On this episode of The Great Antidote podcast with Juliette Sellgren, she is joined by guest Adam Michel. In their discussion, Juliette and Adam cover the federal tax system, expenditures, and potential tax policy improvements.
Adam N. Michel focuses on tax policy and the federal budget as a Senior Policy Analyst in the Grover M. Hermann Center for the Federal Budget at The Heritage Foundation. His research focuses on how taxes impact the well-being and opportunity of Americans.
Michel is published and quoted in outlets such as The New York Times, Wall Street Journal, The Washington Post, Politico, US News and World Report, and The Hill. He has also joined Fox News, CNN, Fox Business, and CNBC to discuss taxes and the economy. Prior to joining Heritage he was a Program Manager for the Spending and Budget Initiative at the Mercatus Center at George Mason University, where he worked on a broad range of topics relating to federal fiscal policy.
Michel received his PhD in economics from George Mason University in Fairfax, VA and a BA in politics from Whitman College in Walla Walla, WA. Originally from northern California, Michel enjoys rock climbing, skiing, and cooking in his spare time.
Juliette: Hi, welcome back. It’s my pleasure today to talk to Adam Michel, he’s a senior policy analyst at the Heritage Foundation where he works on tax policy and the federal budget. Welcome, Adam.
Adam Michel: Thanks for having me on.
Juliette: So, before we get started, I want to ask you the question that I ask all my guests, which is “what is the most important thing that people my age or in my generation should know that we don’t?”
Adam Michel: Yeah, that’s a great question. And obviously, I could go in any number of directions. So I’m not going to claim that this is the most important thing, but within the sphere of things that I tend to think about, I think that the thing that sort of young people in general miss is that when we’re having policy discussions, and the things that sort of get the most attention look at education, look at healthcare that often these things are pointed to and said, look, these are places where we need more government intervention. The market has failed. It’s not doing, not providing what is needed at a price that is convenient for people. T’s often missed that these are also the areas where the government is most involved in the economy. Look at education. The government pores gobs of money into education up and down from K through 12, up into higher education, and same thing in health care. I mean this is part of the economy where the government is probably the most involved, both through regulation and in spending at the federal level and the state level, and at an international level, other countries are even more involved. And so I think often the first reaction in any analysis looking at sort of economic reforms is there’s a problem out there. It must be a market problem, but that almost always gets the analysis wrong. Almost always, it’s highly distorted by a government action that’s already going on. And getting that baseline right is really important. Especially on a lot of the current topics that people are talking about today. So it’s really important to sort of parse out what is true market failure, what is actually a government failure, and how do we sort of compare apples to apples rather than sort of misdiagnosing the problem. And then I think sort of everything goes on from there. There on out.
Juliette: That’s a really good point. I actually haven’t, I don’t know how, I guess I’m young. I haven’t really learned yet. I don’t know too much about tackling issues or talking policy, even though I do it a good amount, but in talking with my friends, it often is that’s always the first response. Oh, what’s wrong with the market? What’s wrong with like schools like private schools, whatever, they’re doing it wrong. But we all go to public school, all my friends and I, and I’m like, now, the more that I’m thinking about it, that is what your first question should be. How is the government already involved and already changing the natural state of things? That’s a good point. I definitely need to keep that in mind more often. So, thank you for that. Okay, today we’re going to be talking about taxes because it’s tax season and we all – well, I don’t really pay taxes, but everyone else pays taxes – and I will be paying taxes. So listen up everybody it’s important. So as individuals, we pay state local and federal taxes, but I mostly want to talk about the federal tax system because it’s the biggest one. And it affects everyone regardless of what state you’re in. So it is very applicable to everyone instead of being like, how are the taxes in Arlington, Virginia? You know? So my first question is what are the main federal taxes that people pay, or that individuals pay, and what are the differences between them?
Adam Michel: Yeah, so I think it’s great to focus on the federal tax code, but just as you pointed out, we do pay taxes in lots of different places, depending on where you live. And so it’s important to remember that anything we talk about at the federal level has something else layered on top of it. So if we say the federal income tax top income tax rate is 37% there’s an additional couple percentage points layered on top of that at the state level or maybe at the local level, in some cases. And so often when we sort of segment the policy discussion it’s important to remember that we’re still only talking about a piece of what the government is doing, but the federal piece is, in this case, the largest and the one impacts everyone. So I think it’s a great place to start. So the federal taxes sort of fall into four buckets, I guess I put them in.
One is individual income taxes. The second is payroll taxes. The third is corporate income taxes. So what large businesses pay. And then there’s sort of all the other ones, other smaller taxes, fees, those types of things that make up the rest of the revenue. So individual income taxes make up just shy of about half of the revenue the federal government brings in. And this is money – You can think of it as like the taxes that you pay on the wages that you earn. Whoever employs you sends you that check. Then the second bucket is payroll taxes, which are similar to individual income taxes, but, but slightly different in that they are often thought of as going to fund specific programs like social security, Medicare, and these payroll taxes are paid by both your employer and the employee. So they’re sort of split down the middle for who’s legally required to pay the taxes, but that’s sort of a misleading way to think about it. Because of the way that the market works, the employer passes their share the full cost of that tax onto the employee. So really the payroll tax is very similar to the income tax in most ways. And then the sort of third bucket, corporate income taxes. This is a little over 5% of federal revenue. And those are taxes that are paid that larger corporations pay on their income. And then there’s a smaller bucket of a bunch of other things, but those are the sort of main pieces.
Juliette: So according to – kind of focusing on individual income tax first – according to Tax Policy Center, about 50% of all federal revenue comes from this and so its the biggest tax. But I also see that about 44% of Americans don’t pay federal individual income taxes, which is done by design, by excluding households, through different things like exemptions, a standard deduction and things like tax credits. Can you explain to us what those are and what they do?
Adam Michel: Yeah, that’s a good question. So there’s often confusion on this point because – I don’t know if you remember – but when Mitt Romney was running for president, he had this sort of famous Quip that only 47% of people pay taxes and he was referring to this income tax piece that you’re referring to. And in that narrow sense he’s right, because of the way the tax is structured. It’s intended to just hit people with income over a certain threshold. And so the biggest sort of way that people don’t end up paying taxes under the individual income tax is a standard deduction, which is essentially just like you can think of it as a 0% tax bracket. So for an individual, the first $12,000 that you earn is essentially tax-free. And then for lower income people, there’s all sorts of other offsetting tax credits. On top of that, the biggest one is called the earned income tax credit. And this is a sort of wage subsidy program. So it sort of supplements your market wages with a tax credit and then phases out as you earn more money. And because it’s what’s called a refundable tax credit you can actually pay what’s in effect a negative income tax rate. So the government’s actually writing you checks beyond an income tax liability that you otherwise would have. So it gets complicated, but because of all of these different pieces, and another big one is a child tax credit some people can end up getting more money back, through the individual income tax system, than they pay.
Juliette: I don’t even- how does that, how does that even work? Because you’re paying, how do you get back more than you give? It just makes taxes seem more confusing than they were before? I don’t know.
Adam Michel: Yeah, well, it’s blending. It’s blending the tax system without the traditional sort of outlay system. Its blending the system where people pay money and the system where the government is paying people. And I think that’s part of the confusion. The line there becomes really blurry when the government is cutting people checks through the tax system, which is often thought of as a system where people are sending their money to the government. But because we were just talking about the individual income tax piece, it’s maybe helpful to then broaden the conversation to include payroll taxes. Often systems like the earned income tax credit, which is a sort of negative income tax for some people, is thought of as offsetting the payroll tax, which doesn’t have that standard deduction. The thing that exempts some income from taxes. So it’s thought of as a way to sort of blunt the impact of payroll taxes, which tax that first dollar that’s earned, and could otherwise reduce sort of the incentive to work when the government is taking some share of that first dollar you earned or the second or the third for that matter.
Juliette: Okay. I see how broadening kind of the range of what you’re looking at makes a bit more sense. If it’s offsetting payroll tax, then it’s not really okay. No, I get it. So that kind of brings me to tax expenditures, which I don’t know if they’re related. Which this seems so contradictory. A tax expenditure? Is it a tax? Is it spending? Can you give us some examples of tax expenditures, and also explain why I see all the time that they’re called social engineering? Why, is it called that?
Adam Michel: So it’s a tax expenditure. And so a tax expenditure is both like spending or the government is spending through the tax code. But can also be sensible ways that the government is lowering tax burdens for a specific reason. And so a tax expenditure can be lots of different things. And it depends on how it’s specifically defined. So trying not to get too technical in the weeds, we’ll start with where we were, or where we already were. The Earned income tax credit, the EITC, the child tax credit, which is a tax credit that most families that have kids receive. These are examples of tax expenditures. They’re sort of specific pieces of the tax code that have been written to lowerthe amount of tax at any given specific person or family pays. But these are sort of broad examples of tax expenditures. There’s also tax expenditures that are incredibly narrow. In the corporate income tax code, for example, the federal government might say we want to subsidize or lower the amount of tax.
This specific corporation is going to pay on this specific activity. There’s an example of special rules that have been written for race horses or for NASCAR tracks or for special oil pipelines in Alaska that are put into service after a specific day. Making all the rules so narrowed only applies to one specific type of product, one specific project. And so these are sort of examples of tax benefits being either narrowly targeted or more broadly available. So that’s sort of the broad lay of the land. The problem with lumping all of these things together is that some things do look very much like spending in the tax code. The earned income tax credit that can be a negative income tax so that someone’s actually getting a check from the government that looks almost identical to spending. Where some often there is a lower tax rate on capital gains and dividends income, which is the sort of investment income that comes from say investing in the stock market. That the lower rate on that income is also called a tax expenditure but is very different than a direct tax credit, because that lowering of the rate is actually reducing an economic distortion that the tax code otherwise would be creating. I’ll start talking in services if I keep going, so I’ll stop there, and have you ask any clarifying or follow up questions?
Juliette: Well you explained this very well. You’ve done a lot of work on this stuff and you’ve made the case for why many of them should be eliminated. Can you explain, I mean, you touched on this a bit, but can you explain your position on that and why you think lots of them should be eliminated?
Adam Michel: Yeah well I think I’ll take an example of say the research and development tax credit that’s available for businesses. This is generally we think of- it’s not necessarily a lot of people don’t think that incentivizing research and development is a terrible thing, but the tax code has this preference for this certain type of business activity. And what happens is when you put in these special carve-outs and rules and credits for different types of activity, it does sort of two things. One, it makes the tax system more complicated, which makes it that much harder for everyone to understand what it’s doing, but it also means that the overall tax rate has to be higher than it otherwise would be if we’re trying to raise a certain given amount of revenue. And so I would much rather get rid of the research and development tax credit and use that money to lower the rate for all businesses rather than preferencing a specific definition of research and development as defined by bureaucrats in Washington. There’s all sorts of similar preferences on the individual tax side. One is the state and local tax deduction is a special deduction that some people get to take for their taxes paid at the state and local level. But unintentionally, or maybe intentionally, subsidizes people who live in higher tax states over people that live in lower tax states and actually distort tax policy at the local level. So, I would much rather- I don’t want to raise everyone’s taxes, but I do want to get rid of that deduction, and use that money to lower tax rates for everyone so that we’re not providing special preferences to people depending on sort of where they live or what type of business they’re in.
Juliette: It also just seems like it makes it way more complicated, because it first it more complicated for me to understand, but also if you’re going to be spending, spend. Don’t take money and then give it back. And then what it just seems so complicated when there seems to be- and then I would imagine that it’s harder then to get a full grasp of what a certain cut or what a certain expenditure does in comparison to a straight out spending program for a certain thing. So I don’t know. It just seems like it-
Adam Michel: You’re exactly right. It blurs the line between what is spending and what is a tax cut. Tax credits are spending that Republicans like often. Because say I want to to incentivize research and development, I could either have the government write checks to companies to go do research and development, or I could design a tax credit that lowers the tax liability of companies that do that same research and development. And maybe one is called spending and one is called a tax cut, but they’re really doing very similar things, and it could be designed to be doing identical things. And so you’re right, it confuses the conversation and makes taxpaying more complicated, which ultimately feeds a whole industry of lawyers and accountants that both lobby for more of these things because it keeps them employed, often lobbies to make them more complicated and harder to understand but also just makes the business of tax paying more complicated. And I think that that’s really a shame. There’s things that sound really good in the tax code, like a tax credit for low income housing. But when you actually dig into it, the tax credit mostly goes to subsidize large developers who would have built that housing anyway, and subsidizes a large cottage industry of lawyers and accountants that do all the documentation and figure out how to actually extract this tax code from this tax credit from the tax code. And then meet all the compliance standards that have to be met to sort of validate that you actually can get this thing. And so it’s really ultimately counterproductive, and we would all be better off if we just removed most of these things and lowered rates for everyone.
Juliette: So the next biggest federal tax, the payroll tax. When I think about this, I think a lot about the fact that it’s for a specific program, it’s for retirement benefits for current retirees, and you’re putting money forward for your future, but like the money is also being spent now. But when I think about it, I think about how programs like social security. Right now, social security is not on a pay as you go. It’s kind of just growing. Also, is the money that you’re paying in your payroll tax going straight to social security, or is it just going to the government? And they’re putting some money towards social security, but your money could actually be going towards like roads or something.
Adam Michel: Yeah. So the idea that the payroll tax is going to fund these programs I think is ultimately more confusing than it’s worth. And that’s for a couple of different reasons. I mean the payroll tax does go to fund social security. The portion that goes to social security goes to social security. And a portion of it goes to Medicare does go to fund those things. But the problem is money is fungible at the end of the day. And so the government can sort of move things from one account to the other, but really what’s happening is that the taxes that we pay, for social security and Medicare, through the payroll tax, don’t come close to funding the benefits that are promised when we retire and draw on those programs that they’re supposed to be funding. So the real problem is that people think that they paid into these programs and that they’re entitled to them. Thats where we get this word “entitlement” for these programs. Social security, Medicare, Medicaid. People feel entitled to them because they paid into them. But most people don’t understand that what they paid into these programs, doesn’t come close to covering the cost for when you actually retire.
For example, some retirees, lower income retirees that retired last year in 2020. If you earned throughout your life about $23,000 on average, you paid in about $171,000. But are going to get out $422,000 in sort of cumulative benefits. And the difference shrinks as you get, as you get wealthier, but you’re still receiving more benefits than you paid in. And it’s that gap that is ultimately a problem. And so the, the flip side of this is that the government isn’t investing this money. You said it’s sort of a pay as you go system right now, that the money that’s coming in is funding current retirees. But if we were to move to a system where instead of sending all that money to the federal government- instead I put it into an account like a 401k account, just a type of retirement account that is invested in assets that make earnings over time, whether they’d be the stock market or something else. Most people would be significantly better off to the tune of hundreds of thousands of dollars over their lifetime, if they were allowed to invest that money in the market, rather than sending it to the government in the form of taxes and then receiving benefits when they retired. And so both sides of the payroll tax system don’t really serve us all that well.
Juliette: Sounds like a lot of tricky business. Such as this next thing that I’m thinking about, which is what is the difference? Really? So the payroll tax is on wages and both employers and employees pay. But the income tax is just employees on their income, but it seems like this distinction between income and wages is kind of unclear? Because both of these taxes are being paid from the same source of revenue for the majority of people. So how, how does that work? Are people just paying taxes twice on the same money?
Adam Michel: You’re right that the bases are similar for most people. The payroll tax does have a cap or above a certain income threshold. You no longer pay payroll taxes where income taxes are- We haven’t talked about those yet, but we have a progressive income tax system. So, I pay a 10% rate on the first amount of money I earn. And then beyond that, the next dollar of income I earn above that threshold is taxed at a higher rate. And then it sort of cascades up from there, but you’re right, the systems are sort of, at the core, taxing the same sort of base pay with some more complications about other deductions for employer-provided health care and some other things. But you’re right, we’re basically taxing a similar money.
Juliette: I’ve heard people say that the person who sends the check to the IRS doesn’t really shoulder the economic burden of the tax in terms of the payroll tax with the way that half the tax is paid by the employer. But I’ve heard a lot of economists say that even the employer’s share of the payroll tax is actually shouldered by the employee. Can you explain how that works and why that is?
Adam Michel: Yeah. So this is true for more than just a payroll tax. But if your employer is going to pay you whatever they think your worth, the amount of sort of productivity that you bring to the table, the amount of whatever product that you’re making. The employer values that at some fixed amount and that’s how much your employer is ultimately gonna want to pay you from their side. That payment can come in any number of ways. It can come as writing you a check for just cash. It could come in other benefits such as increased paid time off or it could come in the form of healthcare benefit or a retirement benefit. But that whole compensation package isn’t going to change. And so we should think of any taxes that the government charges the employer as sort of- they have to fit into that total compensation package. So if the government says “I’m going to charge you 6.2% tax on that employee’s wages” that’s just another cost to the employer of employing you. So that’s just going to come out of your share ultimately at the end of the day. And so that’s what the economists mean by the cost of passed on to employers.
If the government raises that tax by a dollar the employer is just going to end up lowering your pay by a dollar to cover the difference because that tax didn’t make you any more productive or any more valuable to the company. So it ultimately has to come out of your share. But something similar happens in front of the corporate income tax. A corporation is just sort a legal fiction. It’s just a legal entity that’s been set up, and the government charges the corporate income tax to the corporations on their profits, but ultimately it’s people that have to pay the tax somewhere. So, that corporation passes the cost of that tax on to either workers in the form of lower wagesor to consumers, the people that buy the things from the business in the form of higher prices, or to investors, the people that lend the business money so that they can grow and expand. They can pass the tax on, in the form of lower investment returns. And here again, we actually see, when you look at the sort of empirical research that workers are the ones that ultimately end up bearing the true cost of the corporate income tax. Primarily through lower wages, for various reasons, but that the tax cost is ultimately passed back to a person. And that’s a really important principle, especially when we’re thinking about business taxes.
Juliette: It really makes sense once it’s explained, but it’s so counterintuitive. I don’t know. It reminds me of like requiring paid leave because the business, or the company has to take that into account when you’re hired and that that is considered a benefit and that they have to pay for that cost of that. And so if it’s required? I don’t know.
Adam Michel: There’s a – and to make it sort of a catch conversation – there’s a specific exclusion in the income tax where you actually don’t pay income tax on the value of employer provided health insurance. If your employer pays you in the form of more generous healthcare coverage or healthcare benefits, that form of compensation isn’t subject to the income tax. So it actually incentivizes employers to pay their employees in the form of care instead of in the form of an actual physical check of writing you a payroll check every couple of weeks or every month. And so this is just one of the many distortions in the healthcare industry where there’s sort of a government subsidy. Plus it’s a subsidy for more spending on healthcare, rather than spending on everything else that you would spend your paycheck on. And so this is one of the many interesting ways where a capped policy isn’t neutral, isn’t treating sort of all things similarly, but is instead preferencing one thing over another,
Juliette: That’s so interesting. I had no idea that. I mean, I guess if I was older and had a job that was paying me and like healthcare and stuff and giving me healthcare benefits, I might know about that. Just imagine if you want to go buy a smoothie, but no, you’re not, you’re not given the money to buy an extra smoothie because you get a healthcare benefit, but you might not need it ?
Adam Michel: You’re right. It makes some people better off and other people worse off. Many people would much rather just say “give me a paycheck and I’ll choose what to spend the money.” But as soon as, even in this case, the government’s preferencing payment through healthcare. But as you referenced, whether it be paid family medical leave, or if the government mandates certain amount of paid time off or something else. The bundle of employment compensation starts looking more and more fixed. And for some people that might be great, because that’s the bundle of compensation they want, but for someone that lives their life a little bit differently or has different needs,they might want to be compensated with some other bundle of goods or just with cash. And those people are ultimately made worse off.
Juliette: I want to ask you about the progressivity of the federal tax system. So many proponents of the wealth tax believe that the rich don’t pay enough taxes or don’t pay their fair share, but let’s not get into the issue of fair share and stuff because that’s very subjective and just has nothing to do with this really. So we can look at the federal tax code and we can learn a few things about it that can guide our understanding to the matter, and kind of the way that it works. I mean you wrote a recent article that kind of looks at that. One way we can look at it is to look at the share of income made by high income Americans and compare it to the share of income tax that they pay. Can you tell us about what the data shows?
Adam Michel: Yeah, so the one we’re talking about is the income tax piece. The wealthiest Americans pay the lion’s share of the income tax. The top 10% of earners make about 48% of the income, and they pay 70% of all income taxes. I’m sorry. They make about 47% of income and pay 70% of the income taxes. So, they’re paying significantly more taxes in relation to the share of the income they earn. And this gets sort of more lopsided the wealthier you get. But then people will say, “well, what about the the payroll tax? This is the payroll tax is not nearly as progressive.” And you’re correct, but as we sort of add more things into the conversation, we should be looking at the tax side and the benefit side. And again, when we look at the sort of the progressivity of the fiscal system, the full US federal fiscal system of taxes and transfers again, we see that the system has become more progressive over time, and the highest income Americans tend to cover the largest share of those costs. The highest income at 20% of Americans- their share of the total net cost of the federal system has been increasing over time. I think it’s increased sort of over 200% since the 1980s. And so to claim that our system is not progressive is, I think, is certainly disingenuous. And when you compare us to other countries around the world you’ll find that our system is actually much more progressive than many of the countries across Europe.
Juliette: What happens if we include all taxes, even at the state and local level, does that change the way that it’s distributed?
Adam Michel: So when you include state-level taxes the story I just told doesn’t change. The top income groups still pay more taxes than the share of all the income that they earn. But it does become a little bit less progressive because States tend to rely more on sales taxes, which tends to be more evenly distributed across the sort of income scales and less lopsided on the wealthy. So still a highly progressive system, but the federal system is significantly more progressive than the state systems are.
Juliette: What happens when you take into consideration the benefits that are paid through the tax code, like the child tax credit, or some sort of tax credit?
Adam Michel: When I was quoting sort of those income tax statistics a minute ago, that does include the earned income tax credit and the child tax credit. But sometimes people will comment on the progressivity of the income tax system with the tax system overall and leave those pieces out. There’s some economists on the left, like to quote this statistic that the lowest-income Americans pay a higher tax rate than the richest Americans. Those statistics often come from not factoring in the EITC and the child tax credit, and then making some other adjustments on the top end that skew the conversation. So I think it is really important to remember that the tax code has these sort of built-in features that keep taxes low, pretty low, for the lowest-income Americans.
Juliette: I mean, I would not have known to take that into consideration. And I mean, I guess it makes sense. Cause if you’re trying to argue that we still need to make it more progressive then you want to make it look like it’s less progressive. So it makes sense, but stuff like that just shocks me sometimes because if that’s your job, why are you not taking into consideration the things that-
Adam Michel: Because I think this is something that’s true across disciplines. All Issues of public policy are so incredibly complicated that you’re always making decisions about what to include and what not to include in whatever data you’re looking at. And those decisions that are going on behind the scenes often drive the outcomes. And that’s why it’s so easy to think for smart people on the right and the left to come to very different conclusions and very different policy outcomes. It’s almost always driven by some sort of normative internal personal preference as to what the world should look like that then drive some of the decisions of which data to present and how to present it. And everyone does. All data has to be interpreted at some level. And so it’s just always important to go back and sort of ask yourself, “how is this constructed?” “Am I believing it just because it’s confirming my priors and sort of what other pieces of information are out there that might tell a different story?”
Juliette: Another good lesson. So, you mentioned before that countries, especially in Europe, pay for their large spending using mostly regressive taxes, which kind of makes the United States an oddity. So, can you explain how that works? Because from what I hear people saying, and from what a lot of my friends say all the time, it’s like we need the tax system we have. We need to increase how progressive our tax system is because otherwise we won’t be able to pay for it, but in Europe they’re doing just the opposite. I don’t know. Can you talk on that a little bit?
Adam Michel: Yeah. So you’re exactly right. That the sort of average European tax system is much less progressive than the US system. And that happens in a couple of different ways. Often they’ll have income tax rates that are significantly higher than ours. That are, Instead of 40%, there’ll be 50, 60, or 70% income tax rates. But instead of in the US the top rate of 37% applying to people that earn half a million dollars a year and above, that 50, 60% tax rate will apply to people who are making $50,000 a year often in some countries in Europe. And so their highest tax rates apply to a larger, much larger segment of their population. They often also have significantly higher payroll taxes than we do, which are those taxes that sort of packs all income, including the first dollar, and don’t have those early exemptions. And then on top of that, they have what’s called a value added tax. Which is essentially a sales tax thats collected in a different way. And sales taxes hit the majority of spending that people do. Those are certainly not considered progressive. They tend to, because most people spending is on food and housing and other essentials, these taxes tend to hit the lower-income people, middle-class people and higher-income people, similarly. And that’s how Europe funds their large welfare States. They fund their large welfare States through high taxes on everyone. Not just high-income taxes, not just high taxes on the wealthy. And you can see this in sort of comparative data across between the US and the EU. If you look at a worker that earns about $40,000 a year,hich is about 66% of the average income,and you sort of normalize that across the EU and the US, someone earning $40,000 in the U S will pay about,uu$12,000 in taxes. That same person living in Europe, will pay a little less than $18,000 in taxes. And so the taxes take a significantly larger share of everyone’s money in Europe. And that’s the cost that they endure to fund their significantly larger governments.
Juliette: A few episodes ago, I talked to Brian Riedl about federal spending. And again, as I am, any time that anyone mentions anything about the federal budget, I just was so stunned at the scale of our spending. And as a result, the problems we have with the debt. Do you think that people realize that the more money, the more that the federal government increases spending, the more that lower-income people will have to pay in taxes, and that there’s no way around it, because there isn’t even enough money at the top to pay for all of that spending?
Adam Michel: I mean that’s the reality that we’re hurtling towards right now. There’s, especially as we layer on any of the new spending priorities that are being championed by folks on the left, the only real way to pay for those promises is through broad-based taxes on most Americans. A colleague of mine, David Burton, sort of did the back of the envelope calculation, and he found that if the federal government were to take all corporate income, and all personal income, over $200,000 a year, and have a hundred percent tax rate on corporations and people, and income earned over $200,000 a year – Assuming that those people keep working and the businesses continue to make a profit for the government to take all – of you could still only raise about $35 trillion over 10 years. The whole host of progressive promises, Medicare for all free college green new deal costs over $90 trillion over 10 years. So, it’s mathematically impossible to pay for the sort of progressive agenda with just taxes on the rich. Ultimately, we have to end up with taxes on middle-class Americans certainly, but core Americans have to shoulder some of that cost as well. Otherwise, there’s no way to make the math work.
Juliette: And that’s with the assumption that taxing at 100% will it change the incentives to produce things?
Adam Michel: Absolutely ridiculous assumption that it won’t change the ascent incentives. We know that when you raise taxes on people they change their behavior. When you tax something more, you get less of it. And when you tax work at high rates, you get people work less and less work means less economic activity, less innovation, less entrepreneurship, less progress, less of all the things that make our lives better. Less of the innovation that leads to things like vaccines to cure problems that we’ve never had to encounter like the coronavirus you could go on and on. And that, I think, is the real fear. Is that the sort of punitive regimes that will be necessary to pay for all of this, all the spending we’re doing now, let alone all of the spending, that is being promised. It will have sort of long-run dramatic, negative impacts on people to offer economic opportunity and wellbeing.
Juliette: What you think we can do about it? Are we too far gone or is there still hope? Or are any of the possible solutions even going to be accepted or even entertained by politicians or just anyone who has any sort of power to do anything about it?
Adam Michel: I know our conversation has maybe sounded pessimistic, but it’s not too late. And we can get our hands around these issues. People just have to start caring about it and conversations like this. And a lot of the work that Brian is doing, and many others is critically important to getting the average person to care that Congress just spent 6 trillion additional dollars on the coronavirus crisis in the last year. And that most of that money isn’t well-targeted, or isn’t actually going to people in need, but it’s instead being spent on any number of things have very little or nothing to do with the coronavirus. I think that argument can be made well, and is compelling to a lot of people. A lot of people have cared about it in the past. So, I think at some point these arguments will resonate with folks, and once people start caring, then the representatives in Washington will start caring, and that’s when we’ll be able to get some change. But right now we just have to talk about it, get the word out get people to care and you’re doing your part.
Juliette: Yeah. That’s okay. That’s good. That’s some optimism or ending on a pretty good note, I guess. I think a good note about something that’s kind of scary, kind of frustrating.
Adam Michel: Just one quick point on this is that the real problem of sort of the runaway deficits, and debt I think is more manageable if we think about it as in growth rates. So we know that tax revenue sort of automatically grows over time for various reasons. There’s sort of automatic things built into the tax code. That means that we get a little more revenue each year. But spending is also increasing and it’s increasing faster than revenue and it’s increasing faster than economic growth. And that’s the problem. Really, what we need to do is reduce the growth rate in spending. And if we could just reduce the growth rate of government spending to 1% or 2% so not even stopping the growth or even cutting anything, just stopping the growth rate year over year, you could get to a balanced budget pretty quickly.
Adam Michel: I don’t have the updated numbers off the top of my head, but it used to be, if you could get to a growth rate of one and a half or 2%, you get back into a balanced budget within 10 years. And so while the decisions are difficult and how we actually reduce that growth rate, because the growth is driven by Medicare, Medicaid, social security, some of the thorniest issues in American politics. The Math of it is not that difficult. And so as soon as politicians sort of get the guts to be able to talk about some of these issues that are driving the growth rate. The answers aren’t necessarily out of this world, inconceivable, it’s very doable to put us on a sane fiscal path.We just have to have this sort of political will to get there
Juliette: That helpful. And here listeners action item, share this podcast, shout it to myself and to Adam. But also just talk about this sort of stuff, because people, I feel like I didn’t understand this. I know a lot of people who don’t understand this, and so talking about it is not only a way to get people to care, but it’s a way to get people to understand it and see the solutions that are possible if only we all understood it. So, you know, just talk about it or share this, or share something, you know. So to wrap up, what is one thing you believed at one time in your life that you later changed your position on and why?
Adam Michel: This is a great question. I guess I’ll keep it in the same sort of conversation we’ve been having in the taxes and spending space. I used to think that something called “starve the beast” worked. So this is theory that if you cut taxes you’re going to therefore constrain the growth of government. So you don’t need to cut spending. All we need to do is just cut taxes. And then because deficits can’t grow forever spending has to ask to come down eventually. And I think we just empirically see that this doesn’t work. After this most recent- in 2017, there was a big tax cut. Congress turned around and increased spending multiple times. Similar things happened in 2002, 2003 around the Bush tax cuts. And I mean you could see our deficit continues to grow, even though we’ve had some pretty significant tax cuts and other tax reforms. So ultimately I think tax cuts without offsetting spending reforms, just make government look cheaper to people. So they’re not paying for the government they’re getting, which in turn makes them demand far larger amounts of government. So I think it’s really important to talk about spending and taxes as two sides of the same coin. Anytime we try disconnect the two, we get sort of out of whack fiscal policy. And I think we’re seeing some of that today.
Juliette: Yeah. I mean, that makes a lot of sense. I never really thought too hard about, Oh, well, what’s the best way to do this because I’m still kind of trying to grasp what this is and what is going on. But you do bring up good examples and good times where this sort of strategy if it works, should have worked, but it didn’t. I feel like it does make sense. And it does have really bad implications, especially right now – but thank you so much, as you have given a lot of very good lessons and you’ve informed me and informed the listeners. So thank you so much for your insight and thank you to my listeners for listening, subscribing and sharing my podcast. If you want to be on the podcast, or if you have a guest in mind, please feel free to reach out to me at [email protected] Thank you, Adam.
Adam Michel: Thanks for having me on it was a pleasure.