I’ve blogged about Medicaid’s unfunded liability of $38 trillion. How will America pay for that, and our other out-of-control spending? Government could cut spending, but that’s not likely. They may try to inflate its way out of debt – a hidden tax on everyone. Or if the Democrats get their way, taxes will go up.
Liberals like Paul Krugman suggest a tax increase of about 3 to 4 percent of GDP would solve the deficit Krugman says: “We could raise taxes that much and still be one of the lowest-tax nations in the advanced world.”
But it will be harder to raise money through higher tax rates than Krugman thinks. Harvard economist Greg Mankiw notes that
The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.
As the chart shows, European countries collect a far larger share of their citizens’ income, but the governments often get less money because their citizens make less. One implication is that if the U.S. increases tax rates, people will work less (like they do in Europe: French workers, for instance, work some 400 fewer hours than Americans each year) and so the government won’t actually see much new money.
Don’t think people would work less because of higher taxes? Steve Forbes recently gave an excellent example of how tax rates discourage innovation.
Forbes: One example was, out in Colorado, a couple -- they have three kids, one in college, one about to go to college, and a huge college bill. [The wife] thought she’d go into the teaching profession again and make $35,000 a year to help with the bills. She’d end up paying $15,000 more in taxes, because it would be a two-income family. She’d lose $10,000 in college aid. So for $35,000 she’d net about 8 or 10 thousand dollars.
This crushes innovation, you see it in Western Europe, which has been laggard compared to the US in terms of technological innovation, it has devastating long-term consequences.