They’re just sayin’.
The report, called Taxing Times, is part of the IMF’s Fiscal Monitor series. The group’s modest proposal is tucked way back on page 49, just before all of the methodological and statistical appendices that no one reads. It begins:
The sharp deterioration of public finances in many countries has revived interest in a ‘capital levy’ – a one-off tax on private wealth – as an exceptional measure to restore debt sustainability.
Before examining more closely the idea of the “one-off tax on private wealth,” it’s worth looking at the “sharp deterioration of public finances” it is meant to remedy. The IMF worries about such things because they are on the other end of the line when governments facing default dial 911. Part of the famous “troika” (along with the European Union and European Central Bank) that engineered the Greek bailout, they nervously scan the horizon for distress signals from Europe’s periphery and our side of the Atlantic.
They have reason for concern. “High debt ratios amid persistently low growth in advanced economies,” they write, “cast clouds on the global fiscal landscape.” Public debt across the globe now stands at an “historic peak” — 110 percent of the world’s annual economic output and 35 points (47 percent) above its 2007 level – and appears to be stabilizing there [p.4]. The report’s recommendations, if adopted, would return that debt level to a more manageable 70 percent … by 2030 [p. vii].
And if their recommendations are ignored?
Maintaining public debt at these historic peaks would leave advanced economies exposed to confidence shocks and rollover risks and hamper potential growth [p. 4].
Stagnation, recession, default. Republicans, however ill-conceived and reckless their tactics may be thought to be, do have a point: if default caused by political brinksmanship is bad, default caused by insolvency is far worse. Perhaps it’s not so irresponsible to couple an increase in government’s short-term borrowing authority with a reduction in its long-term borrowing needs.
The US fiscal imbalance is worse than that of most other advanced economies. Our debt to GDP ratio of 106 percent exceeds that of the Eurozone, Canada and the UK [Table 2, page 6]. What the IMF calls our “financial need” – the amount, as a percentage of GDP, that a country needs to borrow each year to cover bond redemptions and annual deficits – lags only that of Japan and Italy [Table 5, p. 15]. Our deficit, which the IMF estimates to be 5.8 percent of GDP, is worse than that of Italy, Greece and Portugal [Table 1, p. 3].
When you’re mentioned in the same breath as Italy, Greece and Portugal, you’re running with a bad motorcycle gang. I understand that, unlike them, we can print our own money and that the dollar remains the world’s reserve currency, but that does not make our creditworthiness bullet-proof.
Still, not everyone is as concerned as the IMF about our fiscal incontinence. Paul Krugman believes that we may have entered a new reality in which the US economy exhibits a “persistent tendency toward depression.” In this new economic reality “virtue is vice and prudence is folly.” Congress and the President should agree to run big deficits and enlarge the federal debt load. The Federal Reserve should drop all plans for an “exit strategy” and instead continue with quantitative easing and do its best to depress interest rates. We should “forget all those scary stories about government debt.”
The IMF, which believes all those scary stories about government debt, hews to a more orthodox line. Their prescription has something to offend everyone. Republicans will be cheered by the report’s talk of entitlement reform, Democrats with its embrace of higher taxes (including an additional 30 cents per gallon tax on gasoline, p. 25) and its criticism of sequestration, which it calls “a crude tool … with potentially undesirable effects on the composition of spending and long-term growth” [p. 15].
Tax reform, it states, should increase government revenue:
In addition to entitlement reform, a fundamental tax reform aimed at simplifying the tax code and broadening the base by reducing exemptions and deductions, as well as at higher taxation of fossil fuels, could provide new revenue.
Tax reform has proven no less elusive in the present political environment than entitlement reform and the report is candid in acknowledging the difficulties. Still, it argues that the US is among several advanced economies with a “positive revenue gap” [p. 27], their way of saying that our government taxes too timidly.
And, like the President, they suggest that the rich can tolerate additional tax increases, though observing that this can be “a contentious political issue” [p. 35] on which “reasonable people can differ” [p. 34]. While acknowledging that wealthy people in advanced economies already pay a disproportionate share of taxes, they argue that governments would be better off if they paid a greater share still. They reckon that our “revenue-maximizing” top rate is in the range of 55-70 percent [Figure 17, p. 37].
Taxing income at a higher rate can be justified by income inequality, the report suggests. It goes further in noting that wealth inequality is even more pronounced in advanced economies than income inequality and is “arguably, a better indicator of ability to pay than annual income” [p. 38].
That leads to the report’s discussion of ways that government can do more to tax wealth – property taxes, transaction taxes, death taxes, and recurrent taxes on net wealth [pp. 38-40]. The report notes that if the US imposed a recurrent tax on the wealth of the top 10 percent of households, it would raise the equivalent of 3.1 percent of GDP [Table 12, p. 41]. And while initiatives to institute such taxes would face “difficulties that should not be underestimated, over the longer term they have the potential to make much fairer tax systems” [p. 40].
If recurrent taxes on wealth are fair, one-time taxes on wealth must similarly be fair, and could be more workable in the bargain. Which brings us round to the report’s discussion of a one-off tax on private wealth:
The appeal is that such a tax, if it is implemented before avoidance is possible and there is a belief that it will never be repeated, does not distort behavior … The conditions for success are strong, but also need to be weighed against the risks of the alternatives, which include repudiating public debt or inflating it away (these, in turn, are a particular form of wealth tax—on bondholders—that also falls on nonresidents) [Box 6, p. 49].
A one-time levy, the report argues, if swiftly executed, won’t give the rich time to move their money beyond the taxman’s grasp. And if wealthy citizens genuinely believe that government would never do it again, such a tax won’t induce tax-avoidance behavior.
The report also reminds us that there is no painless way out of government debt crises. A government that can no longer meet its obligations has to screw somebody and that somebody is ordinarily the people and institutions that have lent it money. Either the government devalues its currency, meaning that it repays bondholders in money that is worth much less than what it borrowed or it reneges more directly, by refusing to pay lenders what it owes. The “haircuts” that bondholders last year took on Greek debt (they were, in effect, repaid 26 cents on each dollar they lent the Greek government) is a recent example. Why not spare bondholders, many of whom are not citizens and had no voice in electing the government, and instead avert default by confiscating the wealth of your own citizens? That, the report notes, “may be seen by some as fair” [Box 6, p. 49].
That conception of fairness, that people who earn more and who are worth more should pay more in order to ease the government’s debt burden – that Robin Hood should rob from the rich to give to the Sheriff of Nottingham – is a curious one. IMF acknowledges that entitlement programs are among the leading causes of government’s fiscal imbalance. Such programs transfer money from those who have earned it or accrued it through their investments to those who have not. The rich already bear a disproportionate share of these programs’ costs. Now that entitlements are jeopardizing government’s ability to repay its debts, it is suggested that people with high incomes (or wealth) pay more so that the government can continue to borrow sufficient sums to sustain entitlement spending. Could it not also be reasonably argued that it is unfair to require them to pay more than the disproportionate share they’re already paying?
The idea that it is fair seems to stem from the idea that if someone – whether an individual with low wages or a government that has borrowed improvidently – needs money, then it’s fair for government to take it away from someone who has it.
That concept of fairness has its roots in growing inequality of income and wealth. That inequality, as the IMF report [Figure 20, p. 39] and other studies have shown, is not a uniquely American phenomenon. It is also a characteristic of European economies, where government taxes more aggressively, provides “free” health care, and pursues a more robust redistributionist agenda. Taxing more and spending more has not eased inequality in Europe. Indeed, a recent study showed that European wealth-to-income ratios have returned to levels not seen since the eighteenth and nineteenth centuries.
Inequality has lately been joined with Krugman’s sense that our economy has a “persistent tendency toward depression.” Though they (like me) lack Krugman’s economic sophistication, many people seem to share his view that high rates of joblessness and tepid growth are the new normal. You are much more likely to resent the wealthy if you feel that your circumstances may never improve.
The extraordinary government interventions that have occurred since 2008 seem to have had done little to improve the lot of working people. There is a strong case to be made that they have exacerbated inequality. The growth of government has produced prosperity primarily around the Washington Beltway. Its monetary interventions, according to the former Federal Reserve official who oversaw the first round of quantitative easing, constitute the “greatest backdoor Wall Street bailout of all time.” It is no accident that 8 of the 10 US counties with the highest per capita income are suburbs of Washington or Wall Street.
The noxious combination of inequality and stagnation has fed the resentment that sees tax increases as a way to settle the score. Making the rich pay is thought fair even if it neither stimulates the economy nor reduces inequality. As White House economic adviser Jason Furman once confided, the President’s proposed minimum tax on millionaires “was never our plan to bring the deficit down and get the debt under control.” Though it served at best a negligible fiscal purpose, it was good because it was “fair.”
Though I’m not generally comfortable with that conception of fairness, I must admit that the IMF report has provided a satisfying outlet for my own resentments.
My back-of-the-envelope calculation is that the US would have to tax net private wealth at a rate of 7.25 percent to reduce its debt-to-GDP ratio to 70 percent. Bill Gates’ products have earned him a fortune while causing me untold vexation and frustration. He has amassed an estimated net worth of $67 billion. I am worth much less, and must take blood pressure medication, a condition that I attribute at least in part to the daily irritation that his products inflict. A one-time tax of 7.25 percent on that $67 billion would cost him $4,857,500,000. Sounds fair to me.