America?????s Revenue Problem

[_Analytics]

According to the Stockholm International Peace Research Institute, America spends 4.7% of its GDP on the military. In contrast, consider the military spending of these five countries:

Australia: 1.9%
New Zealand: 1.2%
Switzerland: 0.8%
Canada: 1.5%
Denmark: 1.5%

On average, we spend 3.3% more of our GDP on the military than those countries spend. If we really “support our troops” and support that level of spending, our taxes need to be commensurately higher.

To those who value the point of view of the Heritage Foundation, those five countries should be good comparisons for the direction America ought to go, because the Heritage Foundation says they are all more “Economically Free” than the United States.

These countries have the following tax burden:

Australia: 26%
New Zealand: 31.3%
Switzerland: 29.8%
Canada: 31%
Denmark: 50%

On average, their tax burdens are about 34%. If we want the same general level of government services as these “economically free” countries plus a strong military, the United States ought to have a tax burden of about 37%.

According to the Heritage foundation, America’s tax burden is only 24.8%. That means that in order to get our tax burden commensurate with those countries that are more economically free than we are, adjusted for our military priorities, we need to increase tax revenue by about 50%.

We have a revenue problem folks.

References
http://www.heritage.org/index/
http://www.heritage.org/index/country/unitedstates
http://www.heritage.org/index/country/australia
http://www.heritage.org/index/country/newzealand
http://www.heritage.org/index/country/switzerland
http://www.heritage.org/index/country/canada
http://www.heritage.org/index/country/denmark

[_beastie]

It will be interesting to watch the spinning responses.

[_Kevin Graham]

The big question is where does the Laffer curve bend?

That's the sweet spot we should be shooting for.

Bruce Bartlett, columnist, Forbes.com; former adviser to Reagan and Bush I:

"I would hate to venture a specific number.... I would, however, say that I think the top rate could be quite a bit higher than it is without significantly impairing incentives or leading to excessive amounts of tax avoidance. I think 50 percent is an important threshold and I would be very reluctant to go higher even if it raised net revenue.... Anthony Atkinson, probably the leading public finance economist in England, estimates (PDF) that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue...The European Central Bank...finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates."

Brad DeLong, professor of economics, University of California at Berkeley:

"At 70%."

Emmanuel Saez, E. Morris Cox professor of economics, University of California at Berkeley:

"The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed."

Joel Slemrod, Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, University of Michigan:

"I would venture that the answer is 60% or higher.... The idea that we're on the wrong side has almost no support among academics who have looked at this. Evidence doesn't suggest we're anywhere near the other end of the Laffer curve.... The elasticity of response, which is the key parameter here, isn't some absolute parameter that we just have to deal with. It depends on policies. Let me be specific. There's an article about how the IRS has reorganized itself to crack down on tax evasion of high-income people and corporations moving their operations or assets offshore. That's the kind of policy initiative that can affect the elasticity of response by closing up a loophole. You want to raise tax rates at the same time you look at these kind of initiatives.... If we're talking about just deficit variations, we're not talking about what the government spending, the answer is no. It doesn't matter what this response is. If you're not changing government spending, any change in revenue now will have to offset by some change in revenue in the future. If that's the case, then if the responsiveness is high now, it's going to be high later, too."

Dean Baker, co-director, Center for Economic and Policy Research:

"It would be somewhere around 70 percent and possibly a bit higher. It is important to realize that you can have many different rates so we can have only a very small fraction of people actually paying the top rate and even then only on a small portion of their income."

[_Gadianton]

If we really “support our troops” and support that level of spending, our taxes need to be commensurately higher.

I totally agree. Of course, I support the troops, but not the war. So I would be happier with no war and lower taxes.

[_Gadianton]

That's the sweet spot we should be shooting for.

Why?

It's also true there is a maximum amount a houshold member can spend of your money before his/her spending will drop due to the toll it takes on your finances such that eventually, his or her spending is forced to cut back. It's in the self-interest of every houshold member to spend in such a way as to discover this sweet spot, in fact. But why should each member of your household be allowed to do such a thing?

(in the context of Analytics's post, yes, if we want the war, then the most responsible course is to hit this "sweet spot" to pay for it. Kind of like maximizing your monthly payments on a car. But I'm curious if what you are saying is that the government should be perpetually taxing this way).

[_Kevin Graham]

Gad, that's the point of the Laffer curve. To determine the point at which taxation reaches maximum revenue. It will bend as a result of either too much or too little taxation and so it already accounts for its impact on economic productivity.

Right now we're in a period of very low taxes, and most Economists today believe a dramatic increase in marginal tax rates will not only increase revenues, but also, not harm the economy. They're on solid ground here.

[_Gadianton]

Why should government "maximize revenue".

If there's something something big it's trying to pay off like a war, point taken. I can't tell if you're saying it should maximize revenue in order to solve a problem at hand, or that as a guiding principle, government should always maximize its revenue (as a business should maximize profits).

[_Kevin Graham]

How about the obligation to pay a $16+ trillion debt?

That sounds like a great reason to me.

[_lulu]

That's the sweet spot we should be shooting for.

Why?

It's also true there is a maximum amount a houshold member can spend of your money before his/her spending will drop due to the toll it takes on your finances such that eventually, his or her spending is forced to cut back. It's in the self-interest of every houshold member to spend in such a way as to discover this sweet spot, in fact. But why should each member of your household be allowed to do such a thing?

(in the context of Analytics's post, yes, if we want the war, then the most responsible course is to hit this "sweet spot" to pay for it. Kind of like maximizing your monthly payments on a car. But I'm curious if what you are saying is that the government should be perpetually taxing this way).

Not sure I get your point. I think part of the taxation argument is does it reach a point where it becomes a disincentive to increase gross income? I think that such a point is possible.

That's not a simple spending issue. It also an income issue. And its just a recognition of the human nature of many, but not all, of us. Which is not to say that spending, as opposed to simply income, isn't an issue too.

Captialism is great. Don't kill the goose that lays the golden eggs. But the eggs are useless if the goose just gets to sit on them all. Basic human values require that as much of that gold as possible goes to those least able to support themselves. They are not a powerful constituency, so there has to be a fight for that gold.

But how much is "possible?" That amount can be estimated, but economies have inumerable variables that change minute by minute. But that is the issue, in my opinion, how much gold does the goose have to keep for itself to survive? How much can we give to those who would otherwise, for various reasons, have nothing? The answer is always changing.

[_Gadianton]

Not sure I get your point. I think part of the taxation argument is does it reach a point where it becomes a disincentive to increase gross income? I think that such a point is possible.

Yeah, you're right about that, it's just that making this point in and of itself tells us nothing about why we should or shouldn't maximize tax revenues. Kevin's point seems to be that we need to eliminate the national debt. Your point seems to be that we need to redistribute as much as we can to the poor. My analogy points out that the government does have a self-serving interest in maximizing tax revenues, so you better really be sure tax policy is going to do what you intend it to do before you maximize tax revenues, and hold them at these levels.

That amount can be estimated, but economies have inumerable variables that change minute by minute

Economies for sure, but also economic theories. Kevin is an avowed Keynesian, so why is he concerned about wiping out the debt? Recall, "In the long run, we're all dead." The point Analytics makes uses anti-Keynes logic against itself: Conservatives wanted a war; war costs a lot of money; Keynes was wrong; therefore, there is no justification for paying for the war on credit, we need to tax.

If one is a true Keynesian, then it's going to be problematic to argue for long-term maximum taxes, independent of what the ends are: balanced budget, war, help the poor, etc..

Keynes advocated what has been called countercyclical fiscal policies, that is, policies that acted against the tide of the business cycle: deficit spending when a nation's economy suffers from recession or when recovery is long-delayed and unemployment is persistently high—and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays."[12]

High taxes during downturns will exasperate the downturn. Inflation was 1.7% in 2012, so per Keynesian countercyclical policy, are we really in a position to crank up taxes to the max, say, to 70%? One might skirt the issue and say the sweetspot changes as the economy changes, but that defies the whole point; fiscal policy as a Keynesian is to control the waves, not to ride them. One can believe in a mixed economy where capitalism produces the goods and government redistributes for the betterment of the poor, but without also playing lion tamer. In other words, Keynesian policy and welfare are technically two different things, even though they seem to run together in people's minds, and their ends can easily conflict.