Economist proposes a fairer federal tax plan “I like to pay taxes. With them I buy civilization.”
— Oliver Wendell Holmes Jr., former U.S. Supreme Court Justice
Justice Holmes is quoted by renowned economist Jeffrey D. Sachs in his new book, “The Price of Civilization.” Today I want to lean on Sachs' analysis to explain some of the most important facts about the cancerous growth of our federal government's budget deficit.
One thing I really like about Sachs' analysis is the fact that he presents the budget figures in relation to our nation's gross domestic product (GDP), i.e., the government's annual spending as a percentage of the total value of the nation's annual output of goods and services.
He demonstrates that under our current tax system, the federal government will collect tax revenues equal to about 18 percent of GDP in 2015. That will not even cover mandatory spending, military spending and interest on the debt, which together will equal some 20 percent of GDP. Adding in other expenditures brings likely total 2015 federal expenditures to 24 percent of GDP.
In other words, we are heading toward a 2015 budget deficit equivalent to 6 percent of GDP. Sachs explains why
the idea that we can make a meaningful dent in this deficit by spending cuts alone is a dangerous fantasy.
Consider some of the politicians' favorite targets for cuts. Earmarks, or the pet projects of individual congresspersons, amount to all of 0.1 percent of GDP. Foreign aid amounts to 0.2 percent of GDP.
Then there are the mandatory programs. Those that are universal, that benefit everyone, such as Social Security, Medicare, federal employee benefits, and veterans' benefits, which amount to two thirds of mandatory spending, almost 10 percent of GDP.
There is no real appetite or reason for cutting these.
The mandatory programs that are means tested and can be thought of as transferring money from the better off to the poor have little fat on the bone. Medicaid (health care for the poor) is about 2 percent of GDP. Cutting that makes no sense unless we are comfortable with the idea of stepping over and around people dying in the streets.
Food stamps amount to 0.5 percent of GDP and the earned income tax credit 0.3 per cent. Temporary Assistance to Needy Families, which is what remains of our former welfare programs, amounts to all of 0.1 percent of GDP.
So how do we get rid of a budget deficit equal to some 6 percent of GDP?
As far as spending goes, the only real fat is in the bloated military and intelligence budgets. Sachs recommends cutting the military by at least 1.5 percent of GDP (from 4 percent to 2.5 percent) by ending the Iraq and Afghan wars, cutting procurement of unneeded weapons and scaling back foreign bases.
Then he points out that the rich, who have benefited most from our civilization, need to pay their due. Currently the richest, the top 1 percent, pay about 31 percent of their income in federal taxes, as opposed to 47 percent in 1970. He recommends that at a minimum, the Bush tax cuts should be ended for households with incomes of more than $250,000.
He also recommends:
• Raising capital gains tax levels to equal those on ordinary income.
• Limiting the mortgage interest deduction to one home of a limited size.
• Levying a tax on the net worth of households with more than $5 million in assets.
Other important revenue measures include closing the scandalous corporate tax loopholes, including foreign tax havens. The loopholes have been a force helping to bring corporate taxes down to 1.5 percent of GDP from 3.5 percent in the 1960s.
And Sachs calls for imposing a small tax on short-term Wall Street transactions, most of which are essentially gambling. Even a small tax on these could bring in a lot of revenue.
In general, Sachs' program would look something like this: The military cuts would be offset by higher expenditures on necessities such as infrastructure. But revenues would be increased by some 5.5 percent of GDP, with 2 percent coming from higher taxes on the rich, 1 percent from closure of corporate tax loopholes, 1 percent from taxes on short-term Wall Street trades, 0.5 percent from taxes on carbon emissions and 1.5 percent from a VAT (value-added tax) on all but necessities.
http://www.postindependent.com/article/20120712/VALLEYNEWS/120719976/1022&parentprofile=1077
