Progressives and social democrats must be combating them tooth and nail, not blithely embracing them.
by Steve Roth
Initially Posted at Wealth Economics
The spreadsheet behind the tables and graphs right here is offered on request. Drop me a line within the feedback or elsewhere.
Following the neighborhood of Socks (🧦s) or “social democrats” on the market on the interwebs (that is positively my financial tribe), in articles, and in books, there’s a specific stance on a specific challenge that I discover perplexing, even anti-progressive. They’re typically fairly eager on utilizing “value-added” consumption/gross sales taxes (VATs) to fund a sturdy social-benefits or “welfare” system. (Viz: this out just lately from Matt Bruenig and the Folks’s Coverage Challenge. Because of Matt for discussing this and disagreeing with me on it.)
It’s perplexing to me as a result of consumption taxes, on their face, are probably the most regressive taxes on the market. Poorer folks typically pay a better share of their earnings on a gross sales tax, as an example (in comparison with richer folks), than with an earnings tax, a lot much less a wealth tax. Why would full-throated progressive Socks help and embrace that?
After I ask, I get 4 fundamental solutions.
Monetary/financial: “There’s just not enough money at the top to fund the scope of the programs we need.”
Political: “Without broad participation (read: contributions) across the income/wealth spectrum, you can’t assemble or maintain the political coalition to support robust social democracy.”
Historic: “All the robust, successful social democracies out there are heavily funded by VATs.” Suppose northern Europe, particularly Scandinavia.
Coverage-analytical. “The goal is a total tax/transfer system that’s progressive. Focusing on the progressivity of particular tax or transfer programs misses the point.”
For me, that final level misses the purpose, which isn’t simply offering excessive ranges of fabric well-being on the backside of the spectrum (which I in fact strongly help). It’s about addressing and reversing the world’s excessive and growing concentrations of earnings and particularly wealth. That’s the core, long-term structural challenge that wants fixing. VAT-and-transfer’s laser-focus on the underside leaves the highest to fortunately go alongside on its very merry approach.
That actuality exists even (particularly!) in sturdy social democracies that used to have very progressive taxes, however deserted them for VATs beginning within the ’60s. Socks are fond of claiming that each billionaire is a coverage failure, however . . .
To handle that structural challenge, we have to, fairly merely, seize the wealth and earnings. (Fuggedabout “the means of production.” That overwhelmingly consists of.…folks. Are you gonna “seize the people”?) Willie Sutton’s line pertains right here in spades, particularly on top-end wealth: “That’s where the money is.”
If lowering the focus of wealth, earnings, and therefore energy is a vital progressive aim (and even the progressive aim), then the desire for VATs crashes on some quite simple information, and a few quite simple arithmetic. Within the US for instance, the highest 20% of households holds 74% of economic belongings and 68% of complete belongings, receives 50% of earnings, however solely does 35% of spending.
Do the arithmetic. Flat consumption taxes are inevitably regressive relative to earnings, a lot much less wealth.
There are methods to make VATs much less regressive. Don’t tax meals purchases, as an example. But it surely’s a really deep regressive gap to climb out of. To get a way of that: if the underside quintile pays a ten% consumption tax, what fee would different quintiles need to pay, to make the tax merely proportional (non-progressive) relative to earnings and wealth?
Ought to we tax top-earners 25 cents for each greenback they spend? 78 cents? Good luck with that. And that’s earlier than we even begin to make the tax progressive, to arrest or (gasp) reverse the growing wealth and earnings focus that’s been delivered unto us by The Superb Reaganomics Revolution. Markets on their very own inevitably focus wealth, as much as some very excessive degree the place open violent warfare and revolt get away. VAT-and-transfer can ameliorate that, however it may well’t ever appropriate or reverse it — even over a long time, because the world photos above clarify.
Are the Socks proper, that we are able to’t fund a full welfare state by taxing the wealthy? Completely. However “that won’t solve everything” isn’t, ever, or wherever a sound argument for “we shouldn’t do that.” Can’t we, shouldn’t we begin by taxing the wealthy, then fill in with taxes farther down the spectrum?
To get a way of what we may do, think about taxing $1T a 12 months from the highest 20% — simply 1.1% of their wealth. (To match: portfolio holders’ unearned complete returns are typically within the vary of 5% a 12 months ++. They’d nonetheless preserve getting richer if we pared off 1.1%, simply extra slowly.)
That $1T may ship a modest common earnings of $8,000 for each U.S. family, reliably, yearly. It could fully rework tens of hundreds of thousands of lives. And since bottom-80 households flip over their wealth in annual spending 3–4 instances as quick as top-20 households, the switch would improve complete nationwide spending, financial exercise, manufacturing, and…wealth accumulation.
Right here’s a take a look at how that tax and switch would play out.1
After receiving their $8K UI funds (and paying taxes on them), the efficient tax fee on top-20% wealth would solely be 1%. Greater marginal propensity to spend would improve complete consumption spending by 2%, yearly (in comparison with the present establishment).
In the event you compound that 2% annual development over ten or twenty years, you have got a really large improve in GDP. And far of that improve would devolve to the highest 20%. All boats rise. Funding the welfare state with progressive taxes, first, definitely seems to be like a greater choice — for all however the very richest.
How did Socks get thus far, specializing in regressive taxes to fund a sturdy welfare state, with progressive taxes extra of an afterthought? (Afterthought at finest, because it’s turned out.) The core story facilities on postwar theories of “welfare backlash.” It’s well-described in Harold Wilensky’s 2003 Wealthy Democracies, particularly Chapter 10, “Tax-Welfare Backlash: How to Tax, Spend, and Yet Keep Cool.”
In brief kind, with a U.S. focus: the massive buildout of the welfare state beneath F.D.R. and his labor secretary, Frances Perkins, hit a wall after WWII, with the rise of “neoliberalism” or no matter you select to name it.
Socks’ both-sides-ism on the progressive/regressive query (“all taxes are good!”) can at the very least be seen as a capitulation to the counterattack launched by the Mount Pellerin Society in 1947, the 1971 Powell Memo, and zillionaire-funded astroturf propaganda campaigns that very a lot persist to this present day. Democrats first deserted their full-throated New Deal financial populism (that delivered 4 resounding Presidential wins for FDR) with Kennedy’s huge tax cuts for the wealthy in ’64 — proleptically surrendering to “trickle-down,” fifteen years earlier than that time period emerged.
And within the half-century post-LBJ (Medicare and Medicaid), the one important economic-policy win for Socks has been the Frankenstein-monster “shopping will save us all” free-market-hybrid abomination that’s Obamacare.
American Socks additionally level out that the strong social democratic international locations just about all depend on VATs. However a less-than-charitable description of how that occurred in northern European social democracies beginning within the ’60s bears consideration. They ran screaming away from their progressive taxes in favor of VATs, successfully embracing and at the very least implicitly endorsing the “optimal taxation” notions of “The Washington Consensus.”2
It was a political/electoral determination: if we (attempt to) tax the wealthy, they’ll battle again. So we should always, in Wilensky’s phrases, “keep cool.” Contemplating the outcomes, it’s not all clear that Socks are such nice specialists on branding, political advertising and marketing, technique, techniques, and the prediction of electoral outcomes. There’s by no means even been a noticeable “Social Democracy” faction a lot much less occasion within the U.S., postwar, exterior of academia. In the meantime the electorally disastrous model “Democratic Socialists” has surged as the one outstanding voice of the full-throated left.
Coming again to the important thing takeaway right here: should you suppose (extremely) progressive taxes are a obligatory or at the very least a very good factor, and should you favor consumption/gross sales/VAT taxes, you’re going to need to plan on taxing top-quintile consumption spending at (excessive) double-digit or triple-digit charges. It’s the one approach the arithmetic works. The political/electoral math on that doesn’t appear promising.
1 This doesn’t think about each interacting impact. The UI, as an example, would cut back the necessity (and eligibility) for present packages, which typically contain pernicious mechanisms for means-testing the poor. (This implies-tests the wealthy as a substitute, one thing we already do for earnings at the very least, on their annual tax returns.) That may scale back the necessity for the regressive taxes that typically fund these packages. A full workup is required. However this presentation does precisely impart the magnitude, scale, and useful results from such a tax-and-transfer setup.
2 Their fundamental argument: GDP = consumption spending plus funding spending. Y = C + I. If (profligate, irresponsible) C goes down due to a consumption tax, then (industrious, accountable) I have to go up! See the logical error? Decrease C will clearly trigger producers to take a position much less. I and Y will each decline.
