Raise Middle Class Taxes Now!

Conservatives and liberals are both in the business of spreading illusions

by Mario Rizzo

I now favor expiration of the Bush era tax rates for everyone.  Why? Because the only way to curb spending in the long run is to make as large a number of Americans as possible truly feel the consequences of the expenditures they appear to desire.

If Americans saw the cost of the gigantic welfare state in their paychecks, they would, I am confident, radically re-evaluate the expenditure side of the situation we are in. Then when someone comes up with a genius idea for spending, the people would think: Is it worth higher taxes? Might I not spend it better on my family, my church – or even – on… champagne?

I realize that there are all sorts of imperfections in my idea. For example, if I am a large farmer with much to gain in subsidies, I can get the subsidies for a fraction of the cost in my taxes. Furthermore, the opportunity costs of government programs are not always correctly measured by their monetary costs. And so forth.

But there is a fundamental point here for liberals and conservatives alike: Let’s make the costs of our “generosity” clearer. Let us make the costs of fighting foreign wars more nearly explicit.

Neither conservatives nor liberals want this. They are each in the business of spreading illusions, albeit about different things.

Where is the honesty, where is the justice, in spending through trillion dollar deficits? 

Frankly, I have no patience with the Keynesians and fellow-travelers who conveniently argue that we cannot do this now because the economy is weak. It is never time for them. But if they insist, let us agree on a date certain for the change. The date they give us will reveal something about them.

But I have another idea in the interim.  Let us require, by law, that the taxpayer be simply informed on his pay stub of the amount of withholding that would occur if all government expenditures were fully funded by taxes.

Further, I have no patience with conservatives who know that, under the present system of political- incentives, there is little chance of meaningful expenditure reform. These incentives must be changed.

Finally, I have no patience with the” Ricardian equivalence” economists who argue that people rationally expect and incorporate in their decision-making the present value of all the future interest payments on the debt. In their minds, people already incorporate the costs of big expenditures into their economic decision-making.  I do not know first-hand just how good or how shaky the evidence is. 

I think almost all economists would say that it may work to explain some data but clearly does not work across the board. There is a subtle, but elementary problem here: Hardly anyone really believes that this cost is explicit in voters’ minds. It is just an instrumental assumption that may perhaps rationalize data of a certain sort.  

Let us perform an experiment. Let’s see if explicit taxes restrain government more than as if taxes. We can help settle a debate in macroeconomics as well as in political economy.

The most important argument against my proposal is that the relatively few innocent people who never wanted the state we have will get hit with higher taxes.  Yes, this is terrible. All I can say is that this proposal may be our last best hope for change. Forgive me.