America's Revenue Problem
In his column in the New York Post today, National Review editor Rich "Starbursts" Lowry repeats a line that has become boilerplate among conservatives:
Since 1991, no Republican in national office has voted in favor of a tax increase of any kind. Most members of the party have signed pledges not to raise taxes under any circumstances. Indeed, despite our massive and always increasing national debt, the Republican party has run on a platform of massive tax cuts in every election for the last 30 years. George W. Bush ran for president in a time of unparalleled economic growth promising a massive tax cut. When the economy turned south after he took office, he pushed forward with his tax cuts, merely changing the proffered rationale for them. When the economy started to pick up, he pushed through additional tax cuts. And he did so despite launching two expensive and protracted wars and passing a massive new entitlement program (Medicare Part D).
Most economists belief that deficit spending is necessary during a recession, that you need to stimulate the economy by spending lots of money. But the flipside to that equation is that, during times of growth, taxes need to be increased in order to raise revenue. Consider the last few years. The party is now over on Wall Street, but while it lasted, a lot of people made enormous amounts of money. A competently managed government would have taxed that income at a reasonable rate to recoup losses from stimulus spending during the last recession and to prepare for the next one. We didn't do that. We continued to cut taxes and run record deficits while Wall Street was binging. And now that the floor has fallen out on the economy, we have little choice but to spend even more money that we don't have in the hopes of turning things around.
I've said before and I continue to believe that the biggest long term threat to the well-being of this country is our chronic revenue shortfall. The Republican party's anti-tax zealotry over the last few decades has led this country to the brink of fiscal disaster. Conservatives like to talk about cutting spending, but the simple reality is that it is not possible to put our nation's fiscal house in order through spending cuts alone. We have too many necessary expenditures. We have too much debt. Putting aside issues of policy, justice, and fairness, it will never be politically feasible to cut spending by enough to even come close to balancing our budget, much less pay back existing debt. Revenue must be increased.
The problem, of course, is that the Republican party has managed to make it almost as politically infeasible to raise taxes. Not only do they dogmatically oppose tax increases of any sort at any time, but they actually claim--in defiance of all empirical data and expert opinion--that cutting taxes results in a net increase in revenue. The GOP has been so successful in this endeavor that the prospect of a tax increase over the next four years is uncertain even when the Democrats are more powerful--and the GOP more powerless--than at any point in the last 30 years.
Not only does America suffer from a colossal revenue shortfall at the moment, but it is very difficult to see a scenario in which the situation improves. That is madness.
Proposing tax hikes in the teeth of a recession is madness.What's particularly annoying about this refrain is not that it's false. Most economics do agree that the onset of a recession is not the best time to raise taxes (though "madness" probably goes a little far). The truly maddening thing about this line is the implication that Lowry would be open to the idea of increasing taxes if the economic environment were different. But as anyone who's followed politics over the last three decades knows, the Rich Lowrys of the world are dogmatically opposed to tax increases under any and all circumstances.
Since 1991, no Republican in national office has voted in favor of a tax increase of any kind. Most members of the party have signed pledges not to raise taxes under any circumstances. Indeed, despite our massive and always increasing national debt, the Republican party has run on a platform of massive tax cuts in every election for the last 30 years. George W. Bush ran for president in a time of unparalleled economic growth promising a massive tax cut. When the economy turned south after he took office, he pushed forward with his tax cuts, merely changing the proffered rationale for them. When the economy started to pick up, he pushed through additional tax cuts. And he did so despite launching two expensive and protracted wars and passing a massive new entitlement program (Medicare Part D).
Most economists belief that deficit spending is necessary during a recession, that you need to stimulate the economy by spending lots of money. But the flipside to that equation is that, during times of growth, taxes need to be increased in order to raise revenue. Consider the last few years. The party is now over on Wall Street, but while it lasted, a lot of people made enormous amounts of money. A competently managed government would have taxed that income at a reasonable rate to recoup losses from stimulus spending during the last recession and to prepare for the next one. We didn't do that. We continued to cut taxes and run record deficits while Wall Street was binging. And now that the floor has fallen out on the economy, we have little choice but to spend even more money that we don't have in the hopes of turning things around.
I've said before and I continue to believe that the biggest long term threat to the well-being of this country is our chronic revenue shortfall. The Republican party's anti-tax zealotry over the last few decades has led this country to the brink of fiscal disaster. Conservatives like to talk about cutting spending, but the simple reality is that it is not possible to put our nation's fiscal house in order through spending cuts alone. We have too many necessary expenditures. We have too much debt. Putting aside issues of policy, justice, and fairness, it will never be politically feasible to cut spending by enough to even come close to balancing our budget, much less pay back existing debt. Revenue must be increased.
The problem, of course, is that the Republican party has managed to make it almost as politically infeasible to raise taxes. Not only do they dogmatically oppose tax increases of any sort at any time, but they actually claim--in defiance of all empirical data and expert opinion--that cutting taxes results in a net increase in revenue. The GOP has been so successful in this endeavor that the prospect of a tax increase over the next four years is uncertain even when the Democrats are more powerful--and the GOP more powerless--than at any point in the last 30 years.
Not only does America suffer from a colossal revenue shortfall at the moment, but it is very difficult to see a scenario in which the situation improves. That is madness.
posted by A.L. at 10:56 AM
26 Comments:
But the flipside to that equation is that, during times of growth, taxes need to be increased in order to raise revenue.
Wrong, wrong, wrong.
Not only do they dogmatically oppose tax increases of any sort at any time, but they actually claim--in defiance of all empirical data and expert opinion--that cutting taxes results in a net increase in revenue.
I don't know what data these "experts" are looking at, but those tax cuts brought in record-breaking revenues (I've seen the data at the OMB). However, spending increases (Social Security, Medicare Part D, etc.) far exceeded the increases in revenues.
The problem is that Republicans stopped acting like Republicans (conservatives) and began spending like there was no tomorrow, even before Bush was elected. There was no reform of Social Security (which will eventually bankrupt the government), no reform of ridiculous corporate and agricultural welfare, and an expansion of Medicare as mentioned above. The one thing Bush did do correctly was to try to curb the federal government from financing local infrastructure, which allowed local politicians to spend their own revenue on things other than the police, roads, etc. And now we have mayors and governors with tincups begging for Washington money so they don't have to raise their own taxes and risk the wrath of their constituents.
I have no problem with Obama and the Dems voting to raise taxes as long as Republicans vote against them every time (especially while the tax-challenged Rangel is House Ways and Means chairman) so that Dems will pay for this with their jobs.
I don't know what data these "experts" are looking at, but those tax cuts brought in record-breaking revenues (I've seen the data at the OMB).
Um. No. You don't know what you're talking about. First, there are major causation issues with your claim. Second, the relevant metric is not whether revenue went up (it always go up when the economy grows). The question is whether it went up more than it would have absent the tax cut. It didn't.
Literally no reputable economist thinks that tax cuts pay for themselves (i.e. result in a net increase in revenue). Even the guy who wrote the textbook on supply-side economics, Greg Mankiw, has been absolutely clear on this point. So has the OMB.
http://www.cbpp.org/3-8-06tax.htm
You don't know what you're talking about, Steve.
"You don't know what you're talking about, Steve."
Sure I do. Did you read where I said to leave spending as is? No, I did say it needed to be lowered, and lowered big time. But nobody seems interested in lowering spending, including yourself (I thought you were a "liberal", but you sound like a close-minded "conservative"), and probably those "economists" you mention. Except for possibly lowering defense spending, the one piece of the federal government's infrastructure that can't afford to be cut.
In the type of economy in place, tax increases, even in "good times", and especially on the so-called "rich", would give businesses, those who employ the vast majority of American workers (not the federal government), the impetus to move their operations out of the U.S. faster than they already are. Or to shut them down completely.
There's nothing that says someone can't voluntarily pay more taxes. I believe I pay enough, so I'm not going to pay any more than I already have; but, you don't seem to believe you pay enough taxes. So, have you been paying more taxes in order to alleviate your guilt about not paying enough?
Maybe wealthy liberals from Hollywood and the business world (Soros, Buffett, Oprah, Cuban, etc.) should pay hundreds of millions more since they can obviously afford it.
A.L., your post was dead on. The real question is not how Obama will handle the recession--tax cuts and stimulus spending will be both popular and necessary, and I have faith in him that the spending will be on smart, long-term investments and will not be thrown out the window. But will he have the desire and the political capital to make the tough choices--tax hikes and spending cuts--when the economy starts to boom? Our long-term debt is crippling us.
Steve,
Do you really think it is remotely feasible to cut spending enough to even come close to balancing the budget? Where's the money going to come from? You've ruled out defense spending cuts. That just leaves entitlement spending as a possible source of sufficient cuts. Do you really think it is politically feasible to drastically cut back on Medicare or Social Security spending? Even Republicans won't touch such proposals with a mile long pole. That won't happen. Ever. Those programs are way too popular and too many people rely on them.
There may be ways to trim some spending around the edges on those programs, but we're still going to need new revenue. That's the only feasible option.
And your whole tangent about business flight is nonsense. We're talking about raising marginal income tax rates (which are lower than virtually every country) back to the levels they were in the 90s. That won't cause people to leave the country (what tax free utopia are they going to go to anyway?).
Not only do they dogmatically oppose tax increases of any sort at any time, but they actually claim--in defiance of all empirical data and expert opinion--that cutting taxes results in a net increase in revenue.
The Laffer curve, as it is called, does actually make some basic mathematical sense in the right circumstances. As a very basic example, say the tax rate was 85%. Cutting the tax rate to 80% would be only a 5.9% immediate reduction in revenue while increasing disposable income by 33.3%. A 33.3% increase in disposable income spurring enough economic growth to make up for a 5.9% decrease in revenue with an 80% tax rate is easily conceivable. Now consider a tax rate of 15% decreasing to 10%. That's a 33.3% immediate reduction in revenue and only a 6.3% increase in after tax income. It's a lot harder to imagine that small amount of stimulus causing enough growth to make up that shortfall any time soon. Conservative economic religionism has basically taken the math out of a math problem and replaced it with the doctrine that reducing taxes raises revenue under all circumstances, leading to the absurd conclusion that reducing taxes to 0 still increases revenue. Sure they will scoff at that, but I doubt there is any number above 0 where they wouldn't insist it was true.
Of course anything real is far more complicated, and this doesn't consider that any increase in private spending would be offset by a decrease in government spending, unless it is just borrowed. Cutting taxes and spending rather than increasing the deficit would be a wash as far as stimulus goes, unless of course you believe, as conservatives likely do, that every dollar of government spending is wasted and every dollar of private spending is miraculously efficient.
Realistically, I don't see that we are going to get the debt under control until we stop borrowing money from the rest of the world to finance a military whose purpose is not to defend us but to dominate the world by force. That is not sustainable and the longer we try to continue it the bigger the hole we are digging for ourselves.
You're wasting your time with SteveIL,
You can't refute a theology. You just get torches, ans a stake.
What counts is total spending during a recession. A tax increase makes sense provided that the govt will spend all the extra money, or someone poorer gets a corresponding tax decrease. In either case, overall spending increases, because the govt or the poor spend a higher percentage of each dollar than the wealthy.
steveil,
1. by putting "economist" in quotes are you suggesting economists aren't economists or that there is some way that you personally sanction whether an economist is legit?
2. Why can't the defense budget be cut at all?
And your whole tangent about business flight is nonsense. We're talking about raising marginal income tax rates (which are lower than virtually every country) back to the levels they were in the 90s.
So, that means that Obama will not only increase tax rates on the "rich", but everyone else as well. Which is the opposite of what he campaigned on. Clinton ran on the same premise, then raised everyone's taxes. Democrats lost control of Congress as a result (Clinton recovered, but only because Dole was such a lousy candidate).
Business flight is already a reality. Raising taxes, even in a "boom" market, will exacerbate things.
Do you really think it is politically feasible to drastically cut back on Medicare or Social Security spending? Even Republicans won't touch such proposals with a mile long pole. That won't happen. Ever.
Today's Republicans (many of them anyway) won't, but never say never. If telling the truth about Social Security, that it is a program that will bankrupt the government (because it will), to those of us born after the "baby boom" who would never see a dime out of it anyway (without going bankrupt first), people will elect representatives who will get rid of it eventually.
1. by putting "economist" in quotes are you suggesting economists aren't economists or that there is some way that you personally sanction whether an economist is legit?
I don't believe liberal economists are "economists". For evidence, I give you Paul Krugman, who used to be an economist until he drank the moonbat Koolaid, and pines for the days of the failed New Deal and Great Society.
2. Why can't the defense budget be cut at all?
Like anything else, old and unnecessary programs should be removed. For the military, these would be outdated weapons systems. But they have to be replaced with updated and modern weaponry, and it costs money. So taken on the whole, the defense budget cannot be cut at all. Plus, providing public money and aid and medical care for discharged soldiers is about the only amount of socialism I would agree to, since it is the people from the military that guarantees the Constitution. Any that need help need to be helped by the federal government first and foremost. Along with the defense spending not being cut, the VA should have its budget increased over most everything else.
This is a very important subject, and it would be worthwhile to discuss it without dogmatism of any kind.
Lets begin with identifying the scope of the problem. While the deficit this year is going to be a “mere” trillion dollars, this is a drop in the bucket compared to the total amount of the expected deficit (some 45 trillion and counting) as the baby boom generation retires. According to former Comptroller General David Walker, “Current official government figures show that for the first time in our nation’s history, the federal government’s total liabilities and unfunded commitments for Medicare and Social Security now exceed the total net worth of all American households.”
You state that “the simple reality is that it is not possible to put our nation's fiscal house in order through spending cuts alone.” Does this mean that you support net spending cuts, however modest? If so, you will need to find enough money to offset the cost of the bailouts, the stimulus package and universal healthcare.
Lets assume that you can find such cuts. Now lets combine them with the additional revenue that would be generated by Obama’s proposed tax increases. For arguments sake, lets assume that such increases have no negative effects on economic growth and therefore generate all the expected revenue. While we are at it, lets assume that Obama scraps his tax cuts for 95% of taxpayers (which you diplomatically left out in your discussion).
Would granting all of these generous assumptions get us anywhere near putting our fiscal house in order? I believe the answer is no. What do you think?
... the biggest long term threat to the well-being of this country is our chronic revenue shortfall.
Seriously. It never ceases to amaze me that pundits can go on segment after segment talking about the "fiscal time-bomb" of entitlement spending, and not utter a single word about the Bush tax-cuts. Pay no attention to the fact that the long term cost of making the cuts permanent is three times the size of the supposedly dire Social Security funding shortfall. Benefits for poor and Middle-class people are the real problem. Always.
I don't believe liberal economists are "economists". For evidence, I give you Paul Krugman, who used to be an economist until he drank the moonbat Koolaid, and pines for the days of the failed New Deal and Great Society.
So the guy that won the Nobel Prize this year in economics isn't an economist. Please state your qualifications, or at least why your opinion matters more than the Nobel committee experts in the field. Links to your peer-reviewed economics articles would be helpful.
MLS,
I think you're missing my point. I'm not claiming that Obama's proposed tax increases will put our fiscal house in order. Far from. I think it's a step in a the right direction, but a small one. My point is that the Republican party's three decade anti-tax jihad has made it very, very hard for politicians to do what needs to be done to put our fiscal house in order. All tax increases, no matter how necessary, must now be passed with only Democratic votes (because no Republican will vote for them). And such votes are fraught with political peril for Democrats.
We will need to try to cut spending, but the truth is that people need social security and medicare and slashing spending for those programs is even less politically feasible than raising taxes.
This is why I'm so concerned. America has a major revenue problem and I just don't see how we're going to solve it.
AL- I get your point perfectly. Republicans have learned, through long and bitter experience, that it is politically unwise to advocate spending cuts, but politically advantageous to advocate tax cuts and oppose tax increases. Democrats, on the other hand, have long known that it is politically advantageous to advocate new spending programs (and even more so to suggest that Republicans will cut existing programs), but have come to realize that it is politically dangerous to talk about the tax increases that might be needed to pay for these programs.
Not surprisingly, you see this standoff as being the fault of Republicans and think that it’s a shame that they don’t give up, accept the reality that spending levels are going to increase, not decrease, and agree to support whatever tax increases are needed to support whatever spending levels end up being.
My purpose is not to debate that moral/political issue. It is to raise a simple math question. You say Obama’s proposed tax increases are a “small step” in the right direction. Actually, that is somewhat misleading, as even Obama would acknowledge that his program has more in new spending and revenue reductions than it does in revenue increases. Regardless, what do you believe it would take to put our fiscal house in order? It sounds like you don’t really believe that there can or should be net spending cuts of any significance. So how high would taxes need to go in order to pay for all of this government spending? According to David Walker, overall federal tax levels would have to more than double just to meet the existing commitments that the government has made over the next few decades. Is that what you would propose?
MLS,
As with most issues, you insist on breaking things down into an overly simplistic "pox on both your houses" analysis. The reality, however, is that Democrats have always been much more honest about fiscal tradeoffs. Hence the label "tax and spend" liberals. They have proposed additional spending programs, but they at least try to grapple with the other side of the equation (the need for more revenue). Republicans, on the other hand, have pursued a free lunch policy of tax cuts combined with increased spending. Bush cut taxes dramatically while starting two wars and passing a massive new entitlement program. Republicans claim they want to cut spending but never do and never will.
As for my own view, I think that any solution to our current fiscal mess will necessarily involve both significant tax increases and significant spending cuts. There's no easy answer.
All i know is that between 1962 and 2000, tax revenues increased from one year to the next 36 out of the 38 years - with the 2 exceptions being once under Nixon and once under Reagan. In Bush's first 5 years in office, the tax revenues increased from one year to the next only 2 out of the 5 times. My guess is they'll be decreasing again this year (any bets?). So what that means is Bush, with his tax cuts and all, managed to do in 4 of his 8 years in office something (decrease revenues) that happened only twice in the previous 38 years. Nice job!!
So SteveIL can talk about record revenues all he wants, but he's full of it.
Honestly, I find no problem whatsoever with hiking taxes on those who are truly well off. That's not a majority of us. And if anyone's thinking of reducing taxes or giving some of our taxes back to us again, that is the majority of us who don't make around 20 grand a month or more, then you'd better darned well fund it by taxing those who do so "harshly enough" so that they actually give to the government (and our society) what they would have paid if this tax cut madness never took over our country.
So, let's see. I'm running a business that brings in $200,000 per year and I'm paying 40% tax, netting $120,000 to live on. The tax rate is raised to 50% so, instead of trying to scrimp by on $100,000 per year that the government is now leaving me to live on, I get all blown out of shape and say to heck with it and shut down my business, thereby making tax revenues decrease by the $80,000 that I was paying before the tax increase.
Thank you for making that clear.
The reality, however, is that Democrats have always been much more honest about fiscal tradeoffs. Hence the label "tax and spend" liberals. They have proposed additional spending programs, but they at least try to grapple with the other side of the equation (the need for more revenue). Republicans, on the other hand, have pursued a free lunch policy of tax cuts combined with increased spending.
You have a point at the federal level, but not locally, and especially not in the big cities, the vast majority of which are run by Democrats. In fact, Democrats at the state and local level have made it a point to beg their own infrastructure revenues from the federal government in order to use their own tax revenues to fund non-infrastructure items. As the infrastructure costs have increased, these same Democrats avoid raising tax rates on the constituents who put them into office, knowing the constituents would throw them out of office, and return to begging others (usually the federal government) for the expanded dollars. NJ, Illinois, Michigan, and California (Arnold is an R, but he is a liberal, and all of the major cities are run by Democrats) are running huge deficits, yet refuse to raise the revenues on their own constituents, preferring to use the tincup approach. So the idea that Democrats are more principled is not based on what is really going on.
Bush cut taxes dramatically while starting two wars and passing a massive new entitlement program.
Started two wars? If I remember correctly, and I do, Al Qaeda started the war we are engaged in with them, and started it officially back in 1998. Just because Clinton didn't recognize it for three years, nor did Bush until 9/11, doesn't mean it wasn't already on.
So SteveIL can talk about record revenues all he wants, but he's full of it.
Through and including 2004 and 2007, revenues increased 44% from what it was in 2003. That is an average of 11% per year. The problem isn't so much an increase in revenues but the huge increases in spending. Until spending comes under control, and that means figuring out what to do with Social Security, no amount of revenue increases are going to help.
Um, Steveil, you might want to examine your data. At this time, and for several years into the future (projected), SS revenues exceed payouts, so at this time SS is not contributing to the shortfall.
In addition, you spout these figures about increases since 2003, but 2003 marked a dramatic downturn in revenues. Since the Bush tax cuts were enacted in 2001, and Bush took office in 2001, the starting point an honest person should use is 2001, in which case the 2001-2007 revenue increase is about 20 percent (in inflation-adjusted dollars.) Over the period from 1992-2000, the corresponding increase was 43 percent (again, in inflation-adjusted dollars.)
This means that the tax cuts do not appear to have any positive effect on revenue.
The numbers I've used came from public sources. Look here.
[i]Through and including 2004 and 2007, revenues increased 44% from what it was in 2003. That is an average of 11% per year[/i]
LOL. It wasn't until 2005 - Bush's 5th year - that revenues under Bush equaled or surpassed revenues in Clinton's last year of 2000. Without even adjusting for inflation.
And i'll re-iterate. Revenues are likely to decrease in 4 out of Bush's 8 years - when they only decreased twice in the 38 years before Bush. I don't think any more needs to be said.
oops
It's interesting that so many discussions on taxation seem to begin with the assumption that all taxation authority is the same, but there is a big difference between federal, state, and local taxation. SteveIL is the only one I see who has acknowledged that point in this forum.
Look, I'm as progressive as they come in terms of my goals for society, but I don't see why the progress I desire--and the taxation necessary to fund it--ought necessarily to occur at the federal level. On this point I am in total agreement with conservatives. Our current system of top-heavy federal taxation and spending, with subsequent redistribution to the states, is perverse because it masks the true cost of state government and diverts voter attention and activism from the local level where it belongs. When people see themselves in a 33% federal tax bracket and an 8% state bracket, they think, Wow, why can't the feds be as frugal the states? But the question they should really be asking is, Why can't the states fund themselves without federal help? The feds should be there to help out the states in emergencies (disaster relief etc.), but should there really be a structural necessity for federal assistance wired into every state budget?
It's no secret that there was no federal income tax until the early twentieth century. I doubt we can ever put the genie back in the bottle, but if I had a magic wand, here's what I'd do. Consider it as a thought experiment if nothing else.
1. Eliminate all income, payroll, consumption, and excise taxes and the federal level. Charges for federal services (post office etc.) would be allowed. Devolve all entitlements to the states. Simultaneously, force the states to raise enough taxes, in whatever form they see fit, to fully fund their budgets and entitlements, plus an extra amount to send to the feds (see # 2).
2. Fund the federal government through a direct tax on state treasuries, at a fixed rate of 33% or so, exact rate to be determined by a panel of economic experts and subsequently written into the Constitution, subject to modification only by a congressional supermajority. The IRS would end its dealings with private citizens and turn itself into a tax collection agency dealing exclusively the states.
3. Allow the federal government to create small pools of money--call them block grants if you like--to incentivize behavior at the state level that it considers desirable. For example: come up with a solid plan to reduce greenhouse emissions in your state and we'll fund 50% of your startup costs. Or: come up with a plan to reform your education system so that it becomes competitive in a world economy and we'll pay for half of it. Etc.
The philosophy behind these three radical steps is a simple--and progressive--one: that government begins at the local level, and hence only local governments should have the authority to directly tax citizens. Political power, along with the power of the purse, should be concentrated in the states and municipalities, not in Washington. This sounds like a conservative mantra--and indeed it has been--but ask yourselves: why should be? Why shouldn't people who believe that "all politics is local" and that "it takes a village" be willing to place 66% of taxation authority in the hands of the villages?
Think I'm nuts or that this idea is some kind of conservative Trojan horse? Then just imagine for a second the most likely political consequence of these actions: the death of the Republican Party. Yes, you heard right: the death of the Republican Party. Just think: what's the one issue that Republicans have consistently been able to win on, as AL's post implicitly acknowledges? Taxes. Take that issue off the table, and what have they got left? Liberals, on the other hand, wouldn't have to give up any of their goals in the bargain I am proposing; they would just have to be willing to shift their fight for them to the state level. Isn't that what the framers of the Constitution intended anyway?
I don’t completely understand Michael’s proposed funding mechanism, but I strongly support his concept of assigning the responsibility for providing and funding social services at the state level.
Take, for example, the issue of universal health care. As I understand it, the Obama plan is similar in many respects to the program that Massachusetts has already adopted. The early returns on the Massachusetts program are that it has been successful in getting a lot of uninsured people to sign up for the state plan, but has been significantly more expensive than expected (because there were more uninsured people than the state anticipated).
If the Massachusetts program proves to be successful and popular, it would seem logical that other states would move to adopt versions of it, no doubt with some modifications to reflect local conditions and lessons learned from the Massachusetts experience. Why isn’t this the best way to reform healthcare?
The traditional liberal answer is that allowing states to compete with respect to providing social services would promote a “race to the bottom” because states would cut social services in order to attract the tax base, ie, businesses and wealthier individuals. But I see several problems with this position. First, while competition no doubt constrains the ability of the states to expand social services, it does not appear to prevent states, like Massachusetts, from doing so when there is a sufficient amount of political support. Similarly, a number of states have increased the minimum wage above the federal level, despite the fact that this arguably puts them at a disadvantage with regard to other states.
Second, liberals often claim that expanded social programs will benefit everyone, not merely a disadvantaged minority. For example, in the case of healthcare, they argue that getting people insured will reduce overall healthcare costs by improving the health of the uninsured and avoiding the need to treat them in emergency rooms. If this is true, then states should have an incentive to look for creative ways to provide healthcare to the uninsured.
Finally, to the extent that competition does limit the ability of states to expand social services, shifting the costs of such services to the federal government will mask, but not eliminate, the problem. If the value of the services is less than the cost (from the perspective of the people who are actually bearing the cost), it will over time erode the competitive position of the United States with respect to the rest of the world. True, it is more difficult for an individual to leave a country than a state, but it is not all that difficult for a business to locate its facilities in a jurisdiction where the overall cost of doing business is the lowest. This is why the left sees free trade as a threat to its ambitions.
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