Margaret Thatcher is remembered for her quote, “The problem with socialism is that you eventually run out of other people’s money.” The older definition of socialism of centrally controlled means of production has given way to an association with redistribution. You can have a welfare state with a capitalist economy; the more you depend on the redistribution of wealth the more you must depend on the generation of wealth to distribute. The trick is to leave enough incentives is place to maintain the wealth generation machinery; to protect the golden goose.

The right has embraced tax cuts and deficits in the pursuit of economic growth and erroneously extrapolated an example into a principle. There are circumstances where lower tax rates will yield higher revenues, but that is not an absolute rule and below a certain point lower rates will only yield lower revenues. Deficits yield other hazards making us more fragile and more susceptible to shocks like the one we are incurring in our reaction to Covid-19.

It is important to distinguish statutory tax rates-before deductions and credits- from actual tax rates- after deductions and credits.  It is the former that the media usually refers to but it is the latter that affects behavior.  Our rates may be progressive but deductions have great benefit to the higher income. The 2017 tax bill shrunk the difference by sharply limiting state and local tax deductibility and other deductions like mortgage interest and professional fees.

The left has embraced deficits to hide the true costs of the entitlement state from the voters and themselves. They labor under that illusion that unrestrained spending on endless programs can all be provided on the backs of the wealthiest without economic consequences. Most of the entitlements do not go to the poorest but to the most politically connected. This is particularly true in the unfunded pension liabilities of a few large states. Europe has long accepted that their entitlement state requires high taxes on the middle class; we still refuse to accept that reality.

The shock of the shutdown and the cost of the huge rise in unemployment in a very short time will quickly overwhelm the unemployment systems of most states, and the states do not have a Federal Reserve and the ability to create money and credit. Vulnerable states with the largest underfunded pension liabilities are looking for relief from the largesse of the federal government in their rush to flood the economy with record sums of money. Mitch McConnell has voiced the proposition of letting states go bankrupt, acknowledging that the federal backstop will eventually reach some limits.

Without the ability to create money the reality is that most states will face draconian cuts and severe credit issues. States that have been more responsible in managing their budgets will resist bailing out irresponsible states, even under cover of the Covid relief efforts.

There are not enough wealthy to fund these shortfalls. Taxing the one percent at 100% will not solve the problem. The combination of prior irresponsible state fiscal management and the enormity of the shock we have incurred will demonstrate that we have run out of other people’s money.

Expense cuts will reach state employees and state pensioners. Taxes must be raised broadly; raising it too much in select sectors can yield less revenue depending on the sector and its elasticity. Gas taxes will go up, tax exemptions on food and drugs will disappear, property taxes will go up, sales taxes will go up. There is no longer an escape from the regressive nature of broadening the tax base.

There is a different moral climate on this recession because the damage is seen to be distributed randomly; there is an understanding this must be funded by finding additional revenues. The challenge is to find the most effective means. It may seem unfair in its application, but the choices have become severely limited.

Economist Greg George, PhD, noted in this environment that the problem with the states in the most critical condition before the Covid shock is not that they are too big to fail but that they are too big to save. We are being forced to face limits we have long ignored.

The shutdown avoided the tradeoffs between public health and economic realities. The health risk now seems overestimated and the economic costs were never considered much less underestimated. As new data emerges, we are able to better measure the trade-offs. The problem is that fear has taken hold and many businesses and employees remain reluctant to return to work even when shelter in place rules are relaxed.

The shutdown is responsible to some degree for flattening the curve, but once that objective is achieved, we need to consider steps to return to work. High risk should still avoid public contact, large crowds should still be avoided, and new hygienic protocols should still be respected. The economic consequences can no longer be ignored.