The compromise extension of the Bush tax cuts illustrates how hidebound the leaders of both parties have been, and how sclerotic the whole tax discussion has become. These tax cuts did avoid a serious recession after the terrorist attacks of 2001, and should never have been set up to expire as they were, like a bent tree-branch, snapping on a long-announced date back to a sharply higher rate of tax in several areas, including succession duties. The administration should never have gotten into the silly chicken game of calling them unjust breaks for the rich and should never have imagined that increasing taxes on the incomes of anyone during a recession is justifiable fiscal policy. And the Republican leadership, apart from the very promising Paul Ryan, is not to be congratulated for failing to produce any policy suggestions except an endless caterwauling for retention of a tax-cut plan that was designed for a specific emergency nine years ago.
The approaching expiry date and the midterm elections were an opportunity for a serious discussion — or, as the current political cliché decrees, “a national conversation” — about taxes, the budgetary and current-account deficits, unemployment, and the recession. The political class funked it, as it has funked everything except welfare reform in the last 20 years. Just as it fumbled abortion into the incapable arms of the judiciary, ignored immigration until it was almost impossible to deal with it rationally, allowed the education and justice systems to become a national disgrace, did nothing about a hideously expensive and very uneven health-care system until finally making things worse with Obamacare, ignored income disparities and the economy generally, the administration and the Congress said little and did less that was useful or even sensible about long-term remedies for the worst economic challenge in more than 70 years.
All Americans pledge their adherence to the Constitution, but the Constitution, especially the protections of individual liberties and due process in the Bill of Rights, has been put to the shredder, and at least 300 congressmen are just puppets of their districts’ leading commercial interests. They come to Washington as special pleaders trading earmarks with their colleagues to assure vote-winning alliances spanning a Rube Goldberg spaghetti bowl of different bailiwicks all suckling at the fiscus. It is democracy of sorts, but it isn’t really deliberative legislation, much less enlightened or even disinterested governance in the national interest seen otherwise than as an agglomeration of thousands of patronage-seeking vacuum cleaners.
Tax policy should be designed to stimulate economic growth and finance the necessary activities of the government, and, occasionally, to assist in the natural and desirable evolution of the economy, especially toward higher productivity; an optimal ratio of savings, investment, and consumption; and the economically rational reduction of poverty. Let me take up a number of opinions that have previously been expressed in these columns, and add some new ones: Taxes should be increased on activities it is desirable to reduce, as they have been on the consumption of tobacco, and reduced on activities the national interest seeks to amplify. Thus, taxes on elective energy consumption beyond comfortable norms of heating and air conditioning should be increased. (There should also be incentives for alternative forms of energy, especially natural gas and nuclear power, and specifically a gasoline-tax increase, with rebates for those who earn their income from gasoline consumption, such as taxi companies.) There should also be taxes on legal bills, health-care benefits that are provided in unusual measures of choice and quality by employers, and most financial transactions — especially any fees and windfalls to merchant banks, financial arrangers, and assorted categories of asset-strippers, no matter how imaginatively and hagiographically they describe their activities.
The government must not get into the business of valuing different categories of work differently in the personal-income-tax system, such as by over-taxing entertainers or athletes. (A derogation from this rule would require a severe tax penalization for most government employees, given how redundant to the interest of the nation and its citizens the work of many of them is.) But it would be acceptable to impose a surcharge on highly compensated services that are essentially accelerations of the velocity of money without meeting elemental criteria for betterment of anything, and on luxury-goods sales. A 10 percent surcharge on financial transactions alone would produce over $200 billion per year in deficit reduction, and would affect only deal-making, most of which deals would just as well not be made and few of which positively affect employment. The good deals would be just as good if they cost a little more to consummate. A 10 percent surcharge on legal and consulting bills would yield another $200 billion, and would merely be a tax on largely superfluous activity by any economic criterion.
Lawyers are strangling this country, and most consultants just provide an insurance policy for managers who can’t manage. Most luxury goods are imported from countries whose economies the United States has self-sacrificingly carried on its back for decades: Germany, France, Italy, and Japan. They are all great and friendly countries, and protectionism must not be considered, but a supplementary sales tax is justified and useful in itself, and especially so given that the crumbling euro and the long-term decline in the yen (though not occurring now) have conferred an advantage on the exporters. A reasonable menu of such measures as these would cut a swingeing stroke through the federal budgetary and current-account deficits and send the message that the U.S. is serious about retention of its status as the world’s leading economy and issuer of the world’s reserve currency.
The steady rise in life expectancy for most categories of Americans, and in their physical and mental fitness in the upper decades of their lives, justifies the raising of the retirement age in Social Security and private plans. People should be encouraged to work longer, and those who do so should enjoy a reduced rate of income tax in the last two to five years of their working lives. The alternative is to slide steadily further into the Greek nightmare, where 30 percent of the people were working and 70 percent were drawing benefits of some kind, from public education to state pensions, when the entire system came down.
The income-disparity issue would be addressed by modest — I emphasize, not confiscatory — surcharges on extremely large incomes and small taxes on very large fortunes, the proceeds to be directed by the taxpayers themselves toward approved projects (as bona fide philanthropies are approved), for the reduction of poverty. This would take the sting out of a nasty political controversy that incites envy and extreme political antics, and would put the most agile financial minds in the country to work trying to eradicate poverty. The taxes would be self-reducing, as defined poverty declined, so there would be a built-in incentive for the wealthiest to seek the end of poverty. This would be a practical, as well as an acoustic, improvement on Warren Buffett’s plaintive request to be taxed more highly and the unenforceable pledge to give most assets away when he and other wealthy people die.
These ideas are not carved in stone, but at least they conform to the need to reduce reliance on the service economy and addiction to imported goods and commodities. And they are something of a departure from the fierce firefight over tediously familiar tax arguments that is all our political class has been capable of since the flat tax and the simplified tax made their appearances as political ideas almost 40 years ago. The political class has generally failed and misgoverned the country almost since the end of the Reagan era, which is why the first President Bush was defeated and his three successors all had, and then lost, control of the Congress. Instead of threatening not to lift the debt ceiling, the Republicans in Congress should lift it with notice that it will not be lifted again and attach suggestions for deficit reduction, which will take automatic effect if the ceiling is pressed again.
In a democracy, the people get the government they deserve. The way to get better government is to require and reward original public-policy formation that addresses the country’s problems in the approximate order of their importance. There are a few high office-holders, visible already, who meet this criterion, such as Paul Ryan (mentioned above, chairman of the House Budget Committee), Mitch Daniels (governor of Indiana), and possibly Chris Christie (governor of New Jersey) and Marco Rubio (U.S. senator from Florida). There must be others, in both parties. They might raise their heads if the media made it clear that this would lead to appreciative attention and not instant decapitation, and if the public made it clear that business as usual is, for everyone, in Marlon Brando’s phrase from On the Waterfront, “a one-way ticket to Palookaville.”