The Tax Reform That Isn’t

It is now tax reform season, which means that politicians are poised to unleash even more nonsense on the public than is customary. So perhaps it makes sense to frame some of the underlying issues that are involved. First and foremost: There is not a snowball’s chance in hell that taxes—properly understood—are going to be reduced. I repeat: there is no chance—none, nada, zero—that the total tax burden is going to be reduced. It is merely going to be redistributed, and to boot the total burden next year will be larger than this year, and the same condition will hold the year after that, and the year after that. Until the unavoidable default.

 

To see this it is imperative to define terms and do it properly because words that politicians and their sycophants use are designed to obfuscate rather than clarify. This, by the way, is not unique to arguments about the tax code. They do it all the time, pretty much about everything. So: how should we define the tax burden?

 

Definition: The tax burden is equal to the resources that government commands that would otherwise have remained in the private sector. That means that the real tax burden is not simply equal to the cash government collects from income taxes, sales taxes, other excise taxes, user fees, payroll taxes and various other sources. The real tax is equal to the total amount of money government spends plus the cost of regulatory compliance.   This definition differentiates between the government’s demand for economic resources and how it finances the demand.

 

The Income Statement: Revenues are equal to the cash taxes government collects directly plus the regulatory compliance costs it imposes on business that government would otherwise have to bear if it did the job itself. Expenses are cash disbursements. But government spends far more cash than it collects in direct taxes, so it has to make up the difference, which it does by borrowing the difference.

 

The Balance Sheet: Here is where it gets exceptionally tricky, because the government doesn’t publish a balance sheet. And it doesn’t do so for a very good reason. The Government is insolvent and doesn’t care to admit it.

 

Let’s consider: conceptually speaking what would the government’s balance sheet look like if it published one?

 

Assets = Implied taxing power, otherwise known as the tax base.

Liabilities = All the payments it has promised to make in the future. These include debt service and transfer payments, the largest being Social Security, Medicare and Medicaid. The present value of these unfunded liabilities (plus accumulated debt on the books) ranges from a relatively modest estimate of $100 trillion (from the optimists) to about $200 trillion from the not-so-optimistic. According to the Fed, total net worth of U.S. households is about $85 trillion. That leaves us short somewhere between $15 trillion and $115 trillion. (Corporate assets are largely included in household wealth through stock ownership.)

 

Since U.S. GDP is about $20 trillion, there is no possible way that the U.S. can grow its way out of this. In fact, its liabilities in the form of promised entitlement payments are growing at an increasing rate of speed, so the situation is getting worse rather than better.

 

The only reasonable conclusion is that the U.S. is inevitably going to default on its promises. The only question is when and to whom.

 

 

This conclusion is both inescapably correct and studiously avoided. Progressives have spent the last 100 years or so building a welfare state that is careening toward default by obfuscating the nature of the problem, which is, as Margaret Thatcher put it, Socialists eventually run out of other people’s money to spend.

 

Consider the current discussion over “tax reform” currently taking place. The discussion will carefully ignore the indisputable fact that total government spending and therefore the tax burden, is going to rise. The entire discussion about tax reform / tax relief is entirely distributional without so much as a nod to the underlying structural problem.

 

The Republicans will claim, as they always do, that reducing marginal tax rates a few percentage points will lead to an increase in economic growth sufficient to offset the loss from lower rates. They will propose taking a smaller piece of a much bigger pie. The problem is that there is scant evidence that the modest Republican reforms will have the desired effect because they are not going to address the underlying entitlements beast, which is in the process of devouring everything in its path.

 

 

For their part, the Democrats are still intent on increasing spending for entitlements and “paying” for it by taxing “the rich”. Here we note in passing that Progressives have exactly two solutions for all problems. Tax the rich, and appeal to “the international community”.

 

But let’s go on from here. The great project of building the welfare state, seemingly paid for by taxing the rich, has created a situation in which the financing of the welfare state is divorced from the actual cost of running the welfare state, at least in the public mind. And inevitably that means the public will insist on getting more and more “free” stuff. And because Progressives have convinced otherwise sensible people that they are victims of corporations and the rich, they will continue to demand all this apparently free stuff as a matter of right. It will not end well. They are rapidly running out of other people’s money to spend.

 

 

JFB

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Joe Benning