The contemporary spending habits of congress in our day are fairly well known to most of those who follow the news. There are some conservatives who have not completely accepted unlimited and unrestrained governmental spending. And it is true that Democrats do tend to advocate new spending ideas earlier than Republicans, who will reliably resist such spending for around, say, 14 minutes. But spending in Washington D.C. is generally viewed as being out of control.
In its current budget, the federal government is to spend $4.407 trillion. About 62 percent of all expenditures, by far the greatest part pays for mandated benefits such as Social Security, Medicare, and Medicaid. A huge obligation is the interest on the U.S. debt, which is currently $363 billion. The U.S. Treasury must pay the interest to avoid a default on U.S. debt. Total debt has reached the level of c. $21 trillion and yearly interest on the debt is the fastest growing federal expense.
The rest of the budget, 38 percent of the total, must pay for all other expenditures. This share of the total budget is called discretionary spending. The U.S. Congress changes this amount each year when it allocates funds for all other purposes. The president’s budget is the starting point and additional moneys reflect the preferences of the congress for government activity. Too many senators and congressional representatives give serious consideration to what spending they desire, but seem to pay precious little attention to the revenues that should support the spending.
When AOC began recently to advocate vociferously a 70% tax on the wealthy, people started to think again about some of the better known principles of taxation. Some Democrats would possibly have the imaginative powers to anticipate some unintended consequences of taxing the rich at a 100% tax rate (e.g., ultimate starvation for those so taxed), so it is not likely that they will ever really try to implement such a tax. Thus AOC advocates “only” a 70% tax. Let us consider a couple of ideas that she has either failed to consider, or failed to understand (it is difficult to believe and will not be suggested here that she would deliberately wish to destroy our economy and our lives out of animosity toward her fellow Americans. (Sorry, but the thought arises from a review of a previous essay on open borders, which leads us to believe that there are Democrat politicians who would be happy to destroy our society if in doing so they could embarrass the President of the United States.)
Jeff Stein asks in the article cited above “How much revenue could new taxes on the rich really raise?” He writes: “We looked at the numbers, enlisting the help of a number of tax experts, including Mark Mazur, a former Treasury Department official now at the Tax Policy Center, a centrist think tank; Joel Slemrod, a tax expert at the University of Michigan; and Ernie Tedeschi, an economist who served in President Obama’s Treasury Department.
In 2016, this richest 0.9 percent earned about $1.7 trillion in taxable income and paid about $530 billion in taxes. These Americans would have to pay an additional $320 billion every year in taxes if the top tax rate went up to 70 percent, according to calculations based on IRS data. Mazur, the former Treasury official, noted this estimate was probably high because the wealthy would probably find ways to shelter themselves from higher taxation, such as by buying tax-exempt bonds. “If this entire pool was taxed at 70 percent instead of the 39.6 percent they paid in 2016, the federal government would bring in an additional $72 billion annually or about $720 billion in ten years”, which would hardly pay for a noteworthy fraction of what the socialists wish to spend.
Meanwhile, the rich pay more than their fair share of federal income taxes. The latest federal income tax data reported by the IRS shows that the top 1 percent of income earners pay 39.5 percent of all federal income taxes, nearly twice the 20.6 percent share of national income they earn. The bottom 45% of U.S. income earners pay no taxes at all.
So far, the only concrete step Ocasio-Cortez describes to enact the Green New Deal is the formation of a House select committee to formulate specific goals. On the environmental side, Environmental expenditures for the AOC “Green New Deal” would include, among other things, expanding renewable-energy sources until they provide 100 percent of the nation’s power; building an energy-efficient “smart grid;” upgrading every residence and industrial building in the U.S. for energy efficiency, comfort, and safety; eliminating greenhouse-gas emissions for industry and agriculture; funding “massive” investments to draw down greenhouse-gas levels; and making the United States a leader in the use and export of green technology.
As a conclusion to this brief review of the fiscal impacts of socialist spending plans, let us consider the unintended consequences of the 70% tax of AOC. They are well summarized in an editorial by Edward Conard, (“The Crippling Cost of 70% Tax Rates,” The Wall Street Journal, January 22, 2019, p. A19). He points out two basic facts that devastate the tax and spend arguments.
I. Advocates of confiscatory tax rates for the highest income earners generally ignore the tax’s long-term effects on economic growth. The basic problem is simple: the government’s redistribution of income through taxing and subsidizing programs redistributes and consumes income that would have been invested in the economy. When the economy consumes all the surplus it can produce, there is nothing left to put back into the economy for growth.
II. Spending progressives admit that new taxes on high earnings would decrease work effort. But they also fail to take into account the reduced supply of talent that would restrict investment’s impact over time. The big spenders likewise assume confiscatory tax rates won’t diminish workers’ willingness to pursue difficult training and tedious work efforts in fields that are critical for economic growth, such as computer programming, engineering and technology, and accounting.
There is a cultural effect associated with economic growth that confiscatory tax rates would inhibit. As investment, risk-taking, training and work effort declines, the economy ceases to build what Conard calls “productivity-compounding institutions” currently found thriving in Silicon Valley. Institutions like Google speed up innovation by bringing ambitious workers into environments that generate cutting-edge ideas and opportunities.
The greater payoffs for individual and collective economic success available in the United States encourages workers to work longer and harder, taking more entrepreneurial risks than their European counterparts. Since the early 1990s advent of internet commerce, Americans have innovated significantly faster than in Western Europe. The value of privately held American startups in excess of $1 billion (referred to as “unicorns”) is seven times greater in the United States than in Europe.