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The Buffett Rule won't pay the tab for the liberal agenda

Bill Pugliano/Getty

The Republican Party view on tax increases — none, ever, under any circumstances, for any purpose — is absurd in fairly obvious ways. And one consequence of its absurdity is that it tends to obscure the Democratic Party's own problem with the tax revenue issue.

Simply put, the strategy Democrats have united behind doesn't come close to paying for what Democrats want to do.

According to the Congressional Budget Office, with no policy changes federal spending will increase from 22 percent of GDP in 2012 to 26 percent of GDP in 2038. That forecast assumes that spending on everything other than Social Security, health care programs, and debt service will steadily decline as a share of the economy.

But liberals generally do not favor a broad-based decline in federal spending on education, regulatory agencies, income support for the poor, and other matters included in that heading. Indeed, liberals generally believe the government should do considerably more to provide preschool and child care services.

Beyond that, liberals typically think the government currently underinvests in transportation and other forms of physical infrastructure. They generally believe that K-12 teachers are overworked and underpaid, and that college tuition is under-subsidized.

Meanwhile, the popular liberal proposal for a "Buffett Rule" on high-end investment income would raise about $5 billion a year. That's a bit less than half the $12 billion annual cost to the federal government of a Center for American Progress plan for a universal pre-K program. Except CAP's program envisages joint state-federal fiscal responsibility, so states would need another $12 billion. And yet it's been turned to again and again as a way of paying for things. It was going to finance a job creating stimulus program at one point, then Chuck Schumer wanted it to offset an R&D tax credit, and now Elizabeth Warren is using it to pay for student loan refinancing.

And states have their own fiscal needs. For example, parallel to the federal government's need to pay for Social Security and Medicare benefits, state and local governments face the need to pay pension and health care costs for retired public sector workers. Analysts dispute the size of the shortfall, but even the most optimistic assessment I could find (from Dean Baker) pegs the shortfall at about 0.2 percent of GDP — manageable, but not nothing.

It's a bit reminiscent of Margaret Thatcher's famous quip that the problem with socialism is you eventually run out of other people's money.

That said, it's hardly inconceivable that a government would raise enough tax revenue to pay for American liberals' aspirations. In Denmark and Sweden public spending is over 50 percent of GDP, so it clearly can be done.

The problem isn't that the revenue can't be raised, it's that the proposals American liberals are currently prepared to contemplate don't begin to come close.

Conservative obstinacy on the tax issue tends to mask liberals' own problems with it. Since Republicans can be counted on to block any proposal to pay for anything that involves any tax increase, the exact same tax loophole closure can be proposed as the pay-for on a dozen separate initiatives. As a political strategy it makes perfect sense — you want to lead with your most politically palatable tax hike — but it's not a governing agenda.

The Obama administration's official budget neither fully addresses the need to pay for rising Social Security and Medicare costs, nor spends on the full wish list of progressive priorities. To get a better sense of what revenue liberals need, it's useful to take a look at the Congressional Progressive Caucus' Better Off Budget. The CPC budget raises taxes on everyone earning over $117,000 a year rather than the $400,000 threshold Obama settled for when resolving the fiscal cliff. These increases are quite dramatic. By scrapping the "cap" on Social Security taxes, it imposes a de facto 12.4 percentage point increase in the marginal rates paid on labor income.  Over and above that, there are large increases in high earners' marginal income tax rates and huge increases in capital gains and dividend taxes.

Nonetheless, the CPC also finds itself relying on $1.2 trillion worth of broad-based taxes in the form of a levy on carbon dioxide emissions. The CPC also cuts spending quite dramatically in selected areas by imposing de facto price controls on prescription drugs, and adding a "public option" to Obamacare exchanges that would lower payments to doctors, hospitals, and other health care providers.

Broadly, this points in the direction of what I think of as the end of big government liberalism. Efforts to improve the quality of public services will need to put more emphasis on increasing efficiency, so that public agencies can deliver more or better services without needing more money. That's the spirit of the CPC's thinking on health care spending, and it can be applied to other areas.

Alternatively, programs that are not cost-effective can be cut or eliminated in order to free up money for programs that are cost-effective.

The other strategy — broad-based tax increases like the carbon tax or the consumption taxes relied on in Nordic countries — are a complement to efficiency not an alternative to it. The challenge of income taxes on the prosperous-but-not-quite-rich and environmental taxes on the broad population will be to persuade them that their tax dollars — not Warren Buffett's — are well spent.