The US Congress is turning its attention to something called the Build it Back Better (BBB) bill. Now is a good time to think critically about the political economy of our national debt. It’s good to start with a few facts and recognize what we know and what we don’t know about the economic consequences of a large public debt. Much of this discussion has to be the question of how we tax ourselves to pay this debt.
Public debt is nothing new, and the US government has spent more than it received in taxes for most of the last half century. Despite our economic cycles, we remain the largest, wealthy economy, with reasonable long-term growth, and the most dominant currency in world history. Obviously, a rich nation can go into debt for a long time without significant consequences.
A nation like ours can also finance big negative shocks, like a world war or a global pandemic. We have been successful in repaying these sums over long periods of time, funded by sufficient economic growth to ensure that our tax revenues exceed expenditures. However, we can also be in debt for decades if what we buy is a boost to long-term economic growth.
The composition of the debt is very important. Spending that makes us more productive through better public capital or a more educated workforce often pays for itself through increased GDP which is then taxed. Yet much of government spending does not and is not designed to stimulate the economy. Social security, military pensions and much of the direct income support of the poor are programs that are not amortized by new tax revenues or savings elsewhere.
Honestly, I think there is little disagreement among Americans on these types of programs, or at least the spending portion. While we may disagree on the details of how these programs are administered and who receives the payments, what we are most opposed to is how we pay them.
A small minority in Congress thinks this is a moot point as they cling to what’s called Modern Monetary Theory (MMT). The basic idea behind MMT is that deficits don’t really matter until they become inflationary. The role of taxes is only to control inflation. To most people, this seems implausible, as it does to the vast majority of economists.
Today’s economic conditions provide a good experience of thinking about the reasonableness of MMT. We are in a period of higher prices for everything from food and gas to used cars. Suppose the price increases we see due to supply chain disruptions turn into real inflation early next year. Imagine that consumer prices go up 4.0 or 6.0% at the start of summer. For MMT supporters, the way to fix this is to increase taxes on consumers. And this is where the thought experiment gets interesting: Imagine the current vote in Congress to raise taxes if gasoline costs $ 4.50 a gallon.
You can take a reading break long enough to stop laughing. It must be said that modern monetary theory is a “Hee Haw” skit disguised as sound economic policy, and this is where our problem with talking about deficits lies. The Build it Back Better (BBB) bill has many parts, some of which will appeal to many Americans. However, the tax increases that come with it won’t come close to paying the price. If so, the Congressional Budget Office would have been asked to do a full analysis months ago.
The difficult fact is that we cannot tax billionaires or millionaires enough to foot this bill. To pay the BBB, we’ll need a global tax shake-up. The BBB brings the United States much closer to the Scandinavian countries in terms of social spending. To be clear, this is not socialism; Finland, Norway, Sweden and Denmark are not socialist nations. Yet I think few Americans want this type of government. I’m old fashioned and think the best way to prevent something unpopular is to just tell the truth about it.
In order to pay for the BBB’s significant social spending, the United States will need much heavier, Scandinavian-style taxes. These cannot be levied only on the very rich, whether in income or wealth taxes. We could tax all billionaires 100% and not pay the first year of the BBB. In fact, the big difference between the United States and countries like Sweden and Norway is not how we tax the rich, but how we tax the middle class and the poor.
Right now the United States has a very progressive federal tax. About half of families do not pay income tax. They pay payroll taxes for Social Security and Medicare, as well as state and local taxes, but this generates far too little revenue to pay for the BBB’s big social programs. And, because people can choose not to work or to lobby for a myriad of loopholes, we are nearing the maximum share of income we can collect through income tax.
In order to pay the BBB, the United States will have to institute broad value added taxes or VAT. This is basically the national sales tax that is levied on every trade-in, including business-to-business sales. Readers who support the BBB, be aware that the rate of value added tax in these four Scandinavian countries is currently 24 or 25%. To catch up with the Scandinavian countries, the average American middle-class family tax rate will need to increase by a third or more. This truth should help frame any future discussion of federal spending.
Michael J. Hicks, PhD, is director of the Center for Business and Economic Research and George and Frances Ball, distinguished professor of economics at Miller College of Business at Ball State University. Hicks received a doctorate and a master’s degree in economics from the University of Tennessee and a bachelor’s degree in economics from the Virginia Military Institute. He is the author of two books and over 60 scientific works focusing on national and local public policies, including tax and spending policy and the impact of Wal-Mart on local economies.