The first question is how we even deal with this. The simple answer of course is higher revenue (i.e. higher taxes) and lower spending. We have to have some way of doing both that does not cripple the economy. We then need to muster the political will to actually implement the necessary changes. With both, there will be people who are hurt and those people will apply political pressure to avoid paying for those changes.
The second question is who pays for this and how do we implement it. I have my own ideas, and while I have a decent foundation in economics, I can’t readily calculate the full costs of the changes. The Covid-19 relief efforts should be a short term thing. We can’t ignore them, but should not base our entire strategy on something that should phase out probably within the next year. That said, our primary concern should be in crafting something that will largely eliminate the trillion dollar deficit we were already expecting.
On the top of my list would be repealing the 2017 Trump tax cuts. The cost of that alone has been estimated at over 2 trillion dollars over several years. In itself that would not even erase the previous annual deficit, but at least it would reduce it. While many people got at least some benefit from those tax cuts, the lion’s share went to the wealthiest individuals and corporations.
The second thing I’d do is raise the top marginal tax rates. In the 1950s and early 1960s, when the economy was doing quite well, our top marginal income tax rate was 90% or more. Businesses still thrived, and people still became wealthy even at that. I don’t think we should go back to that, but instead of the current 37%, I think we should have the top tax rate at 50%, which it was during much of Ronald Reagan’s administration. I understand that the wealthy have means of sheltering income from taxation so very little income would actually be taxed at that rate, but it would help.
Corporate taxes need to increase as well. Right now in this country we have corporations making billions of dollars of income while paying little or nothing in the way of taxes. Corporate tax rates have dropped and companies use all manner of clever means to dodge US income taxes. Some of that comes from sheltering income overseas through foreign subsidiaries. They can use foreign manufacturing along with playing with transfer pricing to show the income where is will be more leniently taxed. We need to begin to tax that foreign income, along with raising corporate tax rates.
We need to raise inheritance taxes. Only a tiny proportion of estates have to pay any tax at all, by most estimates less than 1%, and while the top inheritance tax rate is 40% the average estate that is taxed pays only 17%. The truly wealthy shelter their estates through trusts and other means to protect them from estate taxes. While we might not get a huge amount from this, it is an important signal.
Currently hedge fund managers only pay income tax at the capital gains rate. The idea of lower rates for capital gains was to encourage investment and compensate for putting money at risk. Those individuals have no money of their own at risk, but make money on how well their investors do. Since they have no money at risk, they should pay standard tax rates.
We need to raise or even eliminate the cap on Social Security and Medicare taxes. Currently we only tax the first $137,700 in income for Social Security and Medicare. While those funds currently have a surplus, it is estimated that by 2035 they will run out of money. That would be devastating to retirees and would likely require benefit cuts.
We also need to take a look at spending cuts. The US currently spends as much on its military as the next ten countries put together. We have roughly 800 military bases in some 70 countries with tens of thousands of troops stationed overseas. Do we need all of those bases and all of those troops there? We spend many billions on new weapons, some of which don’t even work properly. We buy weapons which even the Pentagon says we don’t need, because the manufacturing is in certain congressional districts. There is clearly money to be saved if we take a hard look and make some hard decisions.
We also spend billions in subsidies to already highly profitable companies. We give massive tax breaks to fossil fuel companies even as we know that burning those fossil fuels increases global warming and in many cases costs more than using renewable energy sources.
This is honestly only the tip of the iceberg. There is much that we can do to bring the federal budget into line. There will be pain to some companies and individuals, but that is part of the price if we truly want a healthy economy going forward.
