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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Quick Note on the Tax Proposals in the Progressive Budget



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Matt Yglesias and Megan McArdle are on roughly the same page when it comes to the House Progressive Caucus budget. Megan writes:

A 47% federal tax rate on top incomes, plus increases on estates, capital gains, and dividends, and all you get is . . . 22.3% of GDP?  A bare 1.3% above the collections envisioned by Simpson-Bowles?If that’s all the Progressive Caucus thinks we’re going to get out of the wealthy, I imagine that the CBO forecasts will be even less optimistic.  Which is hardly going to be enough, given that the big idea for entitlement cost control in the “People’s Budget” is . . . making Social Security more generous + public option for ObamaCare and quasi-price controls for pharmaceuticals.  Whether or not you think these things are a good idea, they are not, all by themselves, going to solve Medicare’s cost growth problem.

Matt adds another wrinkle:

 

The big problem I have with this is that if you raise high-end marginal rates while leaving deductions alone, what you do is massively increase the value of the deductions. The home mortgage interest tax deduction, for example, is both distributively regressive and also economically damaging by shunting too much money into the housing sector. If wealthy people start paying a marginal income tax rate of 47 percent, then the incentive to overconsume housing becomes much more intense. A economically sound approach to the tax code needs to go after some of these deductions, and that means some middle class families will have to pay somewhat more.

Not so much a problem, but an observation, about this plan is that it actually does implicitly recognize the non-viability of a rich people only strategy. After all, even though the legal incidence of these corporate tax changes is on the corporations, the reality is that some of the bite will be felt by middle class consumers of these firms’ products and middle class employees of the firms. 

This is one reason I’ve long advocated something like the “Zero Plan,” or getting rid of virtually all deductions and exemptions, with the exception of the EITC and the child tax credit. 

My view is that heavy emphasis on raising MTRs for high-earners reflects the stranglehold that upper-middle-class households in the largest U.S. metropolitan areas have on our politics. These households, in New York, D.C., and Southern California, have enormous influence in the media and in both the Democratic and Republican coalitions, though perhaps more in the Democratic coalition, and I see this influence as far more insidious than the comparatively trivial collective influence of the top 0.01 percent. Each individual in the top 0.01 percent has more potential for influence, but the number of politically active and engaged upper-middle-class Americans is far larger, and these HENRYs (High-Earners, Not Rich Yet, a phrase Justin Fox introduced me to) are more tax-sensitive. Because they’re constantly competing for positional goods with richer households, they’re particularly drawn to higher MTRs for millionaires, etc., as part of a zero sum strategy. 

Our political discourse rarely focuses on the how the self-interest of the upper-middle-class has corrupted our public life, in no small part because the upper-middle-class dominates political conversation.

One could crudely characterize our politics as a battle between the right-ultrarich (highly ideological and tax-averse) + the rump conservative upper-middle-class (concentrated in low-cost regions, where it’s easier to feel affluent, and in for-profit firms) + the Red State middle and lower middle class and the left-ultrarich (highly ideological and tax-insensitive) + the liberal upper-middle-class (concentrated in high-cost regions, where it’s easy to feel you’re cash-strapped, and in the public sector, non-profits, the professions, stable private bureaucracies) + the public sector middle class + the Blue State middle class and lower middle class + the actually cash-strapped. I’d suggest that it is the Red State middle and lower middle class that sets the cultural tone of the right and that helps frame the moralistic angle on right-of-center policy (e.g., objections to the estate tax grounded in unfairness). The cultural and policy agendas of the left are deeply shaped by the urban and inner-suburban liberal upper-middle-class. In both cases, I think the ultrarich tends to follow rather than lead, just as lobbyists offer legislators a legislative subsidy, i.e., they give them ammunition to achieve the goals they already want to achieve.

The ultrarich can definitely shape the frame at the margin, but that’s very difficult and it requires sustained efforts. The right comparison is not the Kochs vs. Soros but rather the Ford Foundation and Atlantic Philanthropies and left-leaning elite universities and other organizations that have been around for decades vs. the various right-of-center foundations. 

What do you think?



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