Beware of Partisan Tax Zombies

By / 8.27.2010

There has been growing chatter this week in response to James Surowiecki’s recent piece in The New Yorker suggesting we create a new, higher-rate tax bracket for the “super rich.”  It’s the kind of side story I should expect to see and not take too seriously when major tax changes are on the political agenda.  But I can’t just ignore this one, because it keeps getting more traction, and I think it baits extremists on both sides into all-too-familiar class warfare arguments, which are exactly the kind of discussions we should not be having right now.

As a Democrat, I am strongly in favor of a progressive tax system.  It’s one of the widely held values that defines us as a party, and it’s something we should not shrink from fighting for.  But there comes a point when the zeal for progressivity can overtake reasonable concerns about encouraging economic growth, and this year is not the time to let that happen.  Questions of distributional justice are important, and the Bush tax cuts did a lot to worsen inequality in our country that need to be remedied, but let’s keep the bigger picture in mind here.

The proposed “super rich” bracket is a supercharged example of how progressives are misdirecting our energies in the tax debate.  While there’s not much chance that it will make the jump to becoming an actual legislative proposal, the idea has struck a nerve on the left, which is already twitchy over the debate over whether to extend the Bush tax cuts for the top tax brackets, as Paul Krugman dutifully showed in his Times op-ed on Monday.   CNBC was quick to give the story more legs by bringing on Michael Linden from the Center for American Progress to endorse the idea in a segment on Monday.  Then they came back to it with another segment Wednesday night with Matt Miller (also from CAP) facing off with Stephen Moore from the Wall Street Journal.

For someone who has written about the Tyranny of Dead Ideas, Miller really let himself go a little zombie on this one, sounding too much like the “talking dead” with the old-school liberal argument for steep progressivity in the tax code and a deaf ear to the concerns about economic growth.  I’m not criticizing him personally as much I am CNBC for painting him that way, since Miller has repeatedly weighed in with very good thoughts about cuts for payroll and corporate taxes, but I think volunteering to step into the scripted left-wing role for this segment was a step backward from his earlier calls for a more radical centrism.

Is this really the kind of debate we are going to get dragged into this year?  With the country still languishing in recession, people in every tax bracket are looking to Washington to do what needs to be done to get the economy going again.  Do we really have to listen to the same broken records from both sides this time around (and they really are records, because these arguments haven’t changed much since the days of vinyl)?    This is the type of discussion that will drag the current tax debate into a predictable and unproductive battle of liberal and conservative clichés, which all but ensures that Congress will spend the fall in a tug-of-war over marginal tweaks to the Bush tax cuts and ignore other proposals for reform and stimulus.

We Democrats should not paint themselves into our usual corner in the tax debate by limiting our ideas to line-drawing, whether it’s the Administration’s line for the richest two percent or a new line for the “Ultrarich” in the top 0.1 percent.  Letting this happen would be a mistake for two reasons:

First, it obscures and marginalizes better policy questions at a time when sustainable economic growth should be our top priority.  Putting aside broader reform proposals, even the Bush tax cuts may not deserve to be lumped together and simply cleaved in two at the $250,000 line.  For example, rates on dividend income for the top brackets could jump from 15% to 39% in 2011, while capital gains income will stay at a lower 20% rate.  There is a good case to be made that the dividend rate should be kept in line with the capital gains rate, regardless of what happens to marginal rates, because having a disparity between these two taxes on investment negatively affects the cost of capital for utilities and other companies paying high dividends, which discourages spending on new capital and infrastructure.  But we likely won’t have that debate, because the distributional effects of playing with the dividend rate fall mostly within the top brackets, so they are on the wrong side of the dividing line Obama has drawn.

Second, Republicans usually do a much better job delivering their zombie rhetoric than Democrats.  As John Boehner so frequently demonstrates, the Republican response for talking about the top brackets is to use “small business” as a euphemism for rich people.  They have shaky new statistics every week about how the Democrats are raising taxes on small business.  But trying to explain away all the false numbers tends to put Democrats on the defensive, when they should be making an affirmative case for promoting economic growth.   And so far, Boehner and company are getting away with doing just that, because the President and congressional leaders are following our party’s tradition of being reactive on taxes instead of laying out a real vision.  So right now the public thinks the “Democrats’ plan” is pretty much whatever John Boehner and the tax zombies say it is.

Progressives’ top priority right now needs to be reviving economic growth and broad-based prosperity.  We can’t have a meaningful debate about economic inequality until we get our economy growing again.  Jobs and growth—not punishing the rich—are what Americans are interested in, and what we should be talking about.  Instead, progressives are limiting their talking points to justifying the dividing line between those who deserve tax cuts and those who don’t—the helps and the help-nots—and we’re letting Republicans own the growth side of the debate.

Democrats need to have something more than tired old thinking that says the Bush tax cuts are mostly OK for now, as long as we give them a quick liberal haircut—just a little off the top.  Instead of trying to repackage Bush’s mistakes, we should be framing the debate around the pro-growth virtues of a free-standing package of “Obama tax cuts.”  All we need now is for Obama to actually propose one.  I hope the zombies didn’t get to him too.

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