Can We Solve Our Fiscal Problems by Taxing the Rich? I. The Third Way

“I enjoy your blogs and always look forward to the next one.”
“I am amazed when listening to my liberal friends, who could care less about any of the arguments you are making. Their basic belief is that any deficit can be solved in short order by simply raising taxes on the rich. One of these friends just bought a home in Palm Springs and came back declaring, ” Jerry Brown solved the financial problem in California. He raised taxes on the rich and the deficit is gone. California no longer has a financial problem.” He then went on to say that with 40 million people, California will set a good example for the country. After listening to this, I think you should address the issue of why simply increasing taxes will never work. I would start with Simpson Bowles and then go on to more recent findings. I think this argument has to be made over and over again. There are precious few Democrats who think we have a serious or fundamental financial problem that cannot be solved by simply raising taxes on the rich. I believe Obama is leading the charge.”

One response to this argument is provided by the President, Jon Cowan, and the Senior Vice President for Policy, Jim Kessler, of the Third Way, a center-left think tank, in a June 2013 memo, “The Four Fiscal Fantasies” .

  • Fantasy #1: Taxing the rich solves our problems.

Mr. Cowan and Mr. Kessler look at a plan that “completely soaks the rich.”  They stipulate that the top tax rate increases ten points to 49.6%.  They impose the Buffett Rule requiring all millionaires to pay at least 30% in taxes (after deductions).  They raise the estate tax to allow a $3.5 million exemption with a 45% rate.  “If we leave entitlements on auto-pilot in this scenario, our deficit in 2030 will be close to a stunning $1.3 trillion in 2013 inflation-adjusted dollars.”
The authors then show that to keep our finances even roughly in check, a middle income family with a $65,000 income, for example, would have to pay several thousand dollars a year in new taxes.
Conclusion:  We cannot keep entitlements on auto-pilot.  Something has to give!

Federal Cutbacks Suggest State and Local Expansion

 

A front page article in yesterday’s Wall Street Journal, “An Ohio Prescription for the GOP:  Lower Taxes, More Aid for Poor”, describes how Ohio’s Republican Governor, John Kasich, a former congressional spending hawk, has expanded Medicaid coverage in Ohio and steered millions more dollars into local food banks.  Mr. Kasich says, “When you die and go to heaven, St Peter is probably not going to ask you much about what you did about keeping government small.  But he is going to ask you what you did for the poor.”
There are good reasons why we should shift programs and responsibilities from the federal government back to states and localities.  At the federal level there is little fiscal restraint and therefore little incentive for making sure that governmental programs operate efficiently and effectively.  Study after study by the Government Accounting Office, as well as by private think tanks, demonstrate enormous waste and duplication in virtually all areas of federal government.  This long lasting fiscal irresponsibility at the federal level has now led to a massive national debt which will have a perverse effect on our nation’s prosperity for many years to come.
At the same time, all state and local governments are required to balance their budgets.  This means that they have to pay attention to the costs of all programs and set spending priorities.  They have to make sure that all functions of government are effective and be prepared to cut back or eliminate any program which is performing poorly.  States such as Illinois and California, and cities such as Detroit, Chicago and Philadelphia, which have huge operating deficits year after year, will eventually be forced to declare bankruptcy (such as Detroit has just done) in order to reorganize their finances and make a fresh start.
It has long been a practical axiom that government should be as close as possible to the people.  But now it is a fiscal necessity as well to shift as much as possible from federal control back to state and local control.