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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 applied.

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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.

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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 taxation.

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.)

http://kleinbard.usc.edu/book/

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Comment:

By Don McCanne, M.D.

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.”