Paul L. Caron

Thursday, October 22, 2015

Why the Middle Class Should Want to Pay Higher Taxes

The Week:  Why the Middle Class Should Want to Pay Higher Taxes, by Ryan Cooper:

In America, being middle-class is certainly better than being poor. But it could be better — and social democracy offers the way.

Matt Bruenig has calculated that for people in the bottom half of the income distribution, America does objectively worse than the Nordic nations. But what about the upper half — people from the median income on upward, 1 percenters excluded? (Let's call them "Comfortable Americans.") They would benefit from social democracy as well. Taxes would be substantially higher, but the stress, expense, and insecurity of managing college, retirement, and more would be reduced.

Comfortable Americans pay less in taxes than in places like Germany and a lot less than in places like Denmark. But all that extra take-home pay isn't pure gravy. There are still fundamental problems that require money and effort — things like retirement, health insurance, and a college education. In America, these are subsidized through the tax code, but you still have to manage them yourself.

So if you're a Comfortable American, you've got to figure out if your employer offers a 401(k) plan, and if there's a matching contribution, and whether that's a better deal than opening a traditional or Roth IRA, or 457, or 403(b), or some combination thereof. Then you've got health savings accounts and the saver's credit. There's the 529 college savings account, or the education credit if the kid is enrolled in college.

All of this is heavily subsidized through the tax code. But it's still on you to actually figure out which one works best, and which of the mutual fund options are actually a rip-off (spoiler: pretty much all of them). It's so complicated and stressful that there's a huge industry dedicated to figuring it out for you (which is, in a staggering coincidence, also a huge rip-off). If you're like me, you simply freeze up and sock away 10 bucks for the Ernest Hemingway Retirement Solution.

All this adds up to quite a large amount of social spending — but much of it is hellishly inefficient and extremely unpleasant to access, even for the most Comfortable Americans. (Not to mention the fact that a big chunk of most of the above benefits are captured by the 1 percent, and individual investment accounts can be wiped out at any moment if the stock market crashes.) ...

But there is another way. Instead of the incomprehensible morass of tax credits, deductions, and exclusions, increased taxes could fund a public pension, free public college, universal health insurance, universal paid leave, and so on. How much would it cost? Lane Kenworthy has calculated that a similar middle-of-the-road social democratic plan would cost about 10 points of GDP in taxes. He gets there by a 12 percent value-added tax, a return to the pre-Bush tax rates, plus new brackets on the very rich, a carbon and financial transactions tax, a bump in the payroll tax, and axing the mortgage interest deduction.

(Hat Tip: Francine Lipman.)

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Who'd rather live in a society like Denmark's or Germany's versus a place like, oh I don't know, Kansas (a real Shangri-La)? I think jpe inability to live in the reality-based community versus their faith-based one reflects his politics.

Wonder when Germany's economy will crash due to their nanny-statism and learned helplessness, bcl??

Posted by: Cent Rieker | Oct 23, 2015 1:23:24 PM

Wow, Matt is a pretty incompetent human being. Maybe his inability to be a grownup informs his politics.

Posted by: jpe | Oct 23, 2015 9:56:50 AM

Wherever you think the U.S. should be on the earned success versus learned helplessness scale, this is certainly moving toward learned helplessness. I would argue that this sort of nanny-statism is harming more than helping at all income levels.

Posted by: bcl | Oct 23, 2015 6:32:13 AM

I fail to see how the overwhelming majority of Americans, namely those of us who consider ourselves middle class, can derive a net financial benefit from large transfer programs. Spending on beneficiaries rarely exceeds 80% of the cost and often falls below 50%. Most of the rest is eaten up by salaries to administrators (e.g. social workers), who are the primary advocates for these programs.

If government programs delivered anything close to 100% of revenues to beneficiaries, the economic case would be plausible. With a system that encourages accumulation of more and more overpaid and underworked bureaucrats, the argument looks implausible at best.

Posted by: AMT buff | Oct 22, 2015 7:50:53 PM

I don't have my calendar handy, but is it April Fools already?

Posted by: Dale Spradling | Oct 22, 2015 6:42:43 PM