Recently a number of Democrats have called for a complete government takeover of our health care system. Since Americans currently spend almost $350 billion annually on health care, this would result in the government directly controlling another 17% of our economy.
Senator Kamala Harris (D, CA) would like to see Medicare for All. Other senators like Elizabeth Warren (D, MA), Kirsten Gillibrand (D, NY), and Bernie Sanders (I, VT) strongly support the concept. They say that health care is a basic human right and therefore every American should receive health care regardless of their ability to pay.
To pay for these and other programs, Democrats want to raise the top marginal income tax rate to 70% and add a new tax on wealth. They say this will enable the federal government to increase the amount they take from Americans to well over the nearly $4 trillion they now collect annually.
In total, government at all levels takes about 25% of our income, which is significantly less than the 33% average rate for most major economies.
These policy proposals raise a very basic question: “What, exactly, is the role of government in the U.S. economy?”
While there is some debate about the size of government and the depth of its role, there has generally been an accepted answer. The preamble to the Constitution says that the purpose of our federal government is to “establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare and secure the blessings of liberty to ourselves and our posterity.”
That definition can be summarized as having two basic functions: providing public goods and income maintenance programs. Public goods, like a legal system, defense of the country, and education are services available to all members of society, essentially without a direct cost, but rather through taxation of the entire population.
There is some debate regarding which goods should be considered public goods. For instance, the conclusion regarding education is that government, mostly at the local and state levels, should consider kindergarten through 12th grade as a public good. Recently there has been a discussion about making at least two years of college a public good.
The second general function of government is to redistribute income away from those who have earned it and toward those who, for whatever reason, have not earned it. The taking is accomplished by taxing income, wages, consumption, and/or some assets. The income is then given to people through Social Security, Medicare, Medicaid, welfare, food stamps, unemployment compensation and other income maintenance programs.
The Democratic proposals ask us to determine if healthcare and another two years of education should be considered a public good. If so, then taxes must be raised significantly. In addition, there is always the problem of efficiency loss when converting a service from the private sector to the public sector.
The Dems argue that the U.S is the world’s wealthiest country and can afford these programs. They also note that the average rate of taxation in the U.S. is low compared to the rest of the world and should be raised.
They propose to increase the average tax rate by initially holding the middle rates constant and doubling the rates for the highest income earners. With that increase, the U.S. average tax rate will be about the same as the world’s average.
The Democrats also argue that high tax rates won’t necessarily slow economic growth. The highest tax rate was 70% in the 1950s and the economy grew faster than it is growing today.
It appears, however, that most Americans do not embrace these ideas.
The Constitution tells us that the federal government must “secure the blessings of liberty to ourselves and our posterity.” This means that the government must provide income maintenance in such a manner that it encourages individual freedom and individual responsibility. Government must also that actions taken today that don’t place unbearable burdens on future generations.
A smaller, less intrusive government seems to be the way to accomplish that. That means less taxation, not more. It also means economic growth, not curing perceived social injustices, should be the top priority of the federal government.
The arguments of the Dems are easily debunked. By raising the top income tax rates, less capital would be created, which would slow growth in today and tomorrow’s capital-intensive economy. In the 1950s we had a labor-intensive economy and didn’t need large amounts of capital. Today tax policy should encourage capital formation in order to encourage economic growth.
The U.S. went from birth to the most powerful and prosperous nation in the world in about 150 years. Other countries were hundreds, and many countries, thousands of years older. That happened because we had a freedom-oriented country with small government and low taxation.
In 2018, the economy likely grew at over 3% annually. That’s the best year since 2005. That growth occurred because Congress cut income taxes and growth-stifling regulations were eliminated. Lower taxes and less government led to more growth. More growth means more opportunities and a higher standard of living for all Americans.
Reject big-government, high-tax proposals.
Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 40years. @mbusler www.facebook.com/fundingdemocracy