Where is the money coming from?

By Dave Anderson:

I would like to continue my conversation with Bernard Finel regarding the long term composition of the US tax base and taxation methods.  I agree with him on several important points, but I still question his analysis that his alternative solution of dropping progressive taxation will either generate sufficient revenue (as he defines that term) or is even vaguely politically plausible.  First, let's start with areas of agreement:

If you had the choice between a progressive state funding regressively,
or a regressive state funded progressively, which would you prefer.... Personally, I think a progressive state, however funded is probably
better for the nation than a regressive state, however funded.

Agreed, I prefer a progressive state over a regressive state.  Bernard now gives his long run steady-state structurally balanced revenue estimate.  I might quibble a point or two upwards, but it is a number that I basically think is a reasonable starting point of discussion:

 Let�s say we passed a
consumption tax that yielded 23% of GDP in federal government revenue,
and as a result eliminated income tax and the IRS, how would people see
it?  Would they see that as a massive tax increase � which is what it
would be?  Or would they see it as something wholly different?  I�d bank
on the latter.  My point is, the only way to reset federal government
revenue to an appropriate level is going to be by fundamentally
transforming how the government taxes.

Right now, consumer consumption accounts for 70% of US GDP. Just performing a simple cross multiplication without any income or substitution effects of increased consumption taxes would require an inclusive tax rate of 32% on all personal consumption or an exclusive tax rate (which is what 99% of Americans think of as the sales tax rate) approaching 50%. 

These calculations assume that there are absolutely no excluded goods or goods with no special reduced rates.  Under this system, the first gallon of milk is taxed, a pair of shoes are taxed and a gallon of gas now costs $3.75 to $4.00 instead of $2.75. 

Most Americans have more money going to FICA which supports the politically popular Social Security and Medicare programs than they do to the IRS which administers the income tax.  There is a significant number of Americans whose experience with the IRS is a net positive (assuming they get decent customer service, which has been my experience) as they routinely get (net) money back in the form of the Earned Income Tax Credit as well as other fully refundable credit programs.  I don't think most Americans who see the cost of their baseline consumption go up much more significantly than the attendant drop in wage/income taxes would think that they are seeing a good deal, especially when the policy/political rationale is to buy out the billionaires. 

The idea is to get the money men bankrolling the lunacy to drop out
of the game.  We could appeal to their patriotism.  But really, they
don�t care.  They just want to enjoy their plutocratic existence and
ensure that their children can continue to do so.  Ultimately, I say,
whatever.  Let �em wallow in opulence if that will encourage them to go
back to the sidelines.

So the idea is that at least part of the problem we face with
well-funded �populist� fronts can Abe eliminated if we simply remove the
incentives for the super rich to meddle in the politics of the little
people (i.e. you and me).

Bernard's entire goal is break the connection between the billionaires and the right wing quasi-populist mob.  His proposal is to give the billionaires exactly what they want; an entrenched aristocracy with minimal taxation on their wealth.  Billionaires do not have massive personal consumption expenditures, they have too much money where spending an extra ten or fifteen million dollars will not provide them with too much more satisfaction (there are only so many private jets, vanity presidential runs, condos on amazing beaches, hookers and blow one can realistically consume.) 

Wealth is a positional good.  There is a perverse satisfaction and utility in being seen as and seeing oneself as being better off than the vast majority of a relevant comparison group.  A progressive state  even if it is funded by regressive means decreases that perverse utility.

Anyways, even going to a massively regressive tax structure in order to fund a progressive state that is actively engaged in curbing externalities, shifting the cost of risk from individuals to groups including large corporations and the government itself, will still provoke an intense reaction against it by certain segments of the billionaires.  The Koch brothers will go to the mat to fight against any form of carbon pricing (through either a straight tax or cap and trading of permits).  The Walton family will go to the mat to fight against any policy that either limits the transfer of intergenerational wealth OR helps unionization of low wage workers.  An active government that is looking out for the interests of the bottom 98% of the country is a threat to at least some segment of the Fortune 400. 

So between not actually generating enough money to pay for a progressive state, significantly decreasing the living standards of most individuals and not buying the billionaires out of the political process, Bernard's proposal is a good one.