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Money to Burn

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Money to Burn

Washington Examiner September 20, 2019

Free lunch politics are as old as government. Yet the 2020 presidential campaign trail is proving to be unique for the unprecedented scale of the unfunded promises, the failure to acknowledge basic arithmetic, and the relentless criticism of the richest 1% of taxpayers who earn 19% of the income while paying 30% of the federal taxes. And it’s coming from the Democratic Party, which has loudly cast Republicans’ modest 3% 2017 tax cut as fiscally irresponsible.

Imagine if, instead of that 3% cut, Republican leaders proposed repealing all federal taxes, barring Washington from collecting any of the next decade’s $44 trillion in planned tax revenue. What about the budget deficit? How to pay for the $60 trillion in planned spending? Imagine Republicans responding that they will cut a few trillion in spending and figure out the rest later or perhaps just print the money, and then repeatedly promising the middle class a nirvana of federal benefits with no tax burden.

If you believe no party would propose something this crazy and fiscally irresponsible, you haven’t been paying attention to the Democrats campaigning for president. The only difference is that, rather than eliminate $44 trillion in taxes, several candidates are proposing between $40 trillion and $85 trillion in new spending with no way to pay for most of it.

This is the silly season in Washington, where deficits are set to surge past $1 trillion on their way to $2 trillion within a decade and pandering politicians one-up each other with promises. Under Presidents Bill Clinton and Barack Obama, Democrats at least paid lip service to fiscal responsibility, even as Obama signed legislation cumulatively adding $5 trillion in new debt over the decade, and the party’s congressional wing promoted pay-as-you-go rules that they waived regularly.

Those days appear over. Let’s take a look at the long list of promises to Democratic voters and what it would cost America to make good on them.

Sen. Bernie Sanders of Vermont recently conceded that his Medicare for All plan would increase federal spending "somewhere between $30 and $40 trillion over a 10-year period." He has promised a $15-per-hour, full-time government job to every adult who wants one, which would cost $7 trillion just to cover the currently unemployed, and as much as $20 trillion when including job-switchers and labor force dropouts who are earning less. His climate plan would cost $16.2 trillion, and his plan for free public tuition and student loan forgiveness would cost $3 trillion, even if Sanders claims a smaller cost. Social Security expansion would cost $2 trillion, housing programs would cost $2 trillion, his proposed investments in infrastructure, $1 trillion, and other smaller proposals add another $1 trillion. Total cost: between $60 trillion and $85 trillion over the decade.

Sen. Elizabeth Warren of Massachusetts has endorsed a Sanders-style Medicare for All plan while deflecting questions about the required new taxes on the middle class. She would also spend $2 trillion on Social Security expansion, $3 trillion on environmental policies, and $2 trillion on student loan relief and free college. Finally, initiatives that include child care and housing add another $1 trillion. Total cost: $38 trillion to $48 trillion.

Sen. Kamala Harris of California has proposed a baffling healthcare plan that would phase-in a version of Medicare for All over a decade that would be financed in part by a $3 trillion middle-class tax cut. She also promises $3.3 trillion in federal climate spending and a student loan relief and tuition proposal that may cost approximately $1.5 trillion but is so complicated that a detailed score is impossible. Harris also proposes a $2 trillion Social Security expansion and around $1 trillion in various proposals that include K-12 education funding. Few of Harris’ plans are specific enough to be scored, but a reasonable estimate depending on the health plan design is $40 trillion over the decade.

These budget-busting agendas make former Vice President Joe Biden look like Barry Goldwater. Instead of Medicare for All, he proposes a $750 billion expansion of Obamacare. Biden’s Social Security expansion is unlikely to exceed $500 billion, and his climate and energy policies would cost $1.7 trillion. Other proposals such as K-12 spending and lesser-defined calls for infrastructure and defense spending likely add up to approximately $1 trillion. The overall $4 trillion cost would still add to the $15.5 trillion baseline deficit but is not nearly as irresponsible as the plans of his Democratic counterparts.

Putting these plans together, let’s assume the consensus Democratic agenda would cost $40 trillion over the decade. Adding $40 trillion in new commitments to the $15.5 trillion baseline deficit would push the 10-year budget deficit to $55.5 trillion. Federal spending would approach $100 trillion, or nearly 40% of GDP, over the next decade.

The long-term picture is worse. The Congressional Budget Office already assumes a baseline budget deficit rising from today’s 4% of GDP to 9% in 30 years (and even that assumes the 2017 tax cuts expire, defense is slashed, and interest rates remain low). The new proposals would push the annual deficit to 19% of GDP immediately and nearly 27% of GDP in 30 years, which is the equivalent today of a $6 trillion annual budget deficit.

When asked how to close this unfathomable budget gap, candidates and their supporters reflexively shout “tax the rich.” And indeed, polls show that most Americans like the idea of taxing someone else to finance their new benefits (imagine that). Yet it is mathematically impossible to finance more than a small fraction of this budget gap by bleeding the rich.

Even if Washington seized every dollar of currently-untaxed income earned over the $1 million threshold, it would raise $8.6 trillion over the decade. Lowering the income threshold to $500,000 nudges up the possible revenues to $11.8 trillion. These figures implausibly assume that people continue working and investing at 100% tax rates.

Only slightly more realistically, let’s model the Democrats’ tax-the-rich utopia by setting each of their marginal tax rates around the revenue-maximizing rate. On income and payroll taxes, that means applying the current 12.4% Social Security payroll tax to all income, putting the combined tax rate for federal income taxes, payroll taxes, and state income taxes around 60%. Then, adding New York Rep. Alexandria Ocasio-Cortez’s proposed 70% income tax rate over $10 million in income produces a combined marginal tax rate around 90%. Next, investors would be hit with a 37% capital gains and dividend rate, a tax on nearly all financial transactions, and the taxing of carried interest as normal income. Upper-income wealth that survives this onslaught would face Warren’s annual wealth tax of up to 3%. Death would bring Sanders’ 77% estate tax. Corporate taxes would rise back above pre-tax cut levels through Sen. Warren’s “ Real Corporate Profits Tax” and a new annual “bank tax” for large financial institutions.

Total new revenue over the decade: $7.7 trillion under static estimates and the campaigns’ own estimates, and $3.7 trillion based on more realistic dynamic scores that account for macroeconomic and behavioral responses, and are based on neutral sources that include the CBO, Tax Policy Center, and noted liberal economist Lawrence Summers.

In other words, under even the rosiest estimates possible, taxing the rich could not even close half of the existing 10-year budget deficit, much less fund a $40 trillion spending spree.

Of course, setting all tax rates at their revenue-maximizing level would create an enormous economic drag. By definition, such a rate is the point where the economic damage has grown so extensive that it is canceling out 100% of any additional revenue. And the cumulative effect of piling the highest-possible income, payroll, capital gains, dividend, corporate, financial, wealth, and estate tax rates on top of each other would risk an economic calamity that extends well beyond the upper-income taxpayers who are directly assessed at those rates.

So instead, the candidates merely wish away the true costs and the taxes that paying for them would require. Sanders includes no taxes in his Medicare for All legislation and instead offers on his website a menu of $16 trillion in possible related taxes. Harris has asserted that “my vision for 'Medicare for all' does not include a middle-class tax hike. I’m not prepared to do that,” meaning that healthcare will be free of premiums and taxes. Pure fantasy.

Crucially, American Medicare for All proposals are not simply replicating those of Canada and parts of Europe. Decades ago, those countries socialized their much smaller healthcare sectors and then proceeded to build a more modest and affordable health infrastructure to accommodate those budgets. They didn’t adopt the proposed U.S. path of first spending 50 years building countless large hospitals, embracing expensive new technologies, and encouraging drug innovation investments and then afterwards bankrupting many of those providers by slashing their reimbursement rates by 40%. Nor did those countries adopt systems as generous as the U.S. proposals or impose the brutal health-related taxes that would be required by nationalizing nearly one-fifth of the economy.

The truth is, Democratic proposals would quickly push total government spending (federal, state, and local) past 50% of GDP — exceeding Sweden, Norway, and most of Europe. And even that assumes that this spending is totally paid for, otherwise the interest costs would push spending substantially higher even under low interest rates.

If America wants to spend like Europe, it must tax like Europe, which means socking the middle class with large payroll and value-added taxes. For instance, suppose the goal were to raise $34 trillion: the $40 trillion in proposed new spending, less $3 trillion from hypothetically reducing defense spending to European levels (a popular goal for which there is no plausible blueprint), and another $3 trillion from replacing state-level Medicaid costs with Medicare for All. A CBO analysis shows that raising $34 trillion in tax revenue would require either creating a new 38% payroll tax (on top of the current 15.3% rate) or imposing an 88% value-added tax, nearly doubling the cost of all consumer purchases. That would still leave the underlying $15.5 trillion baseline budget deficit, which itself would require an across-the-board 17-percentage-point income tax rate hike.

These candidates cannot publicly acknowledge the middle-class taxes their plans would require. The sticker shock would be politically fatal. So they continue to promise socialism funded on the backs of the wealthy. When pressed on middle-class taxes, Sanders acknowledges modest increases, Warren changes the subject to taxing the wealthy, and Harris promises a $3 trillion middle-class tax cut.

Meanwhile, their defenders on social media offer the Modern Monetary Theory argument that, essentially, the printing press can finance socialism without hyperinflation (economists almost unanimously disagree). Others advocate building the largest government debt burden in world history on the gamble that interest rates will remain below 3% forever. Though even if they did, the interest costs would still soar.

Free-spending candidates may do very well in 2020, yet they will quickly learn that no president or congressional supermajority can repeal the laws of math.

This piece originally appeared at the Washington Examiner


Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

Photo: Justin Sullivan/Getty Images