The Corner

Economy & Business

Steven Rattner on the National Debt

Steven Rattner, chairman of Willett Advisors LLC, attends the Bloomberg Global Business Forum in New York City, N.Y., September 20, 2017. (Brendan McDermid/REUTERS)

Steven Rattner, who was an adviser to the treasury department during the Obama administration, has written a worthwhile column on the national debt, including unfunded entitlements, for the New York Times.

Criticism first: Rattner goes out of his way to tell himself a partisan just-so story about the debt in which wicked Republicans are the malefactors; he does not mention the Obama administration’s misdeed in creating one of the great outright lies of modern political history, i.e. that the so-called Affordable Care Act would be a deficit-reducer. (Nobody ever seriously believed that, including the Congressional budget office.) He also insists on following the strangely superstitious — and, deeply stupid — convention of pretending that the president rather than Congress writes tax law and spending bills, so it’s “Reagan deficits” and “Clinton surpluses” when there is at least as much a case to be made for “O’Neill deficits” and “Gingrich surpluses.” This sort of thing has become practically ceremonial in columns of this sort.

But Rattner is right about the fundamentals: The principle that popular new social spending (and popular tax cuts) need to be paid for has long been abandoned, with various ideological fig leaves (self-financing tax cuts, the miraculous ministrations of the Growth Fairy) deployed as camouflage; that unfunded liabilities for the major entitlements are enormous in real economic terms; that interest on the debt is an important risk for the United States, which would suffer considerable fiscal distress from an uptick in interest rates on its debt. He also is correct that these issues are unlikely to be addressed in a meaningful way without additional tax revenue. Yes, we could and should cut our way to a balanced budget, but any plausible real-world long-term compromise is going to have a revenue component.

Rattner goes looking for that revenue — not looking high and low, but looking high and high: raising taxes on capital gains, raising the corporate income tax, etc. Where he does not look is the most obvious place: the middle class, which enjoys a relatively light tax burden that is wholly out of proportion to its position as principal beneficiary of the broad U.S. welfare state. As Charlie and others have pointed out around here, the great difference between the U.S. tax regime and the practice in the European welfare states admired by American progressives is not in the tax treatment of the rich and corporations but in the tax treatment of the middle class:

The U.K.’s 40 percent tax rate kicks in at just $59,178 (I’ve adjusted for U.S. dollars, here and below), and its 45 percent rate starts at just $191,521. In addition, Britain has a 20 percent value-added tax that makes pretty much everything annoyingly expensive. Australia charges 32.5 percent at $26,377, 37 percent at $64,162, and 45 percent at $128,324. New Zealand’s top rate of 33 percent is levied on earnings above $47,319, while Canada charges 26 percent after $69,794, and 33 percent after $154,153 (this is on top of considerable provincial income taxes).

High-income households by definition earn a disproportionate share of income; they also pay a much more-than-disproportionate share of federal income taxes, while nearly half of the population pays no federal income tax at all. The wealthiest 1 percent earn about 20 percent of all income and pay about 40 percent of the federal-income tax, according to IRS data; despite all those silly claims about Warren Buffett and his secretary, the very high income pay a much higher effective rate (24 percent) than the average (14 percent) or the bottom half (less than 4 percent) do.

Of course, raising taxes on the middle class is a much more difficult political proposition than treating the high-income taxpayers (including businesses) as though they were a bottomless well. But in the long term it is the only real alternative to enormous benefit cuts rather than merely substantial ones.

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