– if you do not pay in Red, then you should pay in Green
Memorial Day was about a week ago. So I read the obligatory references to the brave women and men and their sacrifices, and how but for their valor our way of life would be endangered. However one feels about such patriotic sentimentality, I know that many people are sincere in their gratitude. It makes sense to tap into the notion that sacrificing for your country is a good thing. And as an economist it got me thinking.
This piece is specifically directed to those who have the following ideological arrows in their intellectual quiver:
- That joining the U.S. Armed forces constitutes a sacrifice.
- That sacrificing for the nation is a good thing.
- That the present budget deficits in the U.S. are going to be the cause of serious disruptions to the American economy and way of life.
- That tax rates on the rich and super-rich (I define them as families with annual incomes greater than $124,614) should not be increased as part of a package of policies to combat the budget deficit.
The mathematics of the budget deficit seems pretty simple
Budget Deficits = Government Expenditure – Taxes.
So to reduce the size of the budget deficit one might be tempted to think that the solution is pretty simple – reduce spending or increase taxes. Unfortunately, the economics of budget deficits are a lot more complicated.
First, there is an honest debate as to whether the budget deficit is too big or not. And many credible folks who know something about this stuff suggest that short term deficits should not worry us, especially in times of deep unemployment. It is long term, structural deficits that should be the concern of policy makers, though there is a debate as to whether even that is too big in the U.S. For our present discussion let us assume that the folks to whom this piece is directed are correct, and point (3) above is on the mark.
The second problem with the ‘simple math’ solution to the budget deficit is that the effects of decreasing spending or increasing taxes on variables that impact the level of spending and tax revenues may be such that the deficit might become bigger with the ‘pretty simple’ solution outlined above, due to the endogenous effects of a policy. That is the primary argument against increasing taxes on the rich and super-rich to combat the deficit – the argument goes that if further taxed those with plenty of money will seek tax shelters in other lands, and not invest in job creating ventures in the U.S. deepening unemployment and make the budget deficit bigger.
I’m just guessing here, but my sense is that the vast majority of kids signing on to go to fight in wars being waged to preserve the American way of life come from the not so rich and super-rich families. So how about asking the rich and super-rich to sacrifice by paying higher taxes and not changing their behavior? The logic is simple – your tax rate will be linked to your income (as it is now) and a Binary Sacrificial Value (BSV). Any families BSV is either a 0 or a 1. A ‘0’ if no one in your family was or is enlisted in the Armed Forces (family being defined as someone who is presently or was claimed on your tax form), and a ‘1’ if someone in your family made the decision to put their lives on the line and was willing to make the ultimate sacrifice. And here is the policy:
At all income levels of the rich and super-rich, if your BSV is ‘0’ then your tax rates will be significantly higher than if it is a ‘1’. Put simply – if you do not pay in Red, then you should pay in Green.
And what is the sacrifice that the BSV = 0 types you will be making? They should not make behavioral changes to nullify the deficit reducing effects of their increased taxes. Their response to the higher tax rates should be to go for one less vacation in Madagascar, or drive a Ford instead of a BMW, or god forbid not eat at Tru in Chicago, or Masa in New York, or Cicada in Los Angeles.
I realize that this is just a thought. I’d like to put some numbers to this to see what the deficit reducing outcomes will look like. But before that I’d like to see if the idea has some merit – even if only in theory.
P.S. Full Disclosure – my family’s BSV = 0. Also I teach in a liberal arts college where a number of my students pay a reasonable amount of money to attend. My guess is a lot of their families have a BSV = 0.