Michael Hicks: Time to be honest about debt, spending and taxes | Opinion

The US Congress is turning its attention to a bill called the Build it Back Better (BBB) ​​bill. Now is a good time to think critically about the political economy of our national debt. It’s good to start with a few facts and recognize what we know and don’t know about the economic consequences of high public debt. A big part of this discussion must be the question of how we impose ourselves to pay this debt.

Public debt is nothing new, and the US government has spent more than it has received in taxes for most of the past half century. Despite our economic cycles, we remain the largest wealthy economy, with reasonable long-term growth and a currency that is the most dominant in the history of the world. Obviously, a wealthy nation can go into debt for a long time without significant consequences.

A nation like ours can also finance big negative shocks, like a world war or a global pandemic. We have managed to repay them over long periods, funded by sufficient economic growth that our tax revenues exceed our expenses. However, we can also hold debt for decades, if what we buy stimulates long-term economic growth.

The composition of the debt is very important. Expenditures that make us more productive through better public capital or a more educated workforce are often amortized through increased GDP which is then taxed. Yet much government spending does not stimulate the economy and is not designed to do so. Social Security, military pensions, and much of the direct income support for the poor are programs that do not pay for themselves in new tax revenue or savings elsewhere.

I honestly think there is little disagreement among Americans on these types of programs, or at least on the spending part. While we may disagree on the details of how these programs are administered and who receives the payments, where we disagree most is on how to pay for them.

A small minority in Congress thinks this is a moot point because they cling to what is called Modern Monetary Theory (MMT). The basic idea behind MMT is that deficits don’t really matter until they become inflationary. The role of taxes is only to contain inflation. To most people this seems implausible, as it does to the vast majority of economists.

Today’s economic conditions provide a good experiment in thinking about the reasonableness of MMT. We are in a period of higher prices for everything from food and gasoline to used cars. Suppose the price increases we see due to supply chain disruptions turn into full-blown inflation early next year. Imagine that consumer prices increase by 4.0% or 6.0% at the start of the summer. For MMT proponents, the way to fix it is to raise taxes on consumers. And this is where the thought experiment gets interesting – imagine the current Congress voting to raise taxes if gasoline costs $4.50 a gallon.

You can stop reading long enough to stop laughing. It must be said that modern monetary theory is a “Hee Haw” skit disguised as sound economic policy, and therein lies our problem with talking about deficits. The Build it Back Better (BBB) ​​Bill has many parts, some of which will appeal to many Americans. However, the tax increases that come with it will not be enough to pay for it. If so, the Congressional Budget Office would have been asked to do a full analysis months ago.

The difficulty is that we cannot tax billionaires or millionaires enough to pay this bill. To pay the BBB, we will need a wholesale tax overhaul. The BBB brings the United States much closer to the Scandinavian nations in terms of social spending. To be clear, this is not socialism; Finland, Norway, Sweden and Denmark are not socialist nations. Yet I think few Americans want this type of government. I’m old fashioned and I think the best way to prevent something unpopular is to just tell the truth about it.

In order to pay for the large social expenditures of the BBB, the United States will need much heavier taxes, Scandinavian style. These cannot be levied only on the very wealthy, whether in the form of income or wealth taxes. We could tax all billionaires at 100% and not pay the first year of the BBB. In fact, the big difference between the United States and countries like Sweden and Norway is not how we tax the rich, but how we tax the middle class and the poor.

Currently, the United States has a very progressive federal tax. About half of families pay no income tax. They pay payroll taxes for Social Security and Medicare, as well as state and local taxes, but that generates far too little revenue to pay for the BBB’s big social programs. And, because people can choose not to work or push for a myriad of loopholes, we’re close to the maximum share of income we can collect through income tax.

In order to pay the BBB, the United States will have to institute broad value-added taxes, or VAT. It is essentially a national sales tax that is levied on every exchange, including business-to-business sales. Readers who support the BBB, be aware that the value added tax rate in these four Scandinavian countries is currently 24% or 25%. To catch up with the Scandinavian countries, the average tax rate for middle-class American families will have to rise by a third or more. This truth should help frame any future discussion of federal spending.

Michael J. Hicks, Ph.D., is director of the Center for Business and Economics Research at Ball State University. Contact him at [email protected]