during periods of low interest rates, you can't just stop the borrowing when interest rates climb; you have to pay the interest on that accumulated debt.
In the UK, we spend more on servicing our debt than we do on education. And it's because our debt ballooned after the Great Recession while our economy has barely grown at all. We are now stuck in a fiscal trap.
Yep.
Noah, can you write a piece on our Federal Reserve, specifically its' rate-setting policy? And give us some juicy numbers on exactly how much interest payments on federal and state debt have increased? The functions and functioning of any nation's central bank are an essential factor in national prosperity, and it seems ours is like some Higher Power shrouded in mists of unknowing.
OK! What more would you like to know, specifically?
Yet so many in the US want to emulate the slower growing countries because free stuff
Well, there's a difference between borrowing for investment (which leads to growth), versus borrowing because voters don't want to pay the taxes that fund everything the government does.
The issue is income redistribution. No one likes taxes (on themselves), but there is little room for investment amid all the demands for free stuff.
"Americans hate unemployment, but surveys pretty consistently show that they hate inflation even more."
Well, duh!
Unemployment victimizes an unfortunate few, but inflation makes everyone miserable—and fearful.
Inflation most certainly doesn’t make everyone miserable. My raises have covered inflation and I bought a house with a 2.8% mortgage in 2021.
There is a trade off in writing between brevity/impact and increased specificity/accuracy. I considered substituting the "three lower income quintiles" in place of "everyone," but decided against it.
On the other hand, If I were to answer your comment with an emphasis on brevity, I might say: “Well, aren't you special?"
I might also think to myself: "Chooses to present himself to the world as a poisonous snake . . ."
But again you’re wrong the lower income folks have done the best with their incomes outpacing the rise in inflation. It’s the top income folks who haven kept up.
While that might be true for some lower income people, it is absolutely not true for many millions, A fact that higher income people just would not be thinking about. Also, for the lowest quintile income recipients, even a 10% increase net in income simply lifts them from desperation to misery. Again, this is a fact at higher income people would just not be thinking about.
BTW, if you reject my explanation of why Americans hate inflation much more than unemployment, would you enlighten me with a snake's point of view?
People think they their big raise is due to their own good conduct and savvy. Rising prices (that have risen less than their increased incomes) are cutting into the raise they so clearly deserved.
That's a good reason for affluent and successful people to hate inflation, but it does not explain the hatred and terror felt by low-income people. As I have said, you seem to be only able to imagine reality from a high-income perspective.
high five!
I also feel like I locked in my biggest costs (housing & car payments) before inflation, and now I can watch my income & investments rise with inflation and I'm pretty confident I'm coming out ahead.
Or at least, the inflation doesn't really BOTHER me, even if I find it annoying to pay over $10 for a burrito.
I think Noah is overlooking the politics of the issue here. Today's congressional Republicans will never, ever, ever support tax increases of any kind.
Being philosophically opposed to higher taxes isn't a problem in itself. If America had a normal system of government the GOP would advocate deficit reduction based on spending cuts alone, the Democrats would favor tax increases alone, and Congress would pass a compromise package that included a mixture of the two.
But the Republican Party in its current avatar just isn't able to do that. In practice you'll never even pass a balanced package of deficit reduction measures (much less one that's completely tax-based) unless the Democrats have a trifecta. Since that's only going to be true a fraction of the time, the debt keeps piling up.
Not "philosphically" opposed to tax increases, "strategically" opposed because some of the tax increase would have to come from high income people.
Excellent distinction!
Every GOP politician knows that the safest way to tax the non-rich while not seeming to tax them is through increases in usage "fees", which is most effectively carried out at the state and local level.
True, but there are things that won’t necessarily require legislation (letting the 2017 tax cuts expire). And imagine republicans would get in bored with raising the retirement age
Fund/modernize the IRS, rescind the Trump tax cuts, reform the Inheritance Tax: That adds roughly $250 billion in annual revenues, which is not chump change. Good place to start, eh?
Increased funding for IRS passed in the IRA in 2022 is most definitely still not a done deal even in 2024 in face of continuing GOP attempts to gut its budget. https://www.govexec.com/workforce/2024/01/irs-plans-continue-hiring-spree-despite-setback-new-budget-deal/393221/#:~:text=IRS%20plans%20to%20hire%2020%2C000,the%20end%20of%20fiscal%202022.
Do you think a post fossil fuel economy will have lower inflation all less equal?
Yes. But I think the difference will not be large.
Why would it be lower?
Fewer supply shocks when the world is less dependent on the price of commodities.
Much lower input costs not subject to geopolitics (once you have spent a fortune upfront on capital costs)
That's what high capital costs are for. Pay heavily now to pay a lot less in the future.
Capital costs also have the benefit of being spread out over a long time horizon. So, the capitalization of the electrification of the economy would primarily be spent on creating energy infrastructure that is some or all of: lower unit costs than fossil fuel equivalents; lower volatility in energy unit costs; lower risk of supply shock or demand surge of electricity.
Remember that the money spent on capital isn't put in a vessel and burned, it's recirculated in the economy by paying construction and maintenance wages, buying material, research and development, etc.
That depends entirely on the Fed whatever the energy mix.
Ten men in $1,000 suits in a smoky back room determining national economic policy by deciding the prime rate is...unsettling. And doing things like, you know, picking which banks and which didn't get bailouts during the Great Recession, cannot really be compatible with concepts like democracy and free market economics.
Energy is what? 30% of our current economy?
I think the explanation on mechanics here is done well, but the why seems simpler and more problematic, Congress. The GOP's insane level of tax hate with a desire to lower or eliminate virtually all taxes especially on higher eaeners prevents any basis to reach any compromise. Dems do love spending, and they don't seem particularly worried about deficit running to fund their loans (and during low rates this was less problematic.) in reality we need a Congress that's willing to increase some taxes where needed (the mix is fairly debatable) and exam our spending programs and be willing to actually cut or eliminate some. Right now we have too many extreme safe outside the primary politicians who don't have an incentive to do what's best for the country because it will cost them in their safe district.
The IRS’s use of AI going forward will result in more efficient collection of taxes. Tax cheaters beware: you will eventually get caught, fined, and be added to an audit list. Congress can try to underfund the IRS, but the efficiencies at scale of auditing are in place. Personally, I pay a large five-figure sum in income taxes. This doesn’t bother me. I figure (hope) the money is going to people who need it more than me. I take pride in paying my taxes. However, I want the government to collect all taxes due, by law, from citizens and business at all levels. And the Biden administration should let the Trump tax cuts expire. I’ve yet to see a corporate tax cut that paid for itself. All business sectors receive generous subsidies, which should be more than enough. Corporate welfare needs to be significantly reduced. I say this as a person who has significant investments in public companies (spoiler: they don’t need the tax cuts).
The reduction business taxes is the only part that should not expire, indeed they should be eliminated entirely. Business income taxes are just less fair way to collect revenue from owners who have differing marginal personal tax rates.
That's $130 billion, yes BILLION a year in revenue lost. Nearly one trillion dollars of our current national debt can be ascribed to it. How would you offset just the cost of just the 2017 cuts, much less eliminating the corporate tax entirely?
I'll be happy enough if we achieve a low deficit going forward.
It's also a way to collect revenue from owners who wouldn't otherwise pay at all because they're not American.
That was the point of my "except"
“ Obama then unleashed a massive stimulus to fight the Great Recession.”
Massive? Too-small or inadequate is more accurate. Unnecessarily, the recession was prolonged and millions of Americans suffered irreparable financial harm. The executives of the Big Banks walked away from fraud charges, while selling toxic paper to their “clients.” A container-ship-load of evidence was available in the form of emails, texts, and recorded phone calls (required by the SEC) in re sham trades/paper sales. What good is it for the SEC to require recording phone calls if the evidence isn’t going to be used?
I don’t invest in “sentiment,” “surveys,” or other theoretical nonsense. The trend is decades long: incumbent presidents get re-elected in good economies. The U.S. economy is the envy of the world. Biden is running for re-election; Trump is running from the law. Biden will beat Trump by an even wider margin in 2024. Trump will not succeed in beating four cases and 91 felony indictments.
Biden has put in play an excellent investment in the future of business growth that will play out for the next 10 years. The carrot of matching federal monies will entice business borrowing for expansion, no matter the interest rates. Cripes, some of the largest and most successful corporation issued corporate bonds paying 1-1.5%, in a variety of terms. When we look back, we’ll see that the coin-operated Congress was fighting stupid culture wars when it should have been refinancing U.S. debt at 1-1.5%. Did they seriously think interest rates would drop below a real 0% interest rate? No, they simply wanted to get re-elected by fighting meaningless culture wars. Both sides of the aisle should be held responsible for this fiscal incompetence. They focus their attention on personal stock portfolios. Pelosi had the gall to defend insider trading by members of Congress.
It can both be massive (compared to recent government expenditures) and too small (compared to the size of the crisis it was attempting to mitigate).
Obama was unable to pass enough "relief." The Fed refused to provide enough "stimulus."
“U.S. government is borrowing almost entirely short-term debt right now, instead of long-term debt.”
I do hope that is correct. However, during the periods of virtual zero interest rates, the US was still relying on shorter term debt. I believe average duration of the stock of US debt outstanding is around 5 years, and more than a quarter of outstanding debt is in T-bills? Even when rates really bottomed, there was not a shift to longer term debt (although I did read a nerdy article recommending the issuance of consol bonds). Of course, the issuer of debt, whether a company or sovereign, has to consider the market into which they are selling. Perhaps the US Treasury views the market as more willing or better able to absorb a steady stream of zero coupon bills, which would be in line with market segmentation or preferred habitat theory. However, if so, that might mean the Treasury would be between a rock and a hard place should rates stay higher for longer.
Maybe when interest rates were near zero, the federal government could not borrow long term because no one would lend long term at that interest rate.
But they did. The Federal debt market was pretty stable before the rate hikes. Which can only mean that the big-wigs in government finance currently selling short-term debt are confident that the Fed will once again lower the prime to pre-pandemic rates.
We are on the “late Roman Empire debasing the currency” stage of the USD.
The Late Roman Empire isn't a reasonable model of any industrialized economy. Fullstop.
So were we in that state in 1946 as well, which was followed by the greatest burst of widespread prosperity in U.S. history, before or since.
https://fred.stlouisfed.org/graph/?g=1jhW6
Meanwhile Debt/GDP declined for the next 30+ years even though gov ran deficits the whole time.
Then came 1980.
It would be if the thirty years after those WWII highs weren't such a miraculous growth period...
Per the major economic indicators we're in a boom. Yes, must qualify that, especially distribution-related; see eg https://wealtheconomics.substack.com/p/new-wealth-accumulation-during-covid But still. Population growth can be excluded from consideration using GDP/capita etc. Growth of capital stock is *part of* a boom.
"Why is the U.S. doing so much deficit spending?"
To buy votes.
And because living above our means is The American Way(TM).
Why can't we have nice things? Because people like you believe that the fiscal position of the monopoly supplier of dollars -- the federal government -- is identical to that of the households and businesses, who can only spend as much as they earn or borrow. You are the problem here.
Yes, my mere observing why politicians do so much deficit spending makes me the problem. I made no comparison or federal government fiscal position versus that of households and businesses. Project much?
Your "observation" that politicians engage in deficit spending to buy votes is a ludicrous proposition unsupported by even the tiniest bit of evidence. It's not even wrong.
Underlying your "observation" is the assumption that "deficit spending" is a problem. It can't be a problem because politicians use it to buy votes, because that idea is ludicrous. Can you offer a less ludicrous reason for thinking that "deficit spending" is a "problem"? That would make my day.
Everything politicians do is to curry favor with enough of the electorate to stay in power or move to higher office. The article is about deficit spending. With respect to deficit spending, whether it's tax cuts, tax increases, or, most of all, increased spending on [fill in the blank such as student loan write offs, Ukraine, whatever, does not matter]. That's it.
I did not say deficit spending is a problem. I said that's why they do it. Try to focus on what I actually say, and not make up shit about what you think I must believe.
Because the unelected and very much Not Democratic entity known as the Federal Reserve Bank can arbitrarily and summarily increase borrowing costs that make deficit spending massively painful. Going from 0% to 5% makes any form of deficit spending untenable.
It's also worth pointing out a distinction made by an earlier poster that spending on revenue-increasing or saving-increasing projects like those in the Infrastructure and IRA bills, are investments that will yield substantial future revenues.
Criticizing so-called "Entitlement" spending on Social Security is actually an utter GOP canard, as existing SocSec outlay already is 100% bought and paid for through past and payroll taxation. Medicare is only 55% funded by payroll/premiums, and is thus fair game for discussion.
I was educated in that 1990s New Keynesian framework, and it’s been a pretty good way to understand the world over the last 30 years. I think you should cut the deficit as you get close to full employment, maybe even run a surplus, and that extends the boom.
No, the deficit is just an excuse for bad people in government to hurt poor people. It’s meaningless because the government has a money printer and the ability to tax.
It should zero out the accounts of billionaires every so often, though, just for funsies
If you run the money printer enough you blow up the whole economy
In Zimbabwe, sure, but in America? Doubtful
Uh why do you think there's a fundamental difference?? Markets work the same way in both places.
One is much more deeply embedded in the global economy than the other
Zimbabwe had stopped money printing and is trying the gold standard! Just a phase
I would really, really like to not test that theory
Translation: one produces an inefficient resource allocation. :)
Not this MMT shit again…
Still can't explain why a government that is the monopoly supplier of dollars needs to tax and "borrow" to pay for its spending, can you? You are still incapable of acknowledging that fiscal position of the monopoly supplier of dollars is in no meaningful way analogous to that of individuals, households, and businesses that must acquire dollars in order have dollars to spend and to pay their taxes. You are the problem here, not MMT.
Had you bothered to read, you’d see why it’s moronic fan fiction that doesn’t hold up:
https://www.noahpinion.blog/p/the-nyt-article-on-mmt-is-really
https://www.noahpinion.blog/p/nutty-macroeconomic-theories-will
https://www.noahpinion.blog/p/mmt-and-the-meme-ification-of-macro
Now, I understand that you desperately want to believe in it as the realities of economics are fatal to your desire for limitless spending and no taxes, but you’re just the flip side of the goldbugs/Austrian economists. You and the OP are the problem. This is your time to admit that you are stupid and deserve to be talked down to.
Oh, good grief. You suggest that MMT reflects a "desire for limitless spending and no taxes" and you think that I'm the one who is stupid and deserves to be talked down to? That's rich.
I think I've read most, if not all, of what Noah has written about MMT. Noah's certainly a very smart guy, but, like many other smart guys who write about economics -- Paul Krugman comes to mind -- the silliness of much of what he says about MMT suggests that his animus towards it is rooted in something other than mere intellectual disagreement, or a sober assessment of the threat that MMT poses to the foundations of civilization as we know it. What is it that drives that animus? Heck if I know. I suspect it may have something to do with science envy, and the notion that lots a fancy math can make economics look something like science even though it clearly isn't.
Life is to short for me to critically review the essays you've cited. I was, however, particularly struck by this parenthetical nugget from "Nutty Macroeconomic Theories":
"(In fact, this is how you know [MMT] not a real theory. Real economic theories make testable predictions, and they inevitably get some of these wrong — after all, no theory is perfect, especially about something as complex as the macroeconomy. So the fact that MMT admits no empirical misses is a sure sign that it never made any actual predictions.)"
This might be a trenchant critique were it not for the fact that the macroeconomic predictions made by "real economists" are almost always wrong -- as even the "real economists" themselves have been repeatedly forced to admit. Think of, say, the Fed repeatedly struggling to to explain why its's been completely incapable of explaining anything about the trajectory of the post-pandemic economic.
The idea that it might even be possible to make non-trivial predictions about the trajectory of stochastic systems like the macroeconomy -- an entity that effectively encompasses all human activity -- seems itself to be simply delusional. Which is why -- it seems to me -- that the central focus of MMT clearly is not really to make predictions, but to refocus discussions of federal spending away from the asking of stupid questions -- "How will we pay for it???" -- and towards the only ones that actually matter-- "Is this a good idea? Do the material human and material resources exists to bring the projects that are being funded to fruition? Might this spending give rise to inflation, and, if so why? If it is, might there be ways to mitigate the consequences of inflation on the populations most likely to be adversely effected? Might this spending create perverse incentives that have negative economic and social consequences.
I obviously can't stop you from whining and gnashing your teeth about the mostly imaginary horrors of federal deficit spending, or the issuance of federal debt instruments that exist largely to provide people and corporate entities with places to safely park long and short savings. If you need a hanky to wipe away your bitter tears, I'd be happy to lend you.
Just progressively tax consumption, which might need to go above 100% for high incomes.
Devil's in the details about how you'd define "progressive". We'd probably end up with a regressive UK 20% VAT tax.
Still better than the Wage Tax. But the VAT is not suppose to be "progressive." Progresivity coes from the progressive consumption tax.
Noah, do you have any thoughts on whether the massive post-COVID deficit binge is a big reason why the US isn't having the same doldrums that the rest of the wealthy parts of the world are experiencing? Its notable that the other wealthy state with good per capita growth state is Italy, who is also having a >5% national government deficit.
Agree on a coming age of austerity, and that will probably be the way inflation gets back to 2pct and interest rates (and mortgage rates) come down.
The pattern in the US is that after a big spending blowout (GFC, Covid, Biden) a lot of the supposed one-off expenditures seem to leak into the baseline.
Compare department by department expenditures with estimates for 2024 done in 2019 pre-Covid and the results are pretty shocking (inflation certainly a part of it, but not all of it).
Lots of people talking about social security and Medicare being the problem, but that isn’t particularly true (they will be a massive problem - but there current deficits on their own wouldn’t be much of an issue if all non-Medicare/Soc Sec spending and revenues were brought into balance).
Moreover, because of reconciliation rules, the pattern has been to raid social security and Medicare to “pay” for new (largely unfunded) spending. Obama did this with Obamacare (used alleged Medicare “savings” to justify spending even more on Obamacare) and Biden did it with the IRA (projected Medicare “savings” were used to justify deficit spending on new handouts/subsidies). The obvious risk (and pattern to date) is that any future “savings” in old age programs will simply be more than spent on new giveaways and “investments” elsewhere. Once pols (and markets) get used to running trillion+ deficits the temptation is to continue them to please more constituents (whether with tax cuts or new spending).
I would love to see a plan where non- Social security and Medicare spending has to be brought into balance (spending cuts and tax hikes) over the next five years, with plans to keep it balanced for a succeeding ten years. That would great breathing room to cut social security and Medicare (tax hikes, means testing, increased retirement ages, etc) and fix the old age entitlement problem.
If we were to focus on old age entitlements first without some sort of overall budget discipline, the pols would simply use cuts in Medicare or social security to spend more elsewhere.
Of course, I don’t see budget sanity coming anytime soon (certainly not from Biden or Trump). That will only come after a crisis. Meanwhile, what I would love to see is each party being required to submit their theoretical proposals for how they would balance non-soc sec/Medicare spending over the next five years and keep it balanced for a succeeding ten.
This would be very informative for the general public, who have no idea of the size of the hole the US is in and the massive amount of tax hikes and spending cuts required to restore sanity.
It would certainly (or should) eliminate any talk of tax cuts and the fantasy that the “rich” Can not only cover our deficits but can fund lots of new freebies for everyone.
The reality is the middle and working classes will be much more heavily taxed (as happens in European social democracies) just to pay for existing spending, even if we raise upper income tax rates and raise capital gains taxes and reduce deductions (especially deductions for gifts of appreciated but untaxed assets to charity).
You are probably overestimating the chances that the concern about deficits will stay if there's a change in administration after the election. There's enough precedence for that type of partisan lack of concern. Not to mention, many of the people arguing that the Fed should keep the Fed Funds rate elevated will switch to arguing for cuts in that rate. There's precedence for that too.
Yeah, considering how during the 3 pre-Covid years of the Trump administration, the GOP Trifecta gave us deficits >1 $trillion, without any meaningful GOP attempt to cut spending or raise revenue.
It's "Tax and Spend Dem" vs. "Borrow and Spend GOP".