Matt Miller on Taxes and Stimulus

Question: Is cutting taxes a dead idea?

Miller:    There’s no question that a huge stimulus that includes a big chunk of new government spending and also big new tax cuts needs to be part of what we do to get through the next couple of years.  But after that, and we will reach the far side of this downturn, there’s just no question.  It’s pure math that taxes will rise as a share of the economy, as a share of GDP over the next decade.  It doesn’t matter who’s in power.  In fact, in the book I quote a couple of John McCain’s top economic advisers who say there’s no question that taxes will go up because we’re going into the baby boomers retirement right now and that means, you know, 76 million baby boomers sit at their rocking chairs were doubling the amount of people on social security and Medicare.  There’s already $50 trillion in unfunded liabilities in these programs and there’s just no way the math works at current levels of taxation.  So people in both parties behind closed doors will tell you this but no one will utter it publicly.  One of the points I’m trying to make with the book is even though no one would really want this, no one wants taxes to go up, but they’re going to.  I mean that’s inevitable.  And the good news is we’re not going to become France or Sweden.  The economy is still going to thrive and, in fact, as I try to do with the research, when you look at the history of taxes and spending as a share of the economy, we’ve seen that civilizations and societies get more modern and wealthier, taxes and spending have gone up as a share of GDP and the economy is fine.  So, it’s unutterable now but the idea that taxes hurt the economy and are too high isn’t dead idea, and the fact that we can’t have the honest discussion about it stops us from having the debate we really need, which is given the taxes are going up inevitably over the next decade, what’s the best way to do that for the economy?  You know, there are good ways and bad ways to do this and I think it means we need to shift our tax system away from taxing payrolls and corporations, which is where a lot of our taxes come from now and tax things like dirty energy and consumption which will help us made environmental goals, national security goals and be better for the economy in general.

Question: Has the U.S. approached taxation with more wisdom before?

Miller:    Everything is a function of our history and at certain times.  I mean, FDR created the payroll tax as part of paying for social security.  That developed a life of its own.  It started very small, you know, if you’ll look at the history.  Now, you know, it takes 12.5% and 15% if you’ll include the Medicare part out of both the employer and the employee.  But back in FDR’s day and around the ‘50s and ‘60s, it was only around 2% of payroll.  So politicians found it was the kind of thing people didn’t notice much.  You can ratchet it up a little bit to increase benefits.  But now we’re at that point where actually most families pay more in payroll taxes than they do in income taxes and it’s crazy ‘cause it’s a job killing tax, you know, it’s not sensible for a host of reasons, but what’s sensible doesn’t often, you know, end up becoming what seems politically possible until enough folks start talking differently in ways that change our thinking and then change what we do.

Question: What’s the tax outlook as baby boomers age?

Miller:    Taxes are going to go up.  And if Republicans are in power when all the boomers are hitting the fan, they’ll find a way to raise taxes and try and call it something else.  Or more likely what usually happens we get both parties to get together in the dark of night, you know, jump off the cliff together.  But, you know, I think it’s one of those situations where when you can see what has to happen in terms of just the sheer numbers and the logic of it, because there’s just a stake that the Republican Party has in their tax cut mantra ‘cause it’s been so effective politically for almost 30 years since Reagan, they don’t want to give it up.  Democrats, because they know powerful the tax cut mantra is and ‘cause they know, as you said, that average families feel squeezed and want to hear that we’re going to get more of our money back, they want to be for tax cuts too.  This will all going to collide with reality in some point in the next 5 or 10 years and it’s hard to know exactly how it will get resolved except that the one is thing is sure is that taxes will rise.

Question: What’s one live idea about taxation?

Miller:    There’s one idea in the book that I [float] from a Conservative economist, Kevin Hassett at the American Enterprise Institute who said, you know, who knows taxes are going up and knows there are better ways to do it than dumber ways for the economy.  And he said, what we really could use is a federal reserve of taxation where, you know, which would be [staffed] in his view by, you know, economist like himself and where the politicians would say, look, we need taxes because the boomers are retiring, taxes have to go from 18% of GDP where they are today up to 23 or 24 and you politicians tell us what the level is and then we’ll design a tax system that optimizes for the economy, there’s a least damage to the economy given how much money you need to [hit].  Now that’s kind of a platonic ideal will never happen in the real world but it’s a useful way of thinking about the fact that there are better ways to raise the money we need to do the thing as a country that we want to do.  And if we can get that conversation going, we’ll be better off.

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