The Path Forward for Fiscal Policy

5/27/20

I find it disheartening that despite the pandemic, despite the obvious financial distress of large segments of our society, despite the apparent shortcomings of our healthcare system, despite the visible signs of widespread food insecurity, and despite the widespread recognition of the benefits of early childhood education and nutrition, the anti-tax, small government orthodoxy continues hold sway over too many Americans. None of these concerns will be solved without increased government spending.

While there may be no silver bullets that will necessarily “solve” any of these above-mentioned problems, we should at least be able to achieve consensus that without targeted spending in these areas, the only fiscal policy tool remaining would be lowering taxes. We’ve tried this before, and while lower taxes do provide an economic stimulus (as Keynes would have predicted), history has shown that the rising tide doesn’t lift all boats high enough. Something more is required.

The obvious tension underlying any decision to increase government spending has to do with where the money would come from. Undoubtedly if additional funds are allocated, they’ll come from some combination of higher taxes and deficit spending. The ultimate mix, however, would have to be determined in the political arena.

With respect to additional tax revenues, as Willy Sutton long ago suggested, we have to go where the money is. If we divide the world between the haves and the have-nots, we have to go to the haves. I favor a wealth tax along the lines of the one proposed by Elizabeth Warren. This proposal would apply a marginal tax rate of 2% to wealth in excess of $50 million, rising to 6% for wealth above $1 billion. I hate to be accused of counting other people’s money, but any way you cut it, those affected would be able to afford these taxes without compromising their lifestyle in the slightest.

As logical as that solution is to me, under the current congress and administration, this idea is dead in the water, and it’s not even clear that the Democrats would push for it under a Biden administration. But if not a wealth tax, what’s to be done? Two reasonable possibilities could be (1) raising marginal tax rates for higher income earners, and (2) limiting existing deductions (i.e., closing loopholes). Clearly, the more aggressive the adjustments, the more taxes will be raised, and vice versa. Presumably, policy makers would seek to raise the largest amount possible, with the least pain — a challenging prospect that’s ripe for deadlock, given the toxic nature of political discourse today.

The gulf between the Democrats and Republicans couldn’t be starker. For the Democrats, virtually everything is on the table. For the Republicans, almost nothing is. The mantra of “no new taxes” seems to be as immutable as ever, and the Republicans’ tolerance for deficit spending appears to be at or near its maximum. Given that state of affairs, “compassionate conservatism,” has become a relic of history. Having passed the various CARES Act components thus far, Republicans seem ready to hoist the “Mission Accomplished” banner one more time, prematurely, by all indications.

The coronavirus has highlighted serious structural conditions of our economic system that scream for redress. Failing to authorize additional, targeted fiscal stimulus to address these issues implicitly blesses the status quo. Such Inaction would represent a lost opportunity not only for those most directly challenged by the current pandemic, but for America as a whole.