Paying For Socialism

Concern trolls often ask how we can "afford" socialist policies. Once we're in power, we'll have options. For now, just ignore them.

A worker at the Social Security Board Records Office in Baltimore, Maryland. Harris & Ewing / Library of Congress.

As progressive candidates lay waste to pedestrian moderates in Democratic primaries from the Bronx to Florida, the excitement over proposals for universal health care coverage, free college, and further advances in social welfare has so far tended to mute the “affordability” question. But this question will return, if and when elected progressive legislators acquire the power to actually do good things.

Right now, the most common rejoinder to “how are we going to pay for it” is, “fuck you, the Republicans never talked about paying for their wretched proposals.” Quite so. Even some centrists have taken note of the dynamic in which Republicans repeatedly run up the deficit for dubious projects, leaving Democrats to assume the unpopular task of clean-up (tax increases and spending cuts), leading to the alienation of their own base and political defeat. However, this realization hasn’t precluded centrist criticism of emerging progressive politicians.

If we permit ourselves to imagine future political success, Democratic legislators in that progressive future will have to grapple with how to offset their proposed spending projects, in the form of spending cuts and tax increases. I’m not suggesting that the answers I provide in what follows are good political tactics; I’d rather leave that question to those who know how to win elections (a different skill than crafting fiscal policy). But these answers may prove useful once the elections have been won.

One approach to preempting tax-phobia is to elaborate spending cuts that could offset spending increases. Without doubt, there is much regrettable spending in the existing federal budget, starting with defense and continuing with the “black budget” for secret, nefarious activities overseas (the kind of activities Putin engages in in the U.S.), not all of which are limited to intelligence-gathering. Lesser amounts are associated with agricultural subsidies, private prisons, and the criminal administration of U.S. immigration and border control.

All these things share a few big features in common. One is that if you put them all together, you still couldn’t pay for Medicare For All or a substantial Universal Basic Income. Another is that all of them have powerful political support.

A related gambit is to take up so-called “tax loopholes,” which are known in policy circles as “tax expenditures.” Eliminating these loopholes makes it possible to raise revenue without increasing actual tax rates. But common estimates of the magnitude of these potential revenue sources tend to be inflated, especially those related to the corporate income tax.

As for the loopholes in the individual income tax, it is well known that their benefits are regressive – stacked to the advantage of higher-income households. Yet these benefits are also spread among a sizable number of people, well beyond the super-rich; examples include the deferral of taxes on contributions to retirement accounts and deductions for state income tax and mortgage interest. They are not politically invulnerable; they got dinged in Trump’s tax bill, for example. But they are not push-overs either. And incidentally, their benefits are stacked in favor of “blue states,” from which our most likely democratic socialist legislators will first emerge.

It should also be remembered that the US collects very little in taxes compared to other countries. Measured correctly, the U.S. comes in near the bottom – our ratio of taxes to GDP is among the lowest of the world’s industrialized nations. The takeaway is that if taxes were raised substantially, by hook or by crook, there would seem to be no economic risk. Our relatively small public sector affords the US no important advantage in terms of labor productivity. Although we have higher GDP per worker, other countries have more leisure per worker. Output per hour is what matters and the U.S. is no superstar in this domain.

One common but spurious rebuttal to this point invokes US corporate tax rates, which are higher than most other nations’ rates. But these are what are known as statutory, marginal rates, sometimes called “headline rates.” By contrast, average effective tax rates on corporate income — that is, the amounts corporations actually pay, after taking deductions, exclusions, and other goodies into account — are not out of line with those in other countries.

On the micro level, there is also recent research showing that marginal rates in the individual income tax could be much higher with little resulting economic “damage” — meaning traditional economists’ concerns about disincentives to work, save, and invest. In his autobiography, Keith Richards noted that with tax rates sufficiently high, doing that extra concert became less compelling. So make up your minds, folks: socialism, or more geezer rock. Decisions, decisions!

We could also consider entirely new sources of revenue. Perhaps the most urgent is a carbon tax, which represents one weapon against climate change, though not the only one. (I expect this would be a regressive tax, but there are ways to fix that, though at considerable cost in terms of net proceeds.) There is also a long-standing interest in “land value taxation” (LVT), going back to Henry George in the nineteenth century. I’m in favor of a land value tax, but would reserve it for state and local governments. There is also the option of a tax on stock market transactions. The estate tax, which has been substantially hollowed out over the years, could be rebuilt. Common property resources , such as the broadcast spectrum, departure and landing slots at airports, and forestry resources, could be exploited more for revenue.

The economic feasibility of higher taxes is obvious. The problem is that an aggregate increase obscures a myriad of impacts at the individual level. You may not blanch at an abstract “increase in the tax/GDP ratio.” But that may well change if you personally lose a valuable deduction. Taxpayers are people, my friends.

To me the greatest political obstacle among the natural base of the Left is the failure to appreciate the net gains from a vastly expanded provision of public benefits and services, even if it means higher taxes. If something is worth $X to you, wouldn’t you take it if you could pay less than X? The standing reaction of the Right is to exaggerate payments relative to benefits, especially in the form of “You will pay, but those people will benefit.” That is why universal programs have stronger political legs.

The Left tends to dwell on the ways you won’t have to pay for something that we nevertheless think would be worth your while. We’ll get it from the rich, from corporations, from somebody else. Selling the benefit side as being worth the cost seems to get less emphasis. The overall impression left on the audience seems to be that since this new thing will be free, what’s the harm.

Another increasingly popular dodge of the tax issue is the invocation of Modern Monetary Theory (MMT), which among other things emphasizes the basic harmlessness of government deficits. The brilliantly successful popularization of this theory by very well-qualified economists has had the unfortunate effect of spawning no small number of amateur money cranks. Money printing is the new Big Rock Candy Mountain: no need for taxes, just print money.

I join with MMT in the view that aggressive expansion of the money supply can move the economy to really full employment, and keep it there. It’s hard to imagine any policy outcome more important or valuable.

But once you hit capacity limits, more money won’t get you more real goods and services. It will just raise the price level — which is how you know you’ve reached the limits of MMT. Then you face all the old trade-offs that traditionally bedevil economic policy: we can only afford your new, favorite spending at the cost of foregoing something else.

MMT policy is geared to stabilizing employment at high levels in the face of fluctuating private-sector demand. As such, it implies a need for constant flexibility in tax or spending levels that doesn’t easily apply to a permanent expansion of public sector responsibilities. Chances are that your favorite public program isn’t one you would want to shrink or expand from year to year. (The job guarantee is an important exception.)

So there are any number of progressive responses to the affordability nag that can be dealt with easily, before the fact. It’s really in the design and implementation phases of new spending that the political challenges rear up. Serious socialists might begin to devote themselves more to the details of actually getting shit done. Though it’s too wonky to be useful in campaigns, it will be the lifeblood of successful social transformation.