StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



A Tax Policy Rant

26 Oct 2011
Posted by Andrew Samwick

I couldn't agree more with Pete on the discussions of tax policy that are now occurring as part of the Republican primary campaigns.  The Republican primary campaign almost always gets sidetracked by some inane proposal for tax reform.  This year it is the 9-9-9.  And now we have another version of the flat tax, as if the crushing irrelevance of Steve Forbes to the primaries in 1996 and 2000 were not an indication of how unproductive the discussion will ultimately be.  What are the prospects that a Republican President would actually be able to implement such a change if elected?  They are equal to the chance that Republicans will both retain control of the House and secure a filibuster-proof majority in the Senate in 2012.  In other words, absolutely zero.

The problem that we have with tax policy is that we don't raise enough revenue to cover our expenditures, not the particularly ways we choose not to raise that revenue.

"The problem that we have

"The problem that we have with tax policy is that we don't raise enough revenue to cover our expenditures, not the particularly[sic] ways we choose not to raise that revenue."

OR we could just be spending too much.


Wrong: our income taxes are

Wrong: our income taxes are far too low. From 1945 to 1980 income taxes averaged near 12% of GDP. Reagan reduced marginal tax rates so much that they fell close to 9%. Clinton increase them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%)) of normalized GDP throughout(except for the Reagan/Bush1 years, when they were higher) . The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. But, not only can we no longer continue to borrow from the trust funds, we have to start paying money back as beneficiaries start relying on the trust funds. In the short term, we have to raise income taxes to 12%, simply to cover on budget expenses. In the long term, income taxes must rise above 12% in order to pay back the trust funds.


misdiagnosing the problem

You wrote: "What are the prospects that a Republican President would actually be able to implement such a change if elected? They are equal to the chance that Republicans will both retain control of the House and secure a filibuster-proof majority in the Senate in 2012. In other words, absolutely zero."

Well, I think that takes things a bit too far. After all, given that presidents almost never get control of the House and a filibuster-proof majority (what'd Pres. Obama have it for, between Kennedy's illness & the fight over Minnesota's Senate representation, something like a month?), your argument here would just about absolve presidential candidates from proposing any new policies altogether.

There's a role for proposing policies that might not be enacted exactly as described-- it tells us candidates' priorities and preferences, and reveals their thoughtfulness about public policy.

The problem you're describing-- that Republican candidates propose "inane" proposals-- is a description of the problem with the Republican Party. In lieu of policy preferences, Republicans have a favorite team to cheer for and a series of slogans crafted in response to the policy challenges of the late 1970s.

The McCain campaign suffered from a "paper gap", prioritizing efforts to characterize their opponent as a fearsome Other over giving much thought to which policies a McCain administration would pursue. A few months back, the House GOP came out with a "jobs plan" that involved pasting the GOP's slogans alongside images of families smiling at the camera. The Bush administration pushed relentlessly for bigger deficits ("deficits don't matter") and expanded federal and executive power, for which self-described "conservative Republicans" gave him approval ratings averaging around 70%. Once a Democrat became president, those conservative Republicans started putting on funny hats and shouting with rage in the streets, ostensibly because they were mad about deficits and excessive federal and executive power.

That the GOP has junked policy preferences in exchange for sloganeering and cultural resentment is rather a huge bummer for people who like America. After all, the reason we care about the government is because it enacts policies that affect people's lives.

(This, incidentally, is why we've seen such unprecedented gridlock from the Congressional GOP. The normal back-and-forth of legislative bargaining as we've experienced it for the past few centuries holds no attraction whatsoever for today's GOP. If you have a small handful of slogans instead of policy preferences, you can fight to the death every time, even against proposals you claimed to support a few weeks before-- it's not like you care about getting concessions on policy matters).


"...your argument here would

"...your argument here would just about absolve presidential candidates from proposing any new policies altogether."

No, it would constrain presidential candidates to proposing policies that may actually be able to become law. That would do two things. One is that it would allow voters to see what candidates are actually likely to do if elected, rather than forcing them to judge candidates based on pie-in-the-sky. The other is that it would induce presidential candidates to represent the wider body politic, rather than merely calculating what sort of nonsense would best flatter primary voters in their own party - which voters tend to have very different views of "good policy" than do the majority.

Yes, it would be a shame to have presidents who serve all of us, not just the fringe, and who tell us what their goals are before we hire them.


you're right; I overstated it, that'd allow pie-in-sky nonsense

I see your point.

I guess, in my ideal world, maybe, candidates would propose reasonably complex policies (like, say, Clinton, Obama, and Edwards did on health insurance reform), and the media would then question them & prod them into more detail on the narrower "what's-likely-to-get-implemented" question.

Unfortunately, the Republican Party doesn't care about policy, so its proposals, to the extent they exist, are nonsense upon talking points. And the media is terrible at reporting the news, so we get a pile of horserace updates and breathless speculation about, say, Joe Biden or Jenna Bush's role in the 2016 campaign, and next to nothing about policy.


Hi Professor Samwick, At

Hi Professor Samwick,

At the risk of being branded a troll on my very first post :(
I wonder what you think of Bill Mitchell's take in the recent
HIR interview

http://hir.harvard.edu/debt-deficits-and-modern-monetary-theory

Sincerely,

SC


The GOP candidates all

The GOP candidates all advocate some form of lower or flatter taxes arguing that business can't "put capital to work" because of over regulation and taxation. While I'm certain there is some case-by-case evidence of regulation harming certain businesses ability to expand, and not just polluting, drilling businesses, I don't think it is enough to matter in a major way. On the tax issue, not only do I believe they have it wrong, I believe they have it backwards.

Bear with me; A large number of very wealthy people in this country have figured out how to rig the tax code to pay Capital Gains and Dividend tax rates on their money (15%) in lieu of the already historically low top bracket of 35%. So the wealthy "job creators" are paying a historically low level of taxation on their earnings. Traditionally with higher rates on all sources of income, there was an actual tax advantage in re-investing money back into your business. You don't pay taxes on earnings you use to purchase new equipment, hire new workers, expand operations or buy another franchise - but the theory is you take your $300,0000 - reinvest it, turn it into $500,0000 and then when you actually take the money out of the business, at retirement or when you sell it even though you are still in say the 40% bracket with that money - you still walk with $300,000 instead of $180,000. However, the savey business man knows the financial situation in the United States and knows that taxes will have to go up in the future - so what does that businessman (or woman) do? They are talking as much income as they can out of their businesses now, at these low rates, instead of reinvesting it for future growth. Every day that goes by with these low rates, another investment decision that could remodel a facility, or buy new office furniture, or add employees is put off by these same "job creators" that we are not supposed to "punish" with our punitive tax system.

Raise taxes on the wealthy and it will not just close the fiscal gap in our budget (which of course will require much budget cutting as well) but I believe it will actually lead to more economic growth as reinvesting in your company once again becomes the most sensible thing to do from a tax planning standpoint.


Dear Mr. Samwick: If there is

Dear Mr. Samwick: If there is a Republican President and Republican majority in the Senate, the filibuster will be abolished about one half-hour after the Congess is sworn in.


Reconciliation

The GOP will pass their tax plan the way they did last time...via reconciliation and the plan will come with an expiration date. But even if we get a Democratic president, they will probably be too weak to repeal it.




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