As Bill Galston points out, there’s no longer much doubt that deficit reduction has become a very large public concern over the last year. It’s a separate question as to whether Americans are willing to support actual spending reductions or tax increases proposed by either party, and thus whether there is really a popular base for a deficit reduction compromise. But no one should argue any longer that the whole subject is just being cooked up by elites.
Still, the current extend-the-tax-cuts debate in Washington demonstrates pretty conclusively that deficit reduction is not, in fact, the preeminent value of either party in Congress. Both are pursuing a path guaranteed to increase long-term deficits and debt. And since the wealthy benefit disproportionately from an income tax rate reduction in the lower brackets (that’s how marginal tax rates work), even the Democratic approach elevates tax cuts for “all Americans” (to use the Republican battle cry) over deficit reduction.
[T]here’s no debate in Washington about whether rich people should get a permanent tax cut. Nor is there any debate in Washington about whether rich people’s tax cut should be financed by long-term borrowing. Nor is there any debate about whether rich people should get a bigger tax cut than middle class people. But we “can’t afford” unemployment insurance, we “can’t afford” to pay bank regulators competitive salaries.We have a bipartisan consensus that the short-term deficit should be made smaller and the long-term deficit should be made bigger even when all the economic logic points in the opposite direction.
Now Republicans, of course, dispute that we’re talking about “tax cuts” at all, and maintain that failing to extend the Bush tax cuts represents a tax increase, even though the reversion to earlier rates has been established in current law from the beginning, and even though the original rationale for the Bush tax cuts was to “rebate” unnecessary revenues when the federal budget was in surplus. But that’s just another way of saying that low tax rates, particularly for those “job creators” at the top, are an end in themselves for Republicans, crucial in every fiscal or economic circumstance, and thus far more important to them than deficits-and-debt.
‘Tis the season for deficit commissions. The past week has brought not one, not two, but three stabs at solving America’s looming fiscal crisis. And just yesterday, the Brookings Institution hosted a panel discussion on “The Politics of Entitlement Reform and the Budget Deficit,” featuring a murderers’ row of budget experts across the ideological spectrum. All the activity underscores just how much concerns about the deficit have taken over the Washington conversation.
But will all that hand-wringing lead to anything concrete and enduring? I have my doubts. The substantive merits and faults of the plans aside, what’s striking is, frankly, how unlikely any action seems to be.
Too pessimistic? Perhaps. But at the Brookings event, there was a subterranean motif that tempered any enthusiasm one might have for any ideas put forward. Isabel Sawhill, director of Brookings’ Budgeting and National Priorities project, at one point said, “The public is in denial about the scope of the problem.” Meanwhile, Eugene Steuerle of the Urban Institute sounded another note of consternation: “Both political parties are afraid to ask the middle class to do anything.”
There, neatly stated, are two fundamental problems that stand in the way of fiscal balance: a public in denial, a politics in retreat. Simply put, the American public simply has no idea how much the government that they like to have around costs. They may profess to hate big government, but ask about cuts to the entitlement programs – by far the largest contributors to our long-term deficit – and what do they say? Hands off! Even 62 percent of Tea Partiers say that Social Security and Medicare are worth the cost of the programs; the general public is even more supportive, at 76 percent.
Recent research by Cornell political scientist Suzanne Mettler underscores the disconnect between the kind of government Americans say they want and the government they actually use. In a recent paper that takes a look at Americans’ relationship with the “submerged state” – federal policies that incentivize and subsidize behavior by individuals – Mettler found that most Americans have little awareness of how the state affects their lives. Most alarming were the results of a survey of program beneficiaries who were asked if they had ever used a government program. Forty-four percent of those collecting Social Security retirement and survival benefits said no; 43 percent who had benefited from unemployment insurance said no; nearly 40 percent of Medicare said no. There’s more: 47 percent who took home earned income tax credit said no; 53 percent of those who took Pell Grants said no; and 60 percent who benefited from the home mortgage interest deduction said no.
So the governed don’t know. What about those who govern? Alas, our political elite seems to have lost all sense of responsibility at steering the ship of state to calmer waters. The fault lies mainly with the right. Yes, Nancy Pelosi’s declaration that Social Security and Medicare cuts are off-limits is easily caricatured as liberalism at its worst, but let’s face it – Pelosi faces a lot of opposition on her side on that front. There is a genuine debate going on under the big progressive tent about just how much entitlements should be touched, if at all, and it’s testimony to the vibrancy – and fractiousness – of progressivism.
Contrast that with the right, which has become an all-tax-cut, all-the-time movement. Grover Norquist, in whose image today’s Republican Party has been modeled, dismissed the Bowles-Simpson report, with his organization, Americans for Tax Reform, calling it “a plan to raise taxes cloaked in the veil of bipartisanship” – this in response to a plan that, by any objective measure, by far does more on the spending side than the revenue side. If their starting point is no revenue increases at all, then the right has all but written the obituary on any attempt to narrow the budget gap.
So there you have: a failure of government, a failure of the governed. Until the American public begins to accept responsibility for the current fiscal straits – and it begins by asking serious questions about what they’d like to see from government and how much they’re willing to pay for it – there really is little hope that we’ll see movement on the issue. Meanwhile, the only institution that can give them that nudge, our political class, isn’t up to the task.
When asked about the worst-case scenario that would finally force policy-makers’ hand to do something, Brookings’ Henry Aaron had a one-word response: “Greece.” Americans may profess to hate European-style states, but the disconnect between their hatred of taxes and love of benefits may well hasten the day of a European-style collapse.
The president will meet with leaders from both parties on Thursday to discuss Congress’s unfinished business for the lame-duck session, and the only thing that is clear going into that meeting is that item number one on the agenda (for right or wrong) will be the Bush tax cuts. Speculation is running high this week that the White House is considering a compromise approach that would extend all of the Bush tax cuts temporarily, most likely for two years. This comes in place of the previous round of speculation that the president’s strategy was focused on “decoupling” the tax breaks, meaning he would push for Congress to vote separately to permanently extend lower tax rates for all households making less than $250,000 per year, while allowing another vote on a temporary extension of the cuts for the two percent of taxpayers earning more than that.
As both sides prepare to dig in their heels for the coming tax fight, the possibility of policy alternatives has given way to a pure tug-of-war exercise, in which compromise is limited to questions of how long to extend the cuts or whether to draw the line at $1 million rather than $250,000. The rare occurrence of a fresh approach is too quickly ignored, such as Senator Mark Warner’s op-ed last week calling for the high-income tax cuts to be redirected as targeted tax incentives for business to boost investment and jobs.
Warner’s proposal would likely be a far more effective way to put lost tax revenues into the most productive hands for lifting our economy, but it’s probably not on the table.
Both parties appear hell-bent on confining this battle to the provisions of the original Bush tax cuts, with the winner to be determined by which provisions do or do not get extended. It’s an unfortunate corner we have painted ourselves into, but there are still important policy issues within this narrow debate that deserve greater attention and vigilance.
In a new memo released today, PPI Senior Fellow Michael Mandel acknowledges that the current tax debate has totally missed the most important big-picture questions about the need to modernize our outdated tax code for what he calls the “supply-chain world” of the 21st-century global economy. However, Mandel points out specific elements of the Bush tax cuts that could actually help move us closer to the type of tax code we need for today’s economy: namely, the lower rates on dividend income and capital gains rates.
Mandel explains that keeping rates low on income from capital is critical for encouraging investment in critical innovative industries over the long-term, and that raising these rates right now would be a particularly bad idea, because our economy is still languishing in what he calls a “business investment drought.” Compared to the data on consumer demand, government spending, and even the collapse in housing, Mandel concludes that the real hole in the economy is nonresidential investment, which has plummeted even more sharply than housing. So while the tax debate has so far focused on the economic impact marginal tax rates would have on consumer spending, Mandel makes the case that we should be looking at the impact that upcoming tax votes will have on investment:
It doesn’t make sense to raise the tax rate on corporate dividends and capital gains in the middle of a U.S. investment drought. That’s true, whether you believe in Keynesian economics, supply-side economics or anything in between.
Taxing capital at too high a rate impairs the environment for innovation, especially in this world of permeable borders and mobile money. In particular, raising the tax rates on dividends is likely to hurt innovative industries such as telecommunications and pharmaceuticals, which tend to pay out dividends at a higher level than other industries.
I have raised similar issues about this potential problem of dividend rates before (mainly here, but also here), but Mandel’s analysis of investment brings the question into much sharper relief. Unfortunately, the positions of the White House and Congress have been much less clear in this issue. This year’s tax debate has been an exercise in gamesmanship more than a battle of ideas, so both the president and Democratic leaders have remained a little ambiguous about their proposals for these rates, largely because they don’t fit well with the line-drawing fight over whether the wealthiest Americans should have any of their tax cuts extended.
Changing dividends to 20 percent as opposed to ordinary income rates and keeping it the same as capital gains, I think, is good policy. I’m going for policy. Twenty percent on dividends and capital gains is the right policy.
Senator Baucus and President Obama both deserve enormous credit for “decoupling” good policy from the political gamesmanship over the Bush tax cuts, and Baucus should continue to advocate for the lower dividend rate to be included in whatever compromise proposals get thrown around in the coming days and weeks. As Mandel writes in today’s memo, “the best we can hope for may be small steps in the right direction” from this Congress toward a smarter tax code that encourages sustainable growth and innovation. Hopefully Obama and Baucus can avoid taking a step backward on this one.
The post-election wrangle over extending the Bush tax cuts will take place in the worst possible environment for making good policy: A lame-duck Congress facing an artificial deadline to deal with a highly contentious issue after a nasty election. Even from a substantive policy perspective alone, the debate is a bad one, because there’s no consensus among reputable economists about the impact of lower marginal tax rates—the empirical literature is murky, at best.
The fundamental problem underlying this debate is that the U.S. tax code is an outdated and overgrown morass of bad policy. Our current tax system was designed for a primarily domestic economy. But now we live in a world where the unit of economic value creation is now the supply chain, which crosses multiple national borders and cannot be easily divided into domestic and foreign components. And the whole tax system is increasingly perceived as unfair and complicated, with more and more preferences and loopholes added in. What we really need is a sweeping tax reform aimed at promoting growth and innovation, designed for today’s supply-chain economy and simplified for the benefit of all taxpayers. But we’re not going to get this in the 2010 lame-duck session.
So how can we think about the upcoming tax debate in constructive terms that focus on fostering the kind of meaningful growth and innovation that lead to good jobs and long-term prosperity? We can start by identifying broad principles of what our tax system should look like in order to encourage growth, innovation and jobs, and attempt to apply those principles to the choices Congress must make about extending the Bush tax cuts. In doing so, we can hopefully encourage Congress to take steps that will move us closer to the kind of tax system we need, rather than farther away.
One such principle is the idea that the rates on income from capital investment should be kept low, because it is an important element of the kind of broader tax system we need: one that attracts and encourages capital investment, rather than reducing investment options by raising the cost of capital.
It’s crazy, I know, but imagine that U.S. political leaders after the midterm election called a truce in the partisan tong wars to work out a compromise solution to the nation’s fiscal dilemmas. The result would probably look a lot like a new fiscal reform blueprint drawn up by two canny policy veterans, Bill Galston and Maya MacGuineas.
In The Future Is Now: A Balanced Plan to Stabilize Public Debt and Promote Economic Growth, Galston and MacGuineas map a radically centrist course to fiscal discipline that demands equal sacrifice from the left and the right, and that doesn’t impede economic recovery. Here’s hoping that President Obama’s deficit commission, which is groping for a politically feasible formula for fiscal restraint, will give this plan a close look.
Reducing America’s swollen deficits and debts is fast becoming an urgent national priority. Since President Obama took office, we’ve added three trillion dollars to the public debt, largely thanks to emergency spending to rescue the banking system and goose a faltering economy. But it’s the zooming growth of health care and retirement spending that really threatens to drown the federal government in debt. For decades, we’ve ignored warnings about the growing funding gaps in Medicare, Medicaid, and Social Security, but with the first wave of baby boomers now reaching retirement age, the future really is now.
We’ve dug ourselves more than a hole – it’s a canyon. So any talk now about balancing the federal budget is pure fantasy. The best we can hope for is to arrest the runaway growth of public debt and bring it back down to a sustainable level.
The administration’s forecasts show public debt, 40 percent of GDP two years ago, rising to more than 100 percent in 2012. The Galston-MacGuineas plan would bring that down to 60 percent of economic output by the end of this decade. It also would slash annual budget deficits from a projected five-to-six percent to around one percent, ensuring that our debts don’t grow faster than the economy.
Inevitably, the plan envisions a 50-50 split between spending reductions and tax hikes. It’s hard to image any other way forward considering liberal resistance to spending cuts, especially for the big entitlements that are driving our long-term debt problem, and the conservative allergy to tax increases of any kind. The hacking and lifting, however, would be phased in gradually to give the economy room to breathe and recover.
More specifically, the plan would:
Make sizeable cuts in defense spending, and impose a war surtax should our current conflicts extend beyond mid-decade.
Freeze discretionary spending for three years, such that increases in spending in one area would have to be made up by cuts elsewhere.
Modernize Social Security by indexing the retirement age to longevity, and trimming benefits for affluent retirees in the future. It would also raise the minimum benefit, strengthening the program’s anti-poverty effect, cut the payroll tax and add a new, mandatory savings account.
Supplement the cost-containment features of President Obama’s comprehensive health plan, by raising Medicare premiums, reducing subsidies and adding tort reform.
Prune tax expenditures (which cost more than one trillion dollars a year) by 10 percent and limit their future growth. The proceeds would go to lower tax rates and deficit reduction.
Enact a carbon tax, both to “buy down” the payroll tax and cut deficits.
Many of these proposals, of course, are deemed politically radioactive now, even if they are familiar fixtures on the wish lists of serious fiscal hawks. So why should we expect a package stuffed with political non-starters to advance?
Because the habit of evading even modestly tough choices has allowed the debt problem to reach such ginormous proportions that it can’t be solved in any other way, say Galston and MacGuineas. And if it isn’t solved, it will slow down U.S. economic growth, transfer our wealth to overseas creditors, and limit the federal budget’s fiscal capacity to respond to future emergencies.
The big question is: what impact will the midterm election have on the politics of fiscal evasion? Republicans say cutting taxes is the way to shrink government, but showed little stomach for cutting spending when they were in office. Result: huge public debts. Some Democrats believe deficits should be closed mostly by tax hikes, but aren’t really willing to propose them. Result: huge public debts.
As the Galston-MacGuineas plan shows, solving our fiscal problems doesn’t have to be a political zero sum game. The question is whether our political leaders can rediscover the lost arts of compromise and risk-sharing to advance vital national goals.
Just like their crazy-as-a-FOX cousins, the Wall Street Journal editorial page has indulged yet again in a spectacle of tragicomical self-victimization. An especially shameless recent raving targets the Democrats’ efforts to expose the furtive corporate backing behind their array of political front groups, of the sort that Rupert Murdoch, the brothers Koch and their band of aspiring overloads have nearly perfected. Naturally, the Journal gets it wrong across the board.
Their charge was that Senate Finance Committee Chairman Max Baucus engaged in a “liberal abuse of power” against right-leaning “issue advocacy” groups recently when he asked the IRS to investigate whether “certain tax exempt 501(c) groups had violated the law by engaging in too much political campaign activity.” But Baucus did not target “certain” groups—his request to the IRS was broad, and intended to give them wide rein to go where the facts led them and report back.
Senator Baucus, as chairman of the Senate committee responsible for the tax code, has the obligation to examine how his committee’s laws work in practice, and whether they ought to be revisited. The examples in his letter, one of which cited a local financier who paid for a pro-development referendum campaign in Washington State, represented the results of investigations by the New York Times and Time, not part of any partisan hit list as the Journal would have us believe.
Even if the IRS investigation ends up disproportionately impacting conservative groups, that is because these groups’ “issues” just so happen to coincide squarely with their backers’ financial interests, calling into question their tax-exempt status.
This is not the case with conservative bogeymen such as George Soros. While Soros and other wealthy progressives also contribute to issue advocacy groups, their personal fortunes do not turn on the agenda they espouse. Soros would in fact be even better off financially were the Republicans to gain power and, say, extend Bush tax cuts for the wealthiest Americans. Contrast that with the Koch brothers, whose sprawling empire is one of the top ten air polluters in the United States, and who have been called the “kingpins” of climate change denial. One can just imagine how much they have to lose from stronger environmental regulations or a cap-and-trade bill.
Now, it is all well and good if the Kochs and Co. want to keep pumping dollars into elections and carbon into the air. That is their right under the law. But they should have to be honest about it so that the American people can judge whether this agenda coincides with their own. We all know that the Supreme Court in the case Citizens United upheld the right of corporations to spend freely on behalf of issues and candidates they believe in. Less well known is the court’s decision, in the same term, in Doe v. Reed. In it, the 8-1 majority held that there is no categorical First Amendment right to anonymous political speech.
In Doe, finding against such a right to privacy was critical, said the Court, to “fostering government transparency and accountability.” Perhaps Justice Scalia explained the rationale best: “Requiring people to stand up in public for their political acts fosters civic courage, without which democracy is doomed…” That is what the tax code provisions the right is abusing are supposed to reinforce, and which Senator Baucus is charged with overseeing.
Would that the Journal had Scalia’s spine. Instead it complains about businesses being made the “targets of vilification with the goal of intimidating them into silence.” But why should consumers unwittingly support businesses that advocate interests potentially at odds with their values? This contrast is especially striking when those same businesses can covertly advance their interests through a tax-exempt organization. Only in the Journal’s circular world, where what’s good for the golden gooses is good for the gander, could this somehow square. But such misdirection and obfuscation, as we well know, is the only way the far right can still pretend to have the interests of the American people at heart.
Recently, Third Way released an idea brief suggesting something very simple: A Taxpayer Receipt, a simple itemized accounting of what programs your hard-earned tax dollars go to fund. Ethan Porter, writing in Democracy, had the same suggestion earlier this year. This is a genius idea.
To most taxpaying citizens, government is big, sprawling, and impenetrable. Few have a good idea of where their money goes and what kinds of programs it funds. Absent any acknowledgment of where the money goes, it’s not such a stretch to see how some people could start to think of taxes as theft or servitude.
At a basic level, the current system is bad customer relations. Rather than treating taxpayers as valued citizens who deserve to know what they are getting for their money, federal tax collectors simply take Americans for granted. Not even a simple “thank you, your generous contributions makes it possible to preserve the dignity of our aging population, fight wars on two continents, make education affordable, and keep our environment clean.”
Of course, a simple accounting receipt surely wouldn’t put an end to the anti-government hysteria plaguing the country overnight.
But it might lead to a more informed conversation about the size of government. At the very least, conservatives who support our troops might feel better to get a receipt from the government letting them know that almost half of the income taxes that they pay are, in fact, going to support our troops. Would they be so eager to cut taxes if it also meant cutting our military?
This also could be a way for the federal government to make some inroads at restoring legitimacy. Only one in four Americans say they trust the government to do what is right most or all of the time. Maybe this is because the government has never taken the time to explain what it does in a simple, concise, understandable way.
The receipt could also provide customized district-by-district profile of how federal money is spent locally to show people very tangibly what they are getting for their money. Many conservatives might be surprised to learn that more federal money generally goes to red states than blue states. And members of Congress would surely be very happy to share this information with voters to let them know what they are doing for them (and why they should be re-elected).
Porter also suggested giving each citizen a small discretionary amount of their tax money to allocate as they see fit. He proposed $1,000. I would argue for maybe 0.5 percent of an individual’s tax return. But regardless, I think it’s important because it’s a chance to 1) give taxpaying citizens a sense of ownership over their country; and 2) alert the policymakers to what individuals’ spending priorities are.
If certain programs do poorly in garnering citizen funding votes, supporters of those programs might be on alert that they need to do a better job of justifying why such programs are valuable. It could also stimulate a meaningful discussion of what our national funding priorities should be, as different groups would surely begin campaigning and lobbying more publicly for their favorite priorities.
But the big point here is the federal government does a very poor job of communicating what it does, and how it spends taxpayer money. Here is an opportunity. Let citizen-taxpayers know they are valued contributors, tell them what they are getting, and let their voice count. Then see what happens. Things could hardly get worse.
PPI just released a new policy memo by Jeff Siegel: “Let the Wine Flow: Why Congress Shouldn’t Restrict Free Markets in Beer, Wine, and Spirits.” It’s about an issue that will be the subject of a House Judiciary Committee hearing today—and one that is also very close to my own heart: booze. After reading Jeff’s piece and seeing the witness lineup for this hearing, I had to take a break from our big week of infrastructure events to say a few words about this piece on H.R. 5034 and today’s hearing.
This booze war is good stuff. Any issue that mixes alcohol with economics, congressional politics, and constitutional law is right up my alley. Even putting aside my personal bias as an enthusiastic consumer, the political history of the alcohol industry in America is incredibly fascinating, and the newest chapter being written this week is no exception.
Regulation of alcohol in this country has provided some of the most interesting stories in our history about the role of government in regulating economic activities by private industry and individual consumers. After all, what other consumer product has ever been important enough to us as a nation that we amended our Constitution to ban it from the market, and then amended it a second time to legalize its sale again? Although most of us probably think of prohibition as a one-time quirk of American culture that is well behind us, the regulatory legacy of prohibition is strong and still shapes the industry today.
Because of our national fascination with controlling alcohol in commerce, the three-tier structure of our alcohol industry today is more an accident of history than a system shaped by economic forces. With the repeal of prohibition, the 21st Amendment implicitly endorsed the three-tier approach imposed by the states by explicitly giving states the power to regulate the alcohol industry. At the time, giving distributors a legally-protected role in the market was seen as a safeguard against past corruption and abuses by large alcohol producers that had in large part inspired prohibition in the first place. Since that time, a lot has changed in the industry, but the distributors have continued to enjoy protected status as state-sanctioned middlemen. It’s pretty nice work if you can get it.
Apparently, those same distributors now feel that their place in the market is being threatened to the point that they have asked Congress to step in and help them by making it nearly impossible for anyone to challenge state alcohol laws on constitutional grounds. The distributors claim that the three-tier system enforced by the states is under attack by the growth of direct shipping from small wineries and microbreweries, along with the direct buying power of large wholesale outlets like Costco and Walmart. Producers, consumer groups, free-market think tanks, and an outraged community of wine bloggers have tried to debunk that argument, countering that this is a pure political power play by the distributors to further entrench their position as rent collectors in state alcohol markets.
This bill is an odd thing if you actually read the text of it (which I’m not sure many staffers did), because it’s not at all clear what it’s trying to accomplish unless you’re familiar with the background of the Supreme Court’s 2005 Granholm decision that limited the states’ ability to regulate alcohol under the 21st Amendment when the state regulation unfairly restricts interstate commerce. As a recovering lawyer, I admit that I find the Granholm decision really interesting: a 5-4 decision with an unusual mix of justices in the majority, and hardcore textualist Scalia agreeing that the phantom idea of the dormant commerce clause trumps the clear language of the 21st Amendment. But for sane people who would rather stab themselves in the eye than read the entire decision, the takeaway was that states can no longer pass laws to protect their local alcohol industry by discriminating against alcohol producers from outside the state. That’s good for out-of-state wineries and breweries who want to bypass distributors and sell directly to consumers and retailers, and bad for distributors who lose part of their markup business when that happens.
What the bill actually does, more or less, is to give states free rein to ignore the Granholm decision by making it really, really hard for anyone to challenge state alcohol laws in court for running afoul of Granholm.
That’s a bold step for Congress to take, and for pretty questionable reasons. Which means that even for a recovering lawyer, the jurisprudence is less important than the political story that’s at work here. Because as a recovering Hill staffer, this bill turns my stomach. The language (if you can follow it) is so shamelessly overreaching that when I learned that it has 146 cosponsors in the House, I knew immediately I could name at least 146 legislative staffers who are not very good at their jobs. It baffles me to think how anyone could advise a member of Congress to add his or her name to legislation that is such an obvious political liability waiting to happen. And then I remember what good receptions the beer wholesalers used to throw, and how much young legislative aides appreciate free beer.
But now that the Judiciary Committee is taking this bill seriously and giving it a full-blown hearing, it’s worth thinking critically about the serious questions underlying the distributors’ position. First, is the three-tier system mandated by the states in danger of collapsing? That is, do the distributors have a valid claim that Congress needs to take action to protect the current system against erosion by market forces in interstate commerce? And second, is the system of state-by-state government structuring of the industry, which has produced the three-tier system, worth protecting in the first place?
But as Jeff Siegel points out in his memo, the debate surrounding this bill hasn’t been about these questions, and as often happens in Congress, the real-world outcomes are obscured by rhetoric and misdirection:
Ultimately, this is an issue of choice and competitiveness. It’s one thing to have an honest debate about the pros and cons of the three-tier system and whether it still makes sense, almost 80 years since the 21st Amendment put it in place. But that’s not the debate we’re having. Instead, the debate is whether Congress should tie its hands for no good reason, and make it harder for small businesses to compete in the alcohol distribution market. It seems like a debate that’s hard to justify having.
Given the growth and innovation we have seen in the alcohol industry, and the benefits to consumers of a vibrant national market for new products, it’s hard to see how anyone can make a valid case that the Granholm decision needs to be rolled back, or that distributors can’t continue to flourish in a competitive market, even if they no longer get to put their hands on every product moving into and out of state markets. But apparently someone has made the case successfully to 146 cosponsors in the House, so maybe I need to let them buy me a beer and explain it to me one more time . . .
President Obama stood his ground on his tax plan during Monday’sCNBC town hall forum, arguing that he can’t make the math work for both keeping the deficit in check and giving away tax breaks to the richest two percent of Americans. When asked about possibilities for compromise, including cutting rates for households with incomes between $250,000 and $1 million, Obama didn’t flinch and stuck to his talking points.
So it sounds like the President’s position on the Bush tax cuts is one he’s taking to the people on Election Day, rather than taking to the Hill for negotiation and deal-making. He also brushed off a question about a payroll tax holiday, so it doesn’t sound like that idea will be on the table between now and November either.
Obama did make a strong statement about keeping a portion of the Bush tax cuts that would apply to the wealthiest Americans: reduced rates on income from corporate dividends. He emphasized that he has proposed a 20 percent cap on both dividends and capital gains taxes
If the Bush tax cuts expire without this change, the highest income brackets would pay 20 percent on capital gains, but dividends would be taxed at marginal rates of 39 percent for the top bracket. So when Obama mentions this 20 percent cap on dividends, he’s actually proposing a sliver of compromise in the tax cut debate. This appears to be the only part of the Bush tax cuts that he’s willing to extend for the top 3 percent of taxpayers.
I have to think that emphasizing the dividend cuts was one of the key messaging items the White House planned for this forum today. First, it’s CNBC, so the business and investment audience is going to like the idea.
Second, it’s a cut that Republicans can’t possibly oppose, except as part of their pouting-in-the-corner strategy of demanding all the Bush tax cuts or nothing.
Third and most significant is that this isn’t a new position for the administration, but it’s new that Obama himself is talking about it.
It’s the first time I know of that Obama has really spoken out loud about this issue, even though it was included in hisbudget plan for 2011. The only time other the administration has said anything about that proposal was when Treasury Secretary TimGeithner mentioned it on CNBC in July.
On the merits, the idea is a good one. There are some decent arguments for taxing dividends at the same rate as capital gains to prevent the kind of investment bias that might result from taxing one at nearly twice the rate as the other, as I have briefly argued before. And because the bulk of total dividend payments go to those in the top brackets, their tax rates have a disproportionate impact on investment incentives.
Congress has for the most part ignored dividends in the debate about extending the Bush tax cuts, and the administration has done nothing to inject it into the discussion. Until today, that is.
It will be interesting to see whether the White House actually pursues a legislative push for this cut, or if this is merely defensive posturing without follow-up to appear more business-friendly before a business audience. Since it doesn’t have any real champions in Congress, my guess is that we may not hear much more about it, unless a prominent member or two decide to latch on to the idea as a moderate position and call the President’s bluff.
Weeks before the November elections, leaders of the Republican Party’s increasingly dominant right wing are spending nearly as much time fretting over the potential squeamishness of their own party about implementing a radical agenda as they are ensuring they get the opportunity to enact one.
In a CNN interview yesterday, Sen. Jim DeMint, the one-time kooky loner who’s now a Very Big Dog in the GOP, said the GOP would be “dead” if it didn’t keep its promises to repeal health care reform, balance the federal budget and radically reduce spending. Remember he’s the guy who thinks Social Security and Medicare have ensnared Americans in socialism, and likes to call public schools “government schools.”
Another fringe figure who’s suddenly become very relevant, congressman Steve King of Iowa, is frantic in his fears that a Republican House would fail to shut down the government as part of a strategy to repeal health reform. Indeed, he’s asking would-be Speaker John Boehner to sign a “blood oath” to include a health reform repeal in every single appropriations bill, which would have the effect of shutting down the government, just as Republicans tried to do, unsuccessfully, in 1995, in order to impose a budget on Bill Clinton.
This is a sideshow well worth watching. People like DeMint and King are trying to lash their fellow Republicans to the mast of their ship and make them immune to the siren song of the massive popularity of the public programs and commitments they aim to attack: Medicare, Social Security, federal support for educational opportunity, environmental protection, and on and on. It’s an interesting approach on the brink of what many expect to be a big Republican electoral victory, and says a lot about the gap between what Republicans are campaigning on and how they actually intend to govern when in office.
For all I know, by now House Democrats may have already made the informal decision whether or not to force a vote on extension of middle-class tax cuts and expiration of high-end tax cuts.
I understand that if the votes aren’t there, they aren’t there. But it will be extraordinarily disappointing if they decide against forcing the vote on grounds that it will make some of their Members “uncomfortable.”
This is clearly the last opportunity prior to November 2 for congressional Democrats to make an impression on voters, not only about their own priorities, but about what sort of policies we can expect if Republicans gain control of the House. The GOP has been able to disguise or draw attention away from their own agenda throughout this midterm election cycle. Making them vote against tax relief unless the bulk of it goes to upper-income Americans exposes their hypocrisy on taxes and on federal budget deficits at the same moment. And this strategy also happens to be very popular, as TDS Co-Editor Stan Greenberg is expected to personally explain to the House Caucus later today.
There are few true no-brainers is the complicated business of politics, but this may qualify. Having cynically enacted tax cuts scheduled to expire at a date certain in the future in order to disguise their impact on the deficit, Republicans are in no position to label that expiration a “tax hike,” particularly since millionaires will benefit like everyone else from the portion of their income that falls into the lower brackets.
No matter what happens in November, Democrats are going to have to begin forcing comparisons of the two parties and what they stand for going into the presidential cycle of 2012, lest that election become another “referendum” whereby Democrats assume total responsibility for an economic and fiscal situation they largely inherited. This tax vote is the perfect opportunity to begin that process.
On Friday, I wrote about the current tax debate and bemoaned the failure of Democrats to frame the debate around a more comprehensive proposal of their own, instead of just talking about a more progressive version of the Bush tax cuts. I concluded with my hope that President Obama will put forward his own package of broad, pro-growth reforms to do just that.
Since then, I have two new reasons for hope. First, on Friday afternoon, the President’s Economic Recovery Advisory Board (PERAB), chaired by Paul Volcker, released a long-overdue report on tax reform proposals. Then President Obama said Monday that his team is weighing “additional measures” to move the economy forward, including both extension of expiring middle-class tax and “further tax cuts to encourage businesses to put their capital to work creating jobs here in the United States.” It’s not much to go on, but the president promised more details on these “proposals” in the days and weeks to come.
Looking at these two news items together, are there clues in Friday’s report to what the president is planning? I think there are. Obama chose to mention putting capital to work, which is different than simply talking about putting people to work. I may be reading too much into it (no doubt from watching too much Rubicon), but the president’s choice of words suggests to me that he’s chosen an approach based on corporate income tax incentives, rather than alternatives like payroll tax cuts to boost hiring, which has been suggested at various times by Republicans, Democrats, and both. The corporate income approach would be consistent with options laid out in Friday’s report, which looks at the benefits of corporate income tax changes and treatment of corporate operations overseas, but not other things like payroll taxes.
Drawing from the Volcker report, my best guess is that the president will offer a version of the “direct expensing” proposal to increase incentives for new capital investments. This seems like an easy choice to argue for stimulating demand and getting larger companies to spend the piles of cash they have been sitting on. Plus, it complements the administration’s push for more spending on clean energy and infrastructure, two priorities the president also mentioned as additional measures on Monday. But the real reason I’m betting on this option is the marketing. As the report acknowledges, “direct expensing” is really just “accelerated depreciation” on steroids (insert Rocket joke of the day here), but giving it a new-ish name and taking it to a new extreme are classic markings of the kind of political repackaging Obama may be looking for right now.
If I let my optimism go completely unchecked, I can also interpret the president’s sentence fragment as a sign he’s prepared for more comprehensive corporate tax reform—taking up the Volcker report’s suggestions for simplifying and reducing corporate rates to incentivize investment and make U.S. more globally competitive. Unlikely, I admit. However, the tone and substance of the report’s chapters on corporate tax reform do match up in many respects to Obama’s rhetoric about “putting capital to work” and “creating jobs here in the United States.” These two themes apply to the predicted benefits of several options included in the report:
Lowering marginal corporate rates will make the U.S. more competitive relative to other developed nations (we currently have the second-highest rates in the world).
Lowering marginal rates will encourage companies to build and create jobs by reducing the cost of capital for new investment and reduces incentives to use debt to finance new spending.
Lost revenues from lower rates can be replaced by eliminating special-interest giveaways and tax expenditures, thereby broadening the base and reducing inefficient corporate subsidies and market distortions.
With lower marginal rates, it will be possible to deal rationally with income earned by U.S. corporations overseas and end the nonsense system of deferring repatriation of earnings to avoid high U.S. taxes.
It’s true that the report is short on specifics and estimates for the options it proposes, which has prompted some to pronounce the entire effort as a missed opportunity for comprehensive reform. This might be true in the sense that Volcker and company could have provided more concrete numbers for the president to cite (and for his opponents to distort), and they could have taken it upon themselves to go beyond what was asked of them and issue an urgent call to arms for overhauling the tax code. They didn’t do either of those things. Instead, they did what they were supposed to do: create an opportunity for the president to do whatever he wants with the report.
That the report is so non-committal doesn’t mean it isn’t part of a larger strategy. Thinking big without announcing a hard-and-fast position to fight for from the outset is classic Obama (can I already say “classic” less than two years into his presidency?). When Obama actually comes out in favor of specific proposals, he frequently likes to do it without telegraphing his punch, as was the case the last time he teamed up with Paul Volcker to endorse the Volcker Rule. So it’s conceivable that both the timing and the tone of this report were planned by the White House—not simply to be ignored and forgotten in the doldrums of August, but to quietly lay the groundwork to support a new tax proposal this fall.
Most of the smart money has been on Congress waiting until after the elections to take up taxes, but that leaves a lot of time for Republicans to pound away at the president’s tax plan and for Democrats to splinter off from the administration’s plan to partially extend the Bush tax cuts. The next couple weeks seems like as good a time as any for Obama to stand with Paul Volcker in a Rose Garden press conference to announce the new “Volcker Plan” for corporate tax cuts. You heard it here first.
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.
As Congress prepares for a big debate on the fate of the Bush tax cuts, there’s an internal debate breaking out in progressive circles on how to deal with tax rates on the very wealthy, not just those currently in the top income tax bracket.
This debate-within-the-debate is being driven by two external data points: First, the fact that income inequality in the United States during the last two (or arguably, the last four) decades has especially manifested itself in the concentration of wealth at the very top of the income ladder; and second, the fact that higher taxes for “millionaires” consistently polls well.
James Suroweicki explains the first point nicely in a recent column in The New Yorker:
Between 2002 and 2007…the bottom ninety-nine per cent of incomes grew 1.3 per cent a year in real terms–while the incomes of the top one per cent grew ten per cent a year. That one per cent accounted for two-thirds of all income growth in those years. People in the ninety-fifth to the ninety-ninth percentiles of income have represented a fairly constant share of the national income for twenty-five years now. But in that period the top one per cent has seen its share of national income double; in 2007, it captured twenty-three per cent of the nation’s total income. Even within the top one per cent, income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves, they now earn as much as the bottom hundred and twenty million people. So at the same time that the rich have been pulling away from the middle class, the very rich have been pulling away from the pretty rich, and the very, very rich have been pulling away from the very rich.
The current debate over taxes takes none of this into account.
Thus, framing the tax progressivity question as mainly involving rates for those with incomes well below super-rich levels misses the mark, and, as both Surowiecki and (for months now) Jonathan Chait have pointed out, misses a political opportunity associated with a widespread popular conviction that the very wealthy don’t pay their fair share of taxes.
In terms of the stakes involved in proposing something like a “millionaire’s tax” (essentially a new and higher top rate on very high incomes), Nate Silver has shown at FiveThirtyEight that it could indeed raise some pretty serious federal revenues.
But the political bonus of a “millionaire’s tax” proposal goes beyond the numbers: it would help expose the really dramatic gap between the two parties on the whole concept of progressive taxation.
After all, even as Democrats debate making federal income taxes more progressive, a growing and increasingly dominant segment of Republicans favor “flattening” tax rates to eliminate progressivity, exempting capital and corporate income from taxation, and/or shifting taxation away from income altogether and focusing it on consumption. And even for those Republicans who don’t embrace radical tax proposals, the “thinking” behind them is the rationale for the vague support for high-end or business tax cuts that’s almost universal in today’s GOP, in growing contradiction with conservative demands for debt-and-deficit reduction.
Anything that makes this contrast more vivid, on terms supported by big majorities of the American public, is a pretty good idea for Democrats. So I’d strongly recommend that in the debate over extending or eliminating Bush’s tax cuts for the top bracket, proposals to crate a new bracket for the “super-rich” ought to become an essential ingredient.
The Congressional Budget Office’s long-term budget forecasts on the national fiscal health are highly educated guesswork, but guesswork just the same. The 2030s are pretty far off, and the degree of forecasting uncertainty is higher than it once was. As CBO explains “the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts probably exceeds the historical average.” But let’s imagine that the 2030s have arrived, and that CBO’s budget projections have come true. What would America look like?
For starters, Social Security would be flat broke. All U.S. Treasury’s IOUs to Social Security will have been cashed in. Since the Social Security trust funds will be completely depleted and, because Social Security is barred by law from borrowing from the federal government, the program will be unable to meet its obligations. Thus, by the end of the 2030s, payable benefits would have to be cut by 20 percent. Is it possible to imagine that the government will suddenly cut 20 percent of the benefits it hands out? That seems unlikely — the law would be changed and borrowing would resume.
In fact, Social Security’s problems would start much earlier. In 2016, according to CBO, its outlays would begin to regularly exceed its revenues, and consequently Social Security would first start to regularly call in its IOUs. Thus, the Treasury Department would need to borrow billions of dollars each year to pay back what it borrowed from Social Security’s trust funds.
If Social Security is expected to be in bad shape by the 2030s, the big public health care programs, Medicare and Medicaid, would be doing even worse. The culprits being an aging population and expanding health care costs, which are scheduled to grow faster than the U.S. economy. By the 2030s the number of people over the age of 65 — the beneficiaries – will have increased by 90 percent while those between 20 and 65 — the contributors — will have grown by a meager 10 percent.
In the 2030s, federal spending on mandatory health care programs accounts for 11 percent of GDP, about twice the level in 2010. Add in Social Security, and the big three entitlements cost about 16 percent of GDP. Keep in mind that primary spending for the 40 year period before 2010 averaged 18.5 percent of GDP. This means that in 2030, the U.S. government will either be unable to direct resources to other priorities (like education,) or will have to increase a tax rate by roughly double that of 2010.
Finally, America in the 2030s will groan under mind-boggling public debt, assuming the country’s fiscal fortunes are calculated by the CBO under what’s called a “current policy” scenario. In this case, the CBO assumes that no major public policy innovations will occur throughout the lifetime of its projection. This scenario reflects the political reality we face today. For example, congress is currently debating whether to extend the Bush tax cuts and “patch” the Alternative Minimum Tax. If political inaction prevails, debt-to-GDP ratio would exceed 200 percent by the 2030s, even with an economic recovery.
It is true that the U.S. holds a privileged position by virtue of the dollar’s role as the world’s reserve currency. But we have no idea how a debt of this magnitude would affect our ability to invest in future growth, and to keep borrowing from abroad. Moreover, in the 2030s, interest payments on the national debt are nine percent of GDP, from just one percent of GDP in 2010. If we continue borrowing at the projected rates beyond 2030, interest spending would exceed total federal revenues 15 years thereafter.
Finally, this grim fiscal portrait of America in the 2030s rests on optimistic assumptions. CBO projections assume that revenue will average around 19 percent of GDP and that long-term interest rates remain low. They also assume away the strong likelihood that America will face another economic crisis or armed conflict between 2010 and 2030.
The key for policy-makers, of course, is to envision a different fiscal future for America – and to act on it just as soon as the economy recovers.
After much self-congratulation over passing a massive financial regulatory bill, the U.S. Senate has punted on pricing carbon. That decision is likely to have a bigger long-term impact on the U.S. economy, and not in a good way.
Senate leaders yesterday conceded they don’t have the votes to put a price on carbon. Instead, they’ll try to pass a pallid energy bill that raises liability caps on oil companies and makes modest gestures toward energy efficiency. Even the catastrophic BP oil spill, it seems, was not enough to overcome lawmakers’ fear of being accused of raising taxes on energy as the economy struggles, even though a carbon price wouldn’t have gone into effect for several years.
Well, there’s always next year — except that the midterm election will likely bring in more Republicans wedded to climate denial and cheap fossil fuels. So the Senate’s failure to act is a costly setback from an economic, security and environmental perspective. It will prolong America’s dependence on oil and fossil fuels, worsen our trade deficit, retard investment in clean technology and low-carbon fuels, and forfeit leadership in energy innovation to other countries. And it means the United States won’t do its part to lower carbon emissions and thereby stop overheating the planet.
All this suggests progressives will have to rethink their approach to achieving a low-carbon economy. Not only is “cap and trade” dead, Majority Leader Sen. Harry Reid (D-NV) said those words are no longer in his vocabulary.
PPI has long considered pricing carbon the sine qua non of progressive energy policy, although we have been agnostic as to how. We helped to design the cap and trade architecture in several pathbreaking legislative proposals (the Lieberman-McCain and Lieberman-Warner bills, as well as Senator Tom Carper’s “4P” bill), and proposed a “tailpipe trading” system to cover auto emissions. We continue to believe that cap and trade offers the twin advantages of environmental certainty — a quantifiable limit on the amount of carbon Americans emit – and strong incentives for companies to invest in energy efficiency and innovation.
At the same time, however, we’ve endorsed a straight up carbon tax, as well as setting a “floor” under oil prices to prevent their volatility from inhibiting investments in clean fuels. The key is to price carbon realistically, by taking into account the “externalities” not included in the price of gas at the pump (or coal for that matter): the hundreds of billions we spend each year to assure access to fossil fuels, as well as the environmental damage done by concentrating greenhouse gases in the atmosphere.
To free market fundamentalists, ending such implicit subsidies to fossil fuels is tantamount to raising taxes on energy. So be it. We need to raise the cost of burning fossil fuels and lower the cost of low-carbon alternative fuels. This is a matter of urgent national interest, and President Obama will need to propose a new clean energy strategy to the next Congress.
As Bill Galston points out, there’s no longer much doubt that deficit reduction has become a very large public concern over the last year. It’s a separate question as to whether Americans are willing to support actual spending reductions or tax increases proposed by either party, and thus whether there is really a popular base for a deficit reduction compromise. But no one should argue any longer that the whole subject is just being cooked up by elites.
![](<a href="https://www.progressivefix.com/wp-content/uploads/2010/11/biggvt.jpg"><img decoding= "iStock_000002844697Medium")
The president will meet with leaders from both parties on Thursday to discuss Congress’s unfinished business for the lame-duck session, and the only thing that is clear going into that meeting is that item number one on the agenda (for right or wrong) will be the Bush tax cuts. Speculation is running high this week that