Tax Analysts Blog

Soak the Middle Class

Posted on Apr 7, 2009

Wunderkind blogger Matthew Yglesias thinks progressive taxes just aren’t all that. Other countries typically use regressive taxes – like the value-added tax – to pay for progressive spending. On balance it’s a good deal, leveling the playing field more effectively than progressive taxation alone (University of Arizona sociologist Lane Kenworthy made a similar point last year.)

The important thing, as Yglesias pointed out in February, is just raising enough money. Sure, it might be better, from an egalitarian standpoint, if you could pay for social programs with progressive taxes, like those on incomes and estates. But progressive levies, when targeted narrowly at the rich, tend to top out quickly. Leave rates at a moderate level, and the tax won’t raise enough money. Raise rates too high, and you start to sacrifice jobs, growth, and all the other good things we like to see in an economy.

All of which suggests that new social spending should be financed by a new revenue workhorse. Like the value-added tax. Any number of people have made that connection in recent months (like Jonathan Cohn at the New Republic, Len Burman at the Tax Policy Center, and me). Sure, the VAT is generally regressive. But so is the Social Security payroll tax. And while Americans are none too fond of paying the tab for Social Security, they’ve been willing to do it for 75 years or so.

The political value of broad-based financing is obvious. When taxpayers help pay for a program, they’re necessarily invested in it. Sure, the notion that revenue from payroll taxes is somehow reserved for Social Security (and Medicare) is dubious. That money has long been used to mask overspending in other programs that lack a “dedicated” tax.

But the payroll tax still represents a moral contract. Americans have been told since the 1930s that they have bought and paid for some sort of Social Security benefit when they retire. And they are damn well going to get it. Payroll taxes have made Social Security sacrosanct. Count me among those who don’t believe the program is in any danger, economic or political.

The moral of that story: if you want to create a permanent entitlement, then fund it with a broad-based tax.

Read Comments (1)

Joseph J. ThorndikeApr 9, 2009

Fair enough, at least as far as new programs are concerned (although personally, I think expanded health coverage is vital over the long term). But even absent a new entitlement, today's fiscal traectory is unsustainable: existing entitlements (and Medicare in particular) will soar out of control in the not-so-distant future. Lawmakers have never shown any inclination to control Medicare expenses. Even the Republicans were unwilling to face the music when they controlled the White House and Congress. In fact, they made the problem worse when they created the Medicare prescription drug program but failed to provide any meaningful way to pay for it.

Given the political reality (entitlement spending will continue to grow), it's time to face economic reality (we have to pay for it). Doing nothing is simply not an option. And if we must have some sort of tax increase, then a VAT seems like the best alternative.

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