Thursday, November 29, 2012

Are We Becoming Europe?

I met a sociologist once who commented that he had visited at Princeton University while on sabbatical. He said, "I used to hate the rich; now I hate them with cause." I understood what he meant, for the rich, especially those who grew up rich, seem to feel entitled to all sorts of benefits and expect others to behave deferentially to them. It might seem then, that I would be ready to raise taxes on the rich. But, other things are involved than merely trying to punish the rich for being rich.  While greed is one of the seven deadly sins, so is envy.  (My former colleague, Victor Claar, has written and spoken on envy in recent years.)

If we are to receive the benefits of a stable government, we have to pay taxes.  But, as noted in a book years ago entitled, THE LAW AND THE PROFITS, governments do not have a tight budget constraint. If they want to spend more they can either tax or borrow more. What should be the amount of people's income that go to taxes? There is no "correct" answer, but one that gets worked out through our political process. 

Recently, Steven Rattner had an op-ed in the New York Times, in which he argues for higher taxes on the rich. He writes, "Don't forget that the taxes on capital gains and dividends are absurdly low."  I don't know on what he bases that other than personal opinion, and maybe he is correct. But, he completely ignores that the dividends have already been taxed as corporate profits. Rattner wants all of the extra revenue to come from the wealthy, even thought the wealthy already pay the vast majority of federal income taxes. When forty percent of households pay no federal income tax, what skin do they have in the game?

Another piece in the NY Times is by Eduardo Porter. He argues that we should increase the share of GDP that goes to taxes in order to maintain a better safety net than we now offer. Progressivity isn't the key but broader taxes that collect more revenue as well as more generous welfare programs. He argues that that is what the richer countries in Europe do and we should too.

These two pieces are just a sample of editorials and op-ed pieces in which an argument for larger government is offered. Porter is more forthright in his plan by saying we should be more like Europe. But, the European countries are having a harder time maintaining their programs, and this is not just the case for the basked cases like Greece. Germany has made reforms that have  loosened labor markets; France is still resisting such liberalization, but is also seeing downgrades to its debt.

A book I am reading, and will do a review of when finished, is The Redistribution Recession by Casey Mulligan. He shows that the generosity of the benefits we offer the unemployed and others has increased substantially since 2007. A result is that many unemployed would need a high-paying job to be better off than they are receiving govenrment benefits.  We may be moving closer to Europe whether intended or not. For a couple of decades unemployment in Europe remained higher than in the U.S. The Great Recession altered that briefly. The question now is whether we will follow Europe's path, which has included persistently higher unemployment and slower economic growth.

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