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The public policy blog of the American Enterprise Institute
It is the great unanswered question in Washington: how high are Democrats willing to try and raise taxes to pay for the promises of the American welfare state — Social Security, Medicare, Medicaid, and yes, Obamacare?
As the above chart from the Committee for a Responsible Federal Budget shows, a reasonable case can be made that over the next generation, spending will rise to historically high levels. And that increase will produce historically high and sustained debts and deficits unless taxes also surge to historically high levels.
Spending by 2035, for instance, would require tax revenue 34% above its average from 1973 through 2012 just to keep the budget deficit at its four-decade average of 3%. By 2050, revenue would need to be 58% above that 1973-2012 average to keep deficits at 3%.
And where is all that dough going to come from? Tax increases anywhere near that magnitude would require the US adopt a value-added tax (or absolutely kill economic growth by trying to do it through less efficient income taxes), which would raise the tax burden on rich and middle-class alike. Taxing carried interest isn’t going to cut it. Nor are the tax rates from the 1950s.
Yet Democrats continually make a point of saying that they only want to raise income taxes on business and wealthier Americans. This is every bit as much a deception as telling Americans if they like their health plan, they will be able to keep it under Obamacare. Every single economist in the White House and on Capitol understands the fiscal reality presented here.
But given the party’s overall opposition to significant means testing … well, the math simply doesn’t add up. This creates an eventual moment of truth for the left. William Voegeli in Never Enough:
Liberals have tried to establish an adequate political foundation for the welfare state by indulging the voters’ wish that someone or something other than themselves will pay for its programs. … Unless liberals discover an argument that will make a majority of the electorate feel good about passing much higher taxes to fund a much more ambitious welfare state, they will have to come to terms with the reality that a welfare state comparable to those in Western Europe is politically unfeasible, even unimaginable in America. The full meaning of this coming to terms would be for liberals to finally grapple with the question of the welfare state’s optimal size.
Just as the right needs to accept that demographics and political reality means government welfare state spending and taxes will almost certainly need to rise in the future — we are not returning to the 1920s — the left needs to articulate their limiting principles for the welfare state and the tax burden needed to support it.
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