The Future of the Tax Debate

I often wonder about the parallels between the climate change debate and debates over taxes. On climate change, the left arguably benefits from a debate over whether or not a sufficiently high atmospheric carbon concentration will result in global warming, as the best available science points in that direction. There is, to be sure, a great deal of uncertainty around climate sensitivity, but fighting a rearguard action against the best available science is likely to prove a losing battle. Yet as Jim Manzi has argued, shifting from an argument over whether the best available science is reliable to a debate over what we should actually do about climate change alters the political conversation considerably. Once we start discussing the likely cost of a realistic national carbon pricing system, to name the most popular mitigation strategy, the political terrain becomes more favorable for the right. 

One wonders if the same can be said of the debate over taxes. That is, if both Democrats and Republicans accepted that revenues have to go up, might Republicans quickly gain the upper hand? I realize that this is anathema to most conservatives, and I strongly share the view that Republicans should not preemptively embrace tax increases — at most, they should accept them as part of a compromise over long-term structural reform. Moreover, resistance to tax increases is an important part of the GOP brand, and jeopardizing that reputation could prove very costly indeed. That said, it is worth thinking through what might happen if the debate over taxes changes in the years to come.

Republicans maintain that they oppose tax increases for virtually all households, though some on the right, including many associated with the Tea Party movement, have expressed concern about the fact that a declining share of households pays federal personal income tax. Democrats, in contrast, tend to champion tax increases for a small number of affluent households, whether in the top 2% of the income distribution, which is roughly President Obama’s view, or the top 1% or 0.5%, the view embraced by House Minority Leader Nancy Pelosi and Senator Charles Schumer, among others.

As Josh Barro argues in a new Boston Globe column, however, this Democratic stance is somewhat problematic:

The Congressional Budget Office projects $11 trillion in federal budget deficits over the next decade. The president’s proposals to increase taxes on the wealthy, the ones he was defending in his speech, would only raise $1.9 trillion over that period.

And this is why it’s reasonable for business owners and wealthy people to be sore that the president is singling them out. If Obama won’t make the case to the general public that government is good and worth paying for, why should the wealthy be swayed by the message that they — just they — should pay up?

The president’s real talk to America’s rich — you have it good, the government helped you have it good, now the government needs your help — would be more credible if it came with some real talk for the population as a whole. Entitlement programs cost money, and as the population ages and health care costs expand, they’re getting even more costly. Making the programs more generous, as Obamacare does, also costs extra money. Are we willing to pay for that?

Other advanced countries tend to have more generous welfare states than America does. They pay for that by taxing the middle class much more heavily than we do. America is the only advanced country of significant size without universal health coverage, and the only one without a value-added tax. That’s not a coincidence.

In a Bloomberg View post, Josh elaborates on this theme:

As the government gets larger and needs more revenue, the efficiency problems created by progressive taxation get more and more pressing, and regressive taxation is needed.

This is something U.S. liberals have not gotten comfortable with. You can think of liberals having two goals on tax policy: The government should collect more revenue, and it should do so more progressively. Those goals are in tension with each other, and liberals have chosen to focus on the latter. Unless they learn to love middle-class taxes, they will find that a devotion to progressive taxation makes progressive spending programs unaffordable.

Conservatives hope to escape this trap by advocating deep spending cuts. In the case of Medicare, congressional Republicans have largely embraced a global budget identical to that embraced by the Obama White House, though they aim to achieve the goals outlined in the global budget through the use of competitive bidding. But they also aim to sharply reduce federal expenditures in almost every other domain, most notably Medicaid.

The problem, however, is that the cuts congressional Republicans envision might prove politically unsustainable. That is, if Medicaid block grants grow at the rate of inflation and medical cost growth exceeds inflation by a significant margin, state governments might soon find themselves in an untenable position, particularly in the event of an economic downturn. While it is certainly possible that spending discipline will lead to organizational discipline, i.e., constrained spending will yield gains in productivity, this depends in large part on regulatory reforms at the state and federal level that might prove difficult to achieve. I’m a strong believer in business model innovation as a driver of efficiency gains, but we can’t bank on best case scenarios. 

If it really does prove extremely difficult to constrain the growth of health entitlements, as seems likely even if we embrace significant structural reform, we come back to revenue increases.

Now here is the interesting question: if revenue increases are inevitable, should we shield households from tax increases by income? Or should we embrace some other principle? I would argue that if the right is ever backed into a corner on taxes by changing fiscal and political circumstances, it should not embrace the Democratic principle — shield the bottom 98% or 99% or 99.5% of households from tax increases. Rather, it should embrace the ideas championed by Ramesh Ponnuru and Robert Stein, i.e., we should embrace a life course approach that shields households with children from tax increases. Ideally, we’d apply the life course approach in other ways as well, e.g., we might embrace age-dependent taxes to improve incentives for young workers and workers over age 62.  

Now why would this be the best way to go? If you accept that high marginal tax rates have strong disincentive effects, the Democratic strategy of raising the effective top marginal tax rate above 50% is deeply unattractive. Eliminating tax expenditures is a sensible way to raise revenue, yet the danger is that doing so will negatively impact households with children, which are, if you embrace the Ponnuru-Stein framework (as I do), making investments in human capital that have broad societal benefits. Eliminating virtually all tax expenditures while greatly expanding the child tax credit, and applying it against payroll tax liability, would effectively remove large numbers of households with children from the tax rolls, particularly those with larger families. It is important, however, that this child tax credit not be refundable, for the reasons Ponnuru and Stein stipulate. 

One obvious virtue of this approach from a political perspective is that it is closely aligned with the interests of a large middle-class constituency that has buffeted by structural economic shifts. It would also tend to unite households with children earning modest incomes and those earning higher incomes in a common cause. By eliminating the state and local tax deduction and paring back or eliminating the mortgage interest deduction, it effectively shifts the tax burden to childless professionals living in high-tax jurisdictions, a group that, relatively to cash-strapped middle-class parents, can afford to pay more. Moreover, this shift might make these voters somewhat more tax-sensitive in the state and local context. 

For the same reasons Democrats like Nancy Pelosi have proposed raising the tax increase threshold from $250,000 to $1 million, it is easy to imagine Democrats resisting this kind of family-friendly tax reform, particularly as unmarried women have emerged as a core Democratic constituency.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute Policy Fellow. He is a contributing editor at The Atlantic and National Affairs, a member of the ...

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