Monday, December 6, 2010

Refreshing Honesty About Taxes

I spend a lot of time commenting on what Paul Krugman says because he isn’t coy. Given half a chance, he’ll tell you the things liberals really think—or, by his lights, should think—but are afraid to say openly. Taxes are an issue as to which Krugman’s candor is especially refreshing because, since Walter Mondale’s 1984 presidential campaigned crashed and burned over his promise to raise tax rates, liberals have gotten into the habit of speaking so strategically about tax policy they’re having trouble remembering what they really do, or should, think.

It’s hard to say, for instance, whether Clinton in 1992 and Obama in 2008 campaigned on middle class tax cuts in deference to the liberal principle of making the tax code more progressive or as a political concession to illiberal constituencies.  The same question arises in connection with the Democratic Party’s current support for extending the Bush tax cuts for families making less than $250K/year but resisting their extension to people in higher tax brackets.  If you ask me, liberals are so invested in the notion that Republicans are holding middle-class tax cuts hostage to tax cuts for the rich that they've forgotten what liberal tax policy is all about.

So you have to hand it to Krugman for coming right out and saying that, despite what Obama apparently thinks, it would be better from a liberal standpoint to let all of the Bush tax cuts expire than to extend them across the board:

“[W]hile raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.

“Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?

“America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending.

“And we’re not talking about government programs nobody cares about: the only way to cut spending enough to pay for the Bush tax cuts in the long run would be to dismantle large parts of Social Security and Medicare.”
Notice that Krugman’s attachment to a middle class tax cut is circumstantial. He thinks that, when unemployment is approaching 10% and monetary policy is largely tapped out, it’s a bad idea to take another chunk at out of aggregate demand by raising tax rates on the middle class. But that doesn’t mean that it would be a bad idea to raise middle-class tax rates after the economy recovers enough for monetary policy to regain its traction. If you want to fund a robust social safety net, that’s where the money is.

Let’s get back to basics. The two most important variables in the design of a tax system are marginal tax rates and the breadth of the tax base to which they’re applied.  Imagine that you’re confronted with a Chinese menu of tax systems allowing to choose one offering from column A (either low and flat or high and steeply progressive rates) and one offering from column B (either a broad tax base or a tax base narrowed substantially by your favorite tax deductions and tax credits).

All other things being equal, a consistent anti-statist conservative like Steve Forbes will opt for low and flat tax rates and the broadest possible tax base because that’s the way to generate public revenue while exerting the least social control of individual conduct. A Republican wheeler dealer like Tom Delay would also want low/flat rates, but might prefer to retain a little more control over the breadth of the tax base as a means of paying off favored political constituencies.  But that's a matter of his being more inclined than Forbes to dilute conservatism with political expediency, not a quarrel within conservatism.

Yet if you’re a consistent liberal of either the traditional or New Democratic persuasion, you’ll opt for both high/progressive tax rates and a system that gives you a lot of discretion over the breadth of the tax base. The high/flat rates enable you to exert social control over a higher slice of GDP and fund traditional liberal programs like Social Security and Medicare out of general revenues when they're no longer self-sustaining. And having the discretion to offer relief from high tax rates through well-targeted tax credits and deductions facilitates New Democratic strategies of promoting liberal objectives through the tax code by paying off  crucial constituencies with hidden subsidies to grease the political wheels. So-called tax loopholes are the distinctively liberal way of easing the tax burden on the middle class.  As far as I can see, the only good reason a liberal could have for favoring either low/flat rates or an inflexibly broad tax base is that it's a necessary tactical concession to what he hopes is an ephemeral political reality.

All of this is perfectly obvious--obvious to everyone, that is, except the liberal politicians who think they can sell the lunatic notion that the Democrats have suddenly become the party middle class tax cuts.  Is it any wonder that voters aren't buying?


Taser M said...

What's honest about opposing funding fax cuts with borrowed dollars when Bush is doing them and supporting funding of tax cuts when Obama's doing them?

Lone Wolf said...

Why can't you be supply-side liberal who thinks low taxes are essential to the growth you need to finance equality-enhancing social policy? A guy like Jack Kemp, for example, seemed to really care about helping the urban poor but thought that low-tax enterprise zones and private home ownership were the best way to do it. Why does a commitment to equality have to include a commitment to Krugman's Keynesianism?

Dave said...

Well put, Lone Wolf. That's a great question.

Ron Replogle said...

I too think Lone Wolf is asking a great question. Given that there's no logical inconsistency in believing in Republican economics and liberal ethics, why don't more people believe in both? This post( speaks to that issue