The US federal debt exploded last year. Between a battered economy and trillions in stimulus spending, it will take years to shrink the debt back to a manageable size. In the meantime, the Bold Centrist still wants to fix this country, focusing on six problem areas: healthcare, infrastructure, poverty, social mobility, housing, and threats to the biosphere. The challenge is how to fund the repair job without adding to the public debt or zapping economic growth.
Short answer: increase tax revenue, which has hovered around 25% of GDP for decades. Let’s increase that to 36.3% of GDP: a bit more than what Canada collects (33.8% of GDP) but less than Germany (38.8% of GDP). How much extra spending money would that yield if applied to the 2020 US GDP of $21 trillion? If 2020 tax revenues stayed at the historic norm of 24.5% of GDP (more or less), the expected annual take would be around $5 trillion. If US tax revenues were 36.3% of GDP, another $2.6 trillion would be available ($7.6 trillion total). That’s an extra $2.6 trillion a year (ignoring GDP growth and inflation for now).
Hmmm. What could I do with $2.6 trillion a year?
Wait…I’ve put the cart in front of the horse. The tax system is just as important as the tax revenue and you can’t get the revenue without a system Of course, there’s no one-size-fits-all approach to collecting taxes but here are a few tips. Tax systems should:
Provide a relatively stable revenue stream.
Generate enough revenue to meet policy goals without incurring excessive debt.
Be sufficiently predictable for taxpayers to make long-term spending and investment decisions.
Derive revenue from a diversified portfolio of taxes, such as income, consumption, and excise taxes.
Not rely on a narrow tax base, such as a small number of households or companies.
Be moderately progressive but not overly dependent on taxing the super-rich, which can produce highly variable returns over time.
Be sufficiently broad-based to foster widespread civic engagement with issues of government accountability and efficiency (on the principle of "if I pay in, they better deliver and not waste my money”).
Avoid relying too much on capital gains taxes, which are extremely volatile.
Root out tax evaders, especially in the informal sector, as widespread tax evasion discourages overall tax compliance.
Be simple enough for taxpayers to understand.
Thought experiment
I’m going to assume an annual budget of $2.6 trillion in extra taxes to tackle six problem areas: healthcare, infrastructure, poverty, social mobility, housing, and threats to the biosphere. Healthcare is easy: per an Urban Institute analysis, a few tweaks to the current US system could get us to universal healthcare for just $108 billion a year. Given that close to a quarter of every healthcare dollar is wasted, the US could actually reduce overall healthcare spending and still reach universal coverage - if only our leaders had the political will to implement serious healthcare spending reform. For more, see The Bold Centrist, Part VII: How to Pay for Universal Health Care on a Budget.
In previous posts, I estimated it would take about $216 billion a year in extra taxes to pay for an Adult Student Basic Income (ASBI), which would provide $1000 a month to adult students and trainees, up to six years total. The ASBI would go a long way to reduce poverty and increase social mobility in the US. For more, see The Bold Centrist: Why an Adult Student Basic Income is Better than Pell Grants (and What the Danes Have); The Bold Centrist: Here's How the US could fund an Adult Student Basic Income on Less than $2 a Day per Capita in New Taxes; and, The Beauty of an Adult School Basic Income.
Ok, so far I’ve spent $324 billion a year to achieve universal healthcare, reduce poverty and increase social mobility. Much remains to be accomplished. Thankfully, my budget is in great shape, with more than $2 trillion still available.
References:
Berwick DM, Hackbarth AD. Eliminating waste in US health care. JAMA. 2012; 307 (14):1513–1516. DOI: 10.1001/jama.2012.362
Blumberg, Linda J. et al “From Incremental to Comprehensive Health Reform: How Various Reform Options Compare on Coverage and Costs” The Urban Institute October 16, 2019