As expected, the response from my progressive friends to my “Fiscal Armageddon” column today has been: “So, we have to raise taxes. We had much higher taxes in the 1950s, and those were pretty good times. Why don’t we just go back to that?”
I am more open to raising taxes than are most conservatives, though I would prefer to see higher taxes on the middle class; as Charlie points out, that’s how the Europeans fund their welfare states. If you want European-style welfare state, then you should probably fund it like one.
But those who have gotten themselves all excited about Alexandria Ocasio-Cortez’s soak-the-rich tax talk should take a cold shower. It is time to moderate your expectations.
It is true that we had much higher tax rates in the past. It is not true that we paid much higher taxes in the past. Taxes as a share of GDP do not move in parallel with tax rates, because the economy is complex, and changes in tax laws change people’s behavior. And there is more to determining tax liability than the statutory rate.
The highest tax burden Americans have paid in the modern era (according to Treasury data) was in 1944 — an eventful year, if you recall — during which the federal government collected 20.5 percent of GDP in taxes. Whipping Hitler was expensive — the deficit that year amounted to 22 percent of GDP.
If we were to have adopted a tax plan to capture as much revenue in 2017, the result would have been . . . a deficit, albeit a small one. In 2017, the U.S. government spent 20.8 percent of GDP, which is more than it collected in taxes during World War II. During the Eisenhower era, which progressives seem to think was a golden age of socking it to the taxpayer, taxes were . . . about what they are now: about 1 point higher in 1952, about a point and a half lower in 1955, and almost exactly the same in 1960.
Which is to say: World War II levels of taxation would not cover current U.S. government spending, much less spending inflated by expensive new medical or educational benefits. Neither would Eisenhower-era taxes.
The 70 percent tax on income in excess of $10 million a year proposed by Representative Ocasio-Cortez would raise at most $72 billion a year — a substantial chunk of money, to be sure — but that’s only about 2 percent of what the Medicare-for-all program favored by Senator Bernie Sanders et al. would cost. In the likely event that that tax increase raised significantly less than $72 billion a year, it probably would not cover the cost of the free-college program some progressives are excited about. (Senator Sanders estimates that his plan would cost $70 billion a year, but under his scheme a third of that burden would be offloaded to the states.) If you want Denmark, you’re going to have to pay Denmark taxes — and that does not mean “the rich.”
With that in mind: Yes, I am open to the argument that some taxes should be raised. The difference between those GDP percentages may not look like much, but they are meaningful: In 2001, we took in 18.8 percent and spent 17.6 percent — surplus; in 2002, we took in 17 percent and spent 18.5 — deficit. If the revenue had remained steady as a share of GDP, the surplus would have continued into 2002. And if spending had remained the same, the deficit would have been a lot smaller.
We paid slightly higher taxes in 2017 than in 1956 — 17.3 percent of GDP vs. 17.0 percent. But spending is almost 30 percent higher. I think the conclusion there is obvious enough.