Thursday, August 04, 2011

Email to Sully

Yesterday I sent the following email to Andrew Sullivan in response to this post:
You approvingly quoted Bruce Bartlett's assertion that revenue has plummeted because of its recent decline as a percentage of GDP, but it is not at all clear why this the correct metric. Given how much GDP has grown over the decades even adjusted for population and inflation, isn't this a bit like arguing that your dessert portion has shrunk because you are being handed 15% of a wedding cake instead of 20% of a cupcake?
Back in 1955, when the US had a 91% top marginal tax rate, per capita revenue from the income tax was $2595 in 2008 dollars. In 2010, in the midst of economic torpor? $4418. Why was $2595 sufficient to run the country back in the mid-1950s -- a time period described by Paul Krugman as an economic and political "paradise lost" -- but yet $1500 more than that today is regarded as evidence that taxes must be raised? In fact, the US is currently collecting more per capita income tax revenue today that every year prior to 1987.
We have no revenue problem, only a spending one. Percentage of revenue in GDP terms is a silly metric that is only used to obscure this essential truth.
Sullivan published my email today and responded with this:
The obvious answer is demographics (an older and more costly population), Medicare, created after 1955, and the major source for our future bankruptcy and current debt, and a defense budget that remains at Cold War levels, despite having no major militarized opponent on the world stage. If we keep revenues where they are, we'll have to gut or end Medicare, as Paul Ryan wants, or gut the Pentagon, as Ron Paul wants. I'd prefer the more modest and practical option of returning tax rates to Clinton levels (far lower than Eisenhower's), major tax reform, eliminating corporate welfare and most individual deductions apart from charity, serious defense cuts (an end to nation-building anywhere and everywhere but the US), and means-testing and rationing within Medicare.
Not that hard with a little help on the revenue side - and, more to the point, politically feasible. With no help from revenues, the result is either brutal on the middle-class, elderly, sick and poor or ending the military-industrial complex as we know it. That's why I'm fine with the way the Super-Committee has been set up. It forces Republicans to make that choice, if they will not relent on revenues.
There are a couple of things to note here:
  • Sullivan says that with current revenues we will have to gut either Medicare or the Pentagon. I am fine with both. As I said before, we do in fact have enough revenue -- we just don't have enough for all of the grand ambitions of our politicians. The solution is to scale back those ambitions. 
  • Tax revenue has not declined due to rampant tax cutting -- the last marginal rate reductions took place eight years ago -- but rather the poor state of the economy. If Sullivan wants to see revenue increase, the solution is not a tax increase but rather the expansion of economic freedom in order to promote growth. 
The federal government is collecting more money than it has for the vast majority of its existence. The problem isn't revenue, it's a federal government that is out of control. 

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