Greg Mankiw Says We Have to Tax the Middle Class More

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Saturday, 29 December 2012 18:50

That is the explicit argument in his NYT column today. What is more interesting than what he says is what he doesn't say. There is no mention whatsoever of the possibility of taxing Wall Street, an idea that is now being pushed even by the International Monetary Fund. The U.K. raises between 0.2-0.3 percent of GDP on tax that only hits stock trade, leaving options, futures, and other derivative instruments unaffected. This would be roughly $500 billion over the course of a decade in the United States.

Japan had a tax that raised 1.0 percent of its GDP in the late 80s. That would be roughly $2 trillion over the course of a decade. Robert Pollin and I outlined a structure of taxes that could raise a comparable amount here. Anyhow, the middle class might be in Mankiw's sights when it comes to taxes, Wall Street obviously is not.

The biggest item on the other side of the equation is health care. Our costs are hugely out of line with the rest of the world. We pay on average more than twice as much per person for our health care as people in other wealthy countries with little to show for it in terms of outcomes. If our per person costs were comparable to those in other countries we would be looking at long-term budget surpluses, not deficit.

We could look to fix our health care system or failing that allow people to take advantage of the more efficient systems in other countries by promoting trade in health care services. But this is apparently also not on Mankiw's agenda. These measures would likely be bad news for the drug companies, medical equipment industry, and highly paid medical specialists.

In short, if we assume a world where we can't take any measures that would hurt the wealthy, then we will probably have to raise taxes on the middle class. However the rest of us may not want to accept Mankiw's assumption here.