Thursday, December 3, 2015

qotd: Edward Kleinbard provides a primer on tax and spending that the politicians need to read

We Are Better Than This
How Government Should Spend Our Money
By Edward D. Kleinbard

This book argues that the strand of contemporary American political
thought that defines itself through its hatred of taxation is
narcissistic self-pleading wrapped in a flimsy sheath of economic lingo.
Personal economic liberty, of course, is one foundational principle of
our country and our economy, but it is not the only principle that
defines us; and the emaciated government that this philosophy demands is
not the way to promote the happiness of society, if by that we actually
mean the society composed of all of us who identify ourselves as
Americans. Our fixation on taxation means that we have turned our
thinking upside down: instead of focusing on what government might
usefully do, and whether we can afford it, we obsess over the taxing
side of things, and ignore the purposes to which those tax revenues are


We do not pursue the path of of our society's happiness, including our
collective prosperity, by pursuing abstractions like the sanctity of
markets if by doing so we waste $1 trillion or so every year in
healthcare spending, and further leave tens of millions of Americans
without adequate healthcare coverage, thereby condemning them to worse
long-term health outcomes and to risks of bankruptcy. To the contrary,
the markets here are telling us something quite clearly, which is that
healthcare for all members of a society is a load that private markets
cannot lift alone. And what is true of healthcare of course is even more
apt for broader forms of insurance against the vicissitudes of life.

The alternative - a national single-payer system - is so obvious, and so
powerful in its logic, that it beggars belief that the Obama
administration abandoned it in the debate leading up to the Affordable
Care Act. There is a reason, after all, why virtually all other
developed countries rely on this solution (whether in those words, or
through combinations of policy instruments that have the same effect),
and why the United States itself relies on it for all its seniors
(through Medicare) and all its veterans (through the VA system, which
actually is a single-provider system). At one stroke, the fundamental
problem of adverse selection disappears, because all members of society
participate. Premiums are easily collected through the existing tax
administrative machinery. A patchwork of largely monopolistic local
sellers now faces a monopsonistic buyer. Operating administrative costs
are reduced, as we see today in Medicare administration. There is more
than enough value on the table here to compensate the medical community
fairly and still reap hundreds of billions of dollars of savings every year.


This book has examined how we are doing in investing in ourselves, and
in offering coherent social insurance programs. The answer is not very
well. We starve ourselves of investment in infrastructure, and we
underinsure ourselves in many respects. The result is a less happy
society, to return to Adam Smith's injunction to us, and also a less
prosperous one. Well-designed social insurance programs increase our
appetite for economic risk, rather than depress it, and public
infrastructure investments yield positive economic returns, just as
private investments do. These are the functions that our government is
good at and to which this book has been addressed. Once one moves beyond
police powers and the like, what we call government spending and taxing
in many respects is really investing and insuring, with those
investments and insurance premiums collected through the mechanism of

This book has further considered whether we have reached some natural
limit in our ability to finance collective investment and insurance
through the intermediation of government. The answer is no. We face
budget deficit issues today because we have chosen systematically to
undertax ourselves since 2001, not because the engine of our economy
cannot supply any more revenues than those we currently collect.

In short, for the last decade or more we have allowed the existence of
deficits to determine the contours of our government spending - the uses
to which we put our government. This is backward. What this book has
urged is that the right way to think about things is to ask this
question: What investment and insurance opportunities are there for all
of us, acting together, to advance the happiness of our society? In
answering this question, we need to be mindful of a great many dynamics
- the frustration and unhappiness that comes with paying taxes, the
deadweight loss of taxation, the estimated positive economic and social
returns on that collective spending, the limited competencies of
government agencies, and so on. But the starting point in every case
should not be determined by establishing an arbitrarily small amount of
tax to collect, and then treating the government like an institutional
Procrustes, whose only responsibility is to amputate the welfare of our
fellow citizens to suit that amount.

(Edward Kleinbard is the Johnson Professor of Law and Business at the
University of Southern California's Gould School of Law and a Fellow at
the Century Foundation. He previously served as Chief of Staff of the
U.S. Congress's Joint Committee on Taxation, the nonpartisan tax
resource to Congress.)


Comment by Don McCanne

This book is a particularly valuable resource during this political
season. As one of the nation's most astute authorities on taxing and
spending, Edward Kleinbard provides us with a solid basis for
understanding what we intuitively find to be lacking in the tax and
spending rhetoric being thrown around by the politicians.

By obtaining a good grasp on the complexities of taxing and spending we
can better advocate for what is really a simple concept: we can have
broad agreement on where the government should be spending our money,
such as on public infrastructure and social insurance programs, and then
decide on the most equitable methods of taxation to fund the programs.

A prime example of logically applying the complexities of tax and
spending policies is the way that we should be paying for health care.
As Kleinbard states, "a national single-payer system is so obvious, and
so powerful in its logic, that it beggars belief that the Obama
administration abandoned it in the debate leading up to the Affordable
Care Act."

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