Thinking About Things: Money, Demographics, and Politics

September 17, 2019

By John DeQ. Briggs

This is my inaugural column for The Chesapeake Observer. My topic will always be “Thinking About Things”. I do not know what I will be thinking about any given day, week, or month. In general these days I intend think about the ongoing breakdown and accelerating dysfunction of our political parties and, more broadly, our entire political system. I intend to think and write about these things (among others) in small bites, and in a reasonably orderly way. I expect to stay grounded in facts to support views.

Money: Where It Goes

The expenditures of our country are hiding in plain sight in this mesmerizing website. The captivating first page will tell you at a glance that federal spending is approximately $4.5 trillion; federal tax revenues are approximately $3.5 trillion; the US national debt is more than $22.5 trillion; the ratio of federal debt to GDP has increased from 34.7% in 1980 to 105.6% today; and much more. And you can see that total student loan debt is more than $1.6 trillion while total credit card debt is just a smidgen over one trillion dollars. Such numbers are at the center of most policy issues.

Here are the largest budget items: Medicare/Medicaid nearly $1.2 trillion; Social Security a smidgen over $1 trillion; defense spending $643 billion; interest on the national debt $380 billion; income security (welfare/food stamps $299 billion; federal pensions $287 billion; food/agricultural subsidies $156 billion. These numbers come to $3.96 trillion). Given total federal spending of $4.5 trillion, the stubborn mathematics of it all is that the spending identified above amounts to 88% of the federal budget. And, of course, the entitlements (Medicare/Medicaid; Social Security; interest on the national debt; income security; and federal pensions) are growing relentlessly at a rate in excess of the growth of available federal revenues.

In the face of these daunting numbers, which have been trending this way for some time, it is astounding that no political party seems concerned or committed to some semblance of financial rectitude. Fiscally responsible budgeting used to be the province of the Republican Party and Conservatives generally. This is no longer true. Financial responsibility has never been the province of the Progressives or the Democrats.

Money: Who Provides It

Tax data are important to any understanding of spending policies; the data are also fascinating. Data from the Congressional Budget Office tell us that total federal tax revenue is a bit more than $3.5 trillion and this includes income taxes, payroll taxes, corporate taxes, excise taxes, and all other federal taxes. About half of this total amount comes from income taxes. More than a third comes from payroll taxes. Here are some highlights about income taxes from the Tax Foundation.

  • The top 1% (1.4 million tax returns) paid 37.32% of all federal income taxes in 2018, and the average tax rate was 26.87%
  • the top 5% (7.04 million tax returns) paid 58.23% of all federal income taxes in 2018, and the average tax rate was 23.49%
  • The top 10% (14.08 million tax returns) paid 69.47% of all federal income taxes in 2018 , and the average tax rate was 21.19%
  • The top 25% (35.2 million tax returns), page 85.97% of all federal income taxes in 2018, and the average tax rate was 17.84%
  • The top 50% (70.44 million tax returns) paid 96.96% of all federal income taxes in 2018, and the average tax rate was 15.57%.

“The top 1%” is a construct that varies very much from state to state and is based on household income not individual income. In the US writ large, a family needs an income of $421,926 to be in the top 1%. But in New Mexico, this number is just over $250,000, while in Connecticut, it is just over $700,000. But the average income of the top 1% nationwide is “only” $1.32 million. State-by-state and other data of interest are here.

To be sure, there are thousands of households in the top 1% who may enjoy incomes (and net worth) well in excess of $20-$50 million and even into the billions. These individuals likely include Hollywood stars, many professional athletes, highly paid media personalities, CEOs of certain public companies, and a good number of elected politicians who have managed to parlay public service into vast personal wealth.

It is not particularly clear as a matter of policy why these mega rich or super-rich should be taxed at the same rate and in the same manner as a family of four, with an income of $425,000. And it is not clear why the capital gains rate should be so far below the ordinary income tax rate. There are legitimate policy questions lurking in these areas. But however they are addressed, more taxing of “the rich” (whatever that might turn out to mean) is neither going to be short-term solution to the nation’s financial problems, nor will it represent an endless cache of riches that can fund the Progressive dream of debt forgiveness, free education and free health care services for future generations. There is also the question of the unintended consequence of tax policy serving to smother family businesses. Still and all, funding even the current deficit requires that the funds come from somewhere, and taxing the mega rich more might make a dent in the deficit while creating more social cohesion. But absent a broader tax increase or a national sales tax, our nation cannot afford the obligations to which it has committed itself already, much less those obligations that demographics suggest might soon become politically popular

So, let us turn to the stubborn truths of demographics.

Demography is Destiny

Many aspects of the American future are obvious to anyone who cares to look. We can look at the current population and its ethnic/racial/religious/national makeup; we can look at the birth rate of each discrete segment of the population; and we can look at immigration patterns for the same categories of people. The Pew Research data shows the accelerating impact of Asian, Hispanic and other non-white populations. The data at the link reveal several points of consequence for the medium and longer term.

First, there are wide gaps between the generations on many social and political issues. Millennials (born from 1981 to 1996) and other relatively young people are far more likely than their elders to hold liberal views on most political and social issues. They do not much identify with any political party and more than half self-identify as political Independents.

Second, the 2016 electorate was the most diverse ever and the 2020 electorate will be even more so. Millennials are the most racially diverse adult generation; 43% of them are nonwhite. They are supposedly the “best educated” of any generation, although the nature of that education will be the subject of a future column. This is a generation burdened with much of the $1.7 trillion in student debt, many of whose members still live at home. It is a generation that may not have the wherewithal to produce an income sufficient to retire the debt. It is a generation more dependent on government support than any other.

Third, Millennials this year surpassed Baby Boomers (those born from 1946-64) as the largest US adult generation. Millennials are struggling financially; pay few taxes; and do not contribute substantial amounts to the Social Security system. Baby Boomers pay substantial taxes; they are moving into Medicare at the rate of roughly 10,000 people per day; they will also be drawing down social security entitlements while paying little or nothing into the Social Security system.

Politics and Policies: Cognitive Dissonance

The Democratic Party, increasingly dominated by Progressives, seems fully prepared to tax the income rich, to tax wealth itself, and to add trillions of dollars to annual federal spending. And like it or not, given the demographic trends it is difficult to envision a future in which a majority of voters will not support much of the Progressive agenda despite the vast public and private expenditures required.

The seismic demographic shift provides an enormous challenge to “Conservatives,” however, they may today be defined. Their natural constituency is steadily declining. Yet there has been no coherent Republican or Conservative response to the circumstances, other than what might be called “Trumpism.” However, Trumpism does not bring together any particular set of consistent policies, but rather represents at its best a series of ad hoc reactions to world and national events. It is also depending on a declining base that will be overwhelmed by the ascent of immigrants and younger generations with little affinity for Conservative principles and a natural affinity for “free stuff.”

Yet there are multiple points of consensus across the country that Conservatives, might consider embracing as positive policy that could capture majorities in contestable jurisdictions. For example:

  • On immigration: there is broad agreement on the need to develop an actual national policy on immigration that would welcome desired skills (including unskilled labor in many cases), while barring or limiting from entry skills not desired. Surely, we can agree on country by country quotas and on some requirement that immigrants become integrated into our educational, language, and cultural systems. Immigrants who cannot or will not so integrate simply re-create the tribal systems from which they came and do not seem desirable candidates for citizenship.
  • On entitlements: a Conservative agenda could substantially reduce expenditures for Medicare, Medicaid, Social Security, food stamps and other such welfare by:
  • ratcheting up over time the age of entitlements to age 70 or so;
    • requiring some form of state or national service for the unemployed, perhaps related to infrastructure maintenance or re-building;
    • means testing, Social Security and Medicare benefits.
  • On China: addressing the PRC’s routine theft of American Intellectual Property in ways that are aggressive, but that do not create nearly uncontrollable trade wars to the detriment of American consumers. There are WTO and other remedies less disruptive than engaging in a broad gauged trade war.
  • On climate change: acknowledge that climate change is occurring, while also acknowledging that the United States cannot unilaterally make the slightest difference, if indeed any difference can be made even by multilateral action by the most populous countries in the world, including China, India, Brazil, and so forth.
  • On guns, accept and embrace some form of gun control. Rather than opposing any and all forms of gun control, Conservatives might be far better off embracing agreeable and uniform approaches to state gun control. At some point soon, the annual slaughter of children by armed madmen using large magazine weapons will produce a series of Progressive policies that may reflect the emergent popular will.  
  • On criminal justice reform: the Republicans seemed to have been far more serious than the Democrats and there does seem to be broad consensus that we should not be the country that incarcerates more citizens than any other country.

The list could go on and on.

It will be the purpose of this column to think about and address these and other similar things in a considered way and, in the fullness of time, to make modest or immodest proposals for course changes both within and without the political parties.

JDeQB

John DeQ. Briggs is a lawyer whose practice has for decades focused on competition policy in the United States, Europe, and Asia.  He is a partner with a Washington law firm specializing in these matters and was for a decade a Lecturer in Law at the George Washington University Law School on these topics.