Global Power Requires Less Consumption, More Taxation and Investment

Richard Haass, who leads the Council on Foreign Relations, has a new book out today entitled Foreign Policy Begins at Home in which he argues that the United States needs to get its own house in order to maximize its global power and influence. Haass says the U.S. also needs to avoid getting bogged down in wars of choice that don't involve vital interests, like Iraq. 

All true. 

What exactly does the United States need to do to strengthen itself domestically, according to Haass? As he wrote recently in The Washington Post

A partial list includes fixing broken public schools, repairing or replacing aged infrastructure, modernizing immigration policy, reforming health care, negotiating new trade accords, lowering corporate taxes, reining in spending on entitlements, and reducing debt as a share of GDP. 

See anything missing from this list? Here's a possibility: The United States needs to raise adequate tax revenues to support new investments and achieve fiscal balance. I would go one step further: The U.S. needs to use tax policy to discourage wasteful consumption and channel national resources in ways that build long-term prosperity and power. 

According to a recent New York Times investigation, Americans now pay the lowest taxes -- federal, state, and local combined -- than at any time in the past thirty years. The fiscal cliff deal barely changed that reality, since it only raised taxes on those earning over $450,000 and kept taxes on capital gains near a historic low. 

This light national tax burden make absolutely no sense at a time that the United States is facing rising global competition, deteriorating infrastructure, and changing demographics which require not only more outlays for seniors but also more investments in young people from poorer, nonwhite households. (Whites now account for under 50 percent of all U.S. births.) 

I haven't read Richard Haass's book, only excerpts, so I don't know where he comes out on raising taxes. But it's hard to see how he can avoid that recommendation. Haass surely knows that after World War II there were many conservatives who wanted to go back to the Coolidge era of small government and low taxes. The only reason the United States was able to be a superpower was because it rejected that approach and kept taxes high in order to mobilize national wealth for both international power projection and domestic investments. Rising U.S. power in the 1990s also came as taxes touched the highest level since World War II, as a percent of GDP. 

In contrast, the story of U.S. decline in the past decade is closely entwined with the GOP's jihad against taxes. 

Thirteen years ago, the United States was running a budget surplus and was so powerful that political scientists were talking about the perils of a unipolar world. That position of preeminence was squandered not just by an expensive and disastrous war of choice in Iraq, but also by huge and historic tax cuts that turned a surplus into deficits and helped load up $6 trillion in new debt. Meanwhile, the United States reduced key investments, in relative terms, in the things that help build national power: human and physical capital.

The benefits of low taxes under Bush proved minimal, in terms of fueling growth. What we did see, though, was unprecedented levels of private consumption by U.S. households high on the income ladder with extra cash lying around. For instance, the number of second homes in the U.S. soared, and the average size of all U.S. homes rose by 200 square feet between 2000 and 2007, a big leap by historic standards and one that occurred in large part because flush Americans in upper tax brackets -- paying the lowest tax rates in seventy years -- were building so many huge homes. 

In arguing against taxes, conservatives like to complain that government shouldn't decide how to spend people's money. Apostles of national power like Richard Haass should publicly argue the exact opposite point: That a weakened country like the U.S. can't afford to be channeling so much wealth into trivial forms of private consumption -- ATV sales have skyrocketed since 2000, along with the miles of granite in American kitchens -- while cutting investments in human and physical capital. (To be sure, a weakened country also needs to think twice about how much it wants to spend on old people. But that's a post for another day.)

Bluntly put, the state needs to commandeer more national wealth and use it to lay the foundation for future prosperity. The U.S. needs is not just more revenue, but tax reforms that serve to channel resources to productive ends. A progressive consumption tax is an obvious way to discourage overspending, as the economist Robert Frank has argued. A carbon tax would not only spur energy innovation, but incentivize Americans to build smaller homes and drive smaller cars. 

For a few decades, after World War II, leaders of both political parties embraced robust levels of taxation as a key to national power and greatness. That is no longer the case today. Republicans have returned to Coolidge-era ideas, which are necessarily a prescription for national decline.

Nobody -- whether it's Richard Haass or anyone else -- can talk about restoring American power without talking about taxes. 

Comments