Raise Middle Class Taxes Now!

December 26, 2012

by Mario Rizzo

I now favor expiration of the Bush era tax rates for everyone.  Why? Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.

If Americans saw the cost of the gigantic welfare state in their paychecks, they would, I am confident, radically re-evaluate the expenditure side of the situation we are in. Then when someone comes up with a genius idea for spending, the people would think: Is it worth higher taxes? Might I not spend it better on my family, my church – or even – on… champagne?

I realize that there are all sorts of imperfections in my idea. For example, if I am a large farmer with much to gain in subsidies, I can get the subsidies for a fraction of the cost in my taxes. Furthermore, the opportunity costs of government programs are not always correctly measured by their monetary costs. And so forth.

But there is a fundamental point here for liberals and conservatives alike: Let’s make the costs of our “generosity” clearer. Let us make the costs of fighting foreign wars more nearly explicit.

Neither conservatives nor liberals want this. They are each in the business of spreading illusions, albeit about different things.

Where is the honesty, where is the justice, in spending through trillion dollar deficits? 

Frankly, I have no patience with the Keynesians and fellow-travelers who conveniently argue that we cannot do this now because the economy is weak. It is never time for them. But if they insist, let us agree on a date certain for the change. The date they give us will reveal something about them.

But I have another idea in the interim.  Let us require, by law, that the taxpayer be simply informed on his pay stub of the amount of withholding that would occur if all government expenditures were fully funded by taxes.

Further, I have no patience with conservatives who know that, under the present system of political- incentives, there is little chance of meaningful expenditure reform. These incentives must be changed.

Finally, I have no patience with the” Ricardian equivalence” economists who argue that people rationally expect and incorporate in their decision-making the present value of all the future interest payments on the debt. In their minds, people already incorporate the costs of big expenditures into their economic decision-making.  I do not know first-hand just how good or how shaky the evidence is. 

I think almost all economists would say that it may work to explain some data but clearly does not work across the board. There is a subtle, but elementary problem here: Hardly anyone really believes that this cost is explicit in voters’ minds. It is just an instrumental assumption that may perhaps rationalize data of a certain sort.  

Let us perform an experiment. Let’s see if explicit taxes restrain government more than as if taxes. We can help settle a debate in macroeconomics as well as in political economy.

The most important argument against my proposal is that the relatively few innocent people who never wanted the state we have will get hit with higher taxes.  Yes, this is terrible. All I can say is that this proposal may be our last best hope for change. Forgive me.

29 Responses to “Raise Middle Class Taxes Now!”

  1. Roger McKinney Says:

    I agree! People should be forced to pay for the expenditures they vote for instead of passing that payment off to future generations. However, I don’t believe enough people agree with us to make a difference.

    I doubt that Ricardian equivalence would hold up to scrutiny. Research shows that even with large incentives to save, such as employer matching and exclusion from taxes, 85% of people still don’t save. http://econlog.econlib.org/archives/2012/12/payday_for_beha.html.

    Saving requires planning for the future. If people won’t even plan for their own retirement, how much less do they consider long term government spending and its effects on them?

  2. Peter Gordon Says:

    I hope you’r right. This mornings’ LA Times lead editorial (http://www.latimes.com/news/opinion/editorials/la-ed-wind-energy-tax-credit-20121226,0,364449.story) argues for maintaining subsidies for widn farms. Are people like this ever in a learning mode? I am skeptical.

  3. Bill Stepp Says:

    The problem with this is that it assumes everyone pays taxes. Net taxconsumers (e.g. government “workers,”) and even some net taxpayers (e.g. unionized non-government workers) want more spending and government intervention generally, not less. As the state grows, the ratio of producers to parasites falls, so there is more pressure on pols to increase spending.

  4. Ray_Cathode Says:

    Let everyone feel the pain of the welfare state – fully fund the bastard – no deficit – no creating money at the bank to finance expenditure. The best cure of a high price is a high price – let the people experience the price of their government – maybe then the people will discover that their government is far, far from free.

  5. Mario Rizzo Says:

    Bill,

    You are correct. But your comment assumes (or does it?) that I am claiming that this idea will produce an “optimum.” No, but it will ensure that more costs are perceived by more people than now.


  6. Taxation is theft! Would you encourage a thief to take more of your property?

  7. Frank Barnes Says:

    Mario,
    The IRS will accept your donation toward our debt. If your conscience dictates you take such action,please write the check for as much as is required to resolve your conflict. I do not feel a sense of obligation to pay the bill for the malfeasance of a governement that is inefficient, ineffective an inept in doing the will of the people. We have a spending problem, not a revenue problem.

  8. Otis gilley Says:

    The point Mario is making is that the “will of the people” isn’t really their will if they truly understood the cost.

  9. Andreas Hoffmann Says:

    I like the proposal.

    Most governments try to blur the costs. That is why I believe they are going to opt for slow rates of inflation and negative real interest rates to finance the deficits. It is simply easier with the voters than expenditure cuts or tax increases that a large share of the population actually feels.

  10. Mario Rizzo Says:

    The only issue is the *perception of the costs* by those who are advocating (at least implicitly) the spending programs.

  11. Bill Stepp Says:

    The costs imposed by the State on producers (and parasites, I guess) keep going up, but the latter seem more impervious to them than the former.


  12. [...] Rizzo appears to agree with my sentiments, as he writes on his blog in this post why he supports increasing taxes on the middle [...]


  13. The concept of reducing government spending seems to be absent from the dialog. If one’s personal debt is greater than one’s income, reducing one’s spending is the only solution. I’m astounded the thought “we need to spend our way out of being broke” is still bandied about so easily! If you or I can’t “spend our way out of being broke”, why should we allow the Government to do so?

    I didn’t vote for most of these programs. I don’t agree with many of these programs. I told my elected officials to vote AGAINST the “stimulus”; wars in Iraq and Afghanistan; and AGAINST QE2 and QE3.

    Demanding “I need to have more of my resources confiscated by Government to pay for social programs” provide those who speak it the illusory cover of “moral superiority” while requiring absolutely no action on their parts to illustrate their actions actually meet their verbosity.

  14. Roger McKinney Says:

    If Europe provides insight into the future of the US, nothing will change the minds of the majority. The system will change only when the state runs out of money and creditors and is forced to cut spending.

  15. Bill Bisson Says:

    “A family of four in the exact middle of the income spectrum will pay only 5.6 percent of its 2011 income in federal income taxes, according to a new analysis by the Urban Institute-Brookings Institution Tax Policy Center. [3] Average income tax rates for these typical families have been lower during the Bush and Obama Administrations than at any time since the 1950s…” April 2, 2012 – Center on Budget and Policy Priorities – http://www.cbpp.org/cms/index.cfm?fa=view&id=3151

  16. Jim Pier Says:

    Social Security withholding taxes and medicare withholding should be made 100% explicit also. The fiction that half of the cost is borne by the employer contributes to the common perception that our massive welfare state is nearly cost-free.

  17. Andrew Allison Says:

    Taxes on the middle-class are going up (think Obamacare, etc.), but will inevitably go up even more because, as Willie Sutton famously said, “That’s where the money is!”. Obama’s “tax-the-rich class warfare, if successful, will raise just 1o% of the amount needed.

  18. Geno Says:

    This is a good piece weakened by the old “liberals and conservatives alike” equivalence. I get that you have no patience with Keynesians who say that, when the country’s broke and unemployed, that’s the time to spend like drunken sailors. I do not get why you have no patience with conservatives who “KNOW” that reform won’t happen until everyone’s similarly incentivized. Yes, they know it. Most conservatives even agree with you that we should make taxes less progressive, if not flat, and with no withholding from paychecks. They also DO want to talk about the costs of big government. But even if they didn’t, would that make them equally culpable to the redistributionist Keynesian socialists?

    This “both sides are guilty” stuff pops up a lot (especially among libertarians). We heard how Democrats and Republicans were equally to blame for Freddie and Fannie and the financial crisis when it was really just the Democrats. I guess it seems more fair and less biased (not to mention less, yuck, conservative.) But we’ll never reform the debate and push back against the expanding welfare state as long as we keep insisting that both sides are wrong.


  19. Mario is right, but the I’ve been saying much the same thing. Both sides have constituencies they are protecting and so are not serious about spending cuts.

    It is curious to listen to conservatives decree Keynesian stimulus except when it comes to defense spending. Then they employ the most ridiculous multipliers to arrive at huge job losses if defense spending is cut back to 2006 levels.

  20. Geno Says:

    Conservatives believe in funding the limited functions of government as enumerated in the Constitution. Military and national defense are key among these legitimate functions. Keynesian stimulus is not. In fact, a strict reading would prohibit “stimulus spending” even if it WASN’T a lie-word for a slush fund to pay off Democrat constituents and illegally fund campaign activities.

    The argument that the military and the stimulus are equally illegitimate uses of federal spending or of the state overreaching is utter crap.


  21. Actually, Geno, if you had ever read the US Constitution, you would know that most of what the federal government does under “defense” is not authorized. Start with the fact that a standing army is not authorized.

    But that was not my point.

    Conservatives are employing multipliers for the defense cuts that are totally implausible. They deny the efficacy of stimulus spending, but portray defense spending as having huge positive effects on the economy.

    If those multipliers are correct for defense, why not for food stamps? Or wind mills?

  22. Roger McKinney Says:

    National defense is a legitimate role for government, but show me one war since 1776 that was for national defense as the writers of the Constitution understood it. As Higgs and others have written, the “good” war, WWII, was not about national defense initially. Roosevelt did everything he could think of to provoke Germany and Japan into attacking.

  23. Allan Walstad Says:

    Roger–and a good case can be made that there would have been no WWII and no Cold War without the prior US intervention in WWI.


  24. [...] Raise Middle Call Taxes Now! – Think Markets    “… favor expiration of the Bush era tax rates foreveryone.  Why? Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.‘” [...]

  25. Laura S. Says:

    I agree with you that ANY government should immediately recognize the necessity of paying its bills and not leaving any debts (especially under circumstances of low population growth and generational disparities, as we have in Canada). There is not moral justification to do so. Any discourse that tries to convince us we need to get some debt in order to be able to build (buy, establish, renovate etc.) for the future generations is a lie. With the huge interests almost all nations in the world pay, we can see where it goes while behaving irresponsibly.

  26. Wu, Zhongjie Says:

    I agree that tax should be raised, as long as the government can put the money into good use. However, the range of people, the middle class, is way too wide. We cannot say the tax from all middle class people should be raised. Furthermore, the tax rate of America is already very high. I can hardly imagine people would agree with that.

  27. Potpourri Says:

    [...] Mario Rizzo wants to raise your taxes. (But read it in context to see what he’s [...]

  28. ANCAP Says:

    Sorry, taxation is theft.

    Theft is the involuntary transfer of property.

    Money is property, the transfer is obvious, and there is no tax code provision that states paying is voluntary. If you don’t pay you are sent to jail (after being arrested at the point of a gun).

    Default on the debt, and keep your hands off my money. K? Thanks.


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