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Saturday, December 10, 2016

Taxation is always at the very center of Washington’s economic debate, but is it a distraction from bigger issues? In his amusing and informative new book We Are Better Than This: How Government Should Spend Our Money, Edward D. Kleinbard argues that progressives ought to focus on wise spending instead of higher taxes – and fight for changes that can actually address economic inequality.

You can purchase the book here.

A Nation Of Jerks?

Let me ask you a question: What do you believe our government is good for?

I can almost hear the chortling—the nearly irresistible urge to answer my question with a hearty “Nothing!” and then to turn back to one’s private pursuits. But I ask that you consider for a moment the possibility that the answer is not quite this obvious, and that in fact government—which is to say, all of us, acting collectively—can make our country healthier, wealthier, and happier, if we put government to useful work in those areas where it most productively complements our private markets.

That is what this book sets out to demonstrate. Its purpose is to encourage readers to resist the gravitational pull that naturally tugs us in the direction of becoming what one recent opinion piece termed a nation of “jerks.” That short article summarized research suggesting that the fraction of Americans who believed that government should guarantee each person enough to eat and a roof over her head fell by 10 percentage points over the five-year period since the onset of the Great Recession, declining to fewer than three out of five Americans in 2012. It would be nice if this disenchantment with government were a consequence of government’s displacement by nationwide movements that actually funded and operated community-organized food banks and shelters sufficient to the national task, but the data contradict this convenient claim. Millions of American citizens are hungrier today than they were in 2007, and the reason is simply that those of us who are not acutely hungry are more anxious about ourselves and our own economic security.

As I write this in late 2013, our economy still underperforms for most Americans. As a result, this personal economic anxiety is understandable. But We Are Better Than This shows that the path forward to a better economic environment for all of us lies through more government involvement, not less. When we starve government of resources, it turns out that we largely are starving our own long-term prosperity.

We are inundated today by economic noise and fog designed to generate superficially plausible rationales for what at bottom are simply jerk-like instincts. You see this machinery at work, for example, when you read editorials making the “leveling down” argument: you cannot make the poor rich, the writer sadly notes, by making the rich poorer—there’s just not enough money to go around to do that. In your naïve ambition to level up the poor, you will only succeed in leveling down the rich. The regrettable slaughter of the goose that laid the golden eggs is sometimes invoked. The writer then typically draws from this purported iron law of economics the conclusion that, since the rich cannot shoulder the whole burden, why ask them to do anything at all?

We Are Better Than This refutes these and similar exercises in false economic syllogisms. The book demonstrates that we effectively leave long-term prosperity and happiness off the table through our current penchant for minimalist government. And it makes the economic case for a more muscular federal government that complements the private sector through sensible investment and insurance programs.

In making the economic case for government investment and social insurance functions that work with, not against, the private sector, We Are Better Than This shows that we can afford to pay for government to take on a larger role, and that our semi-annual budget emergencies are largely false fiscal crises. It calls for somewhat higher federal income tax rates than those in force in 2013 (except at the top!), but not materially higher than those in 1999, when the economy was humming. There is nothing terribly radical in the book’s programmatic aims (except perhaps in its fundamental business tax reform suggestions, all the way at the end of the book). I am not a closet Trotskyite. I am, in fact, a friend to business—in a Dutch uncle sort of way.

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Along the way, the book marshals a great deal of evidence, and assists readers in becoming much more sophisticated consumers of claims regarding tax and budget policy. The reader who makes it all the way to the end may well not agree with me at every turn, but he or she will be a better informed citizen, and much less likely to be a fiscal jerk.

Taxing And Spending, Or Spending And Taxing?

As the actor Edmund Kean lay on his deathbed, a tactless friend inquired whether dying was difficult. “No,” Kean replied, “Dying is easy; comedy is hard.”

And so it is with fiscal policy—that is to say, the art of government spending and taxing. Households find it difficult to earn money and easy to spend it. But for governments, taxing—the side of fiscal policy that seems so difficult and abstruse from the outside—turns out to be relatively easy as a technical matter; it is the policy underlying government spending that is maddeningly difficult.

This conclusion is something of an embarrassment to me, as I have spent 35  years meditating on federal tax matters, as a practitioner, government official, and academic, but it nonetheless is true. Colbert—not contemporary pundit Stephen, but rather Jean Baptiste Colbert, finance minister to King Louis XIV of France—explained the essence of tax policy neatly 350 years ago: “The art of taxation,” he wrote, “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” All of contemporary tax policy analysis is just an elaboration.

Since the time of Colbert, we have learned a great deal about how to pluck the goose as quietly as possible. Public finance economists (the subspecies who study the effects of tax and government spending policies) now have a reasonably clear idea of which tax policies lead to the fewest squawks, in terms of unintended economic consequences. Government spending, on the other hand, is completely different. There are no generally agreed-upon technical solutions to the question, what is the proper role of government? This question, it turns out, ultimately does not even reside solely in the domain of economics (although many economists resist this). Instead, the issue implicates questions of moral and political philosophy with which thinkers since Aristotle have wrestled.

So all of our technical knowledge on the economic side effects of taxation cannot resolve the fundamental fiscal issue that dominates contemporary political discourse, which is how much tax revenue our technical expertise should be harnessed to collect in the first place. But in turn, government taxing and spending are completely bound to one another, so that policies in respect of one side cannot be developed without considering the other.

The famous economist Milton Friedman summed things up with the maxim, “to spend is to tax.” That is, every decision by government to spend money necessarily requires an offsetting commitment to raise the revenues to pay for that spending. Friedman’s aphorism is as close to a Newtonian law as economics gets.

Of course, government has a few choices of how to relate taxing to spending, some of which are more disreputable than others. Its honorable choices are to tax now to pay for current spending, or to issue bonds (IOUs) today, and collect taxes tomorrow (or the day after tomorrow) to repay those borrowings. Government’s seedier options include borrowing today and then relying on inflation to minimize the tax burden tomorrow, but that is just a way of saying that inflation itself is a hidden and pernicious sort of taxation, in this case on lenders. And finally government can amaze the world by borrowing today and defaulting tomorrow, but this tactic turns out to be so cataclysmic in its implications that only a modern Nero would contemplate it.

Tax policy is the handmaiden, and spending policy the sovereign:  we need to decide on what projects to embark collectively through the intermediation of government before we can design a tax system to meet those needs. Our greatest public finance policy mistake over the last few decades has been to obsess over tax policy, while simultaneously failing to have serious and rational debates over spending policy. We quibble over tactics without really engaging in the more difficult enterprise of forging a national consensus on our strategic objectives.

And therefore this book, which in its embryonic form was an explanation of the tax policy choices that confront us as a nation, necessarily has evolved into a more discursive inquiry into what we fairly should ask our government to do by way of spending our money. It is also a confession by a longtime tax geek that I, like many others, have elevated the tactical issues of tax system design beyond their ultimate importance to our society. Instead of arguing about tax rates or even levels of tax revenues in the abstract, we must focus instead on the real question, which is what we think our government is good for.

If you enjoyed this excerpt, purchase the full book here.

Reprinted from We Are Better Than This: How Government Should Spend Our Money by Edward D. Kleinbard with permission from Oxford University Press USA, © Edward D. Kleinbard, 2015.

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