Eli Lehrer has an article on the FrumForum entitled “Five Revenue Raisers the GOP Should Back.” He argues it would be good to get rid of preferences such as the state and local tax deduction and the mortgage interest deduction, and he also asserts that there should be “user fees” for things such as transportation.
As an avid supporter of a flat tax and market pricing, I have no objection to these policies. Indeed, I would love to get rid of the state and local tax deduction so that taxpayers in Texas and Florida no longer have to subsidize the fiscal profligacy of politicians in California and New York.
But there is a giant difference between getting rid of certain tax preferences as part of revenue-neutral (or even better, tax-cutting) tax reform and getting rid of tax preferences in order to give politicians more revenue to spend.
The former is a noble goal. Who can argue, after all, with the idea of getting rid of the corrupt and punitive internal revenue code and replacing it with a simple and fair flat tax? Lots of loopholes are eliminated, so there are plenty of tax-raising provisions in tax reform. But every one of those provisions is offset by provisions that lower tax rates and get rid of double taxation of saving and investment.
The latter, by contrast, is an exercise in trying to lose with minimal damage – sort of the “French Army Theory” of taxation, surrender gracefully and hope that your new masters give you a few crumbs after their celebratory feast.
What is especially strange about this approach is that the Republicans who advocate higher taxes claim that they are political realists. Yet if we look at real-world evidence, the moment Republicans show their “realism” by putting taxes on the table, the entire debate shifts.
Instead of the debate being tax-hikes vs. no-tax-hikes, it becomes a debate over who-should-pay-more-tax. Republicans win the first debate. They get slaughtered in the second debate.
Remember when the first President Bush agreed to enter into tax-hike negotiations in 1990? He set out two conditions – that there should be a reduction in the capital gains tax and that there should be no increase in income tax rates. So what happened? As everyone with an IQ above room temperature predicted, the capital gains tax stayed the same and income tax rates increased.
Last but not least, this conversation only exists because some people have thrown in the towel, acquiescing to the idea that there is no way to balance the budget without higher taxes. Yet the Congressional Budget Office data shows that the budget can be balanced by 2020 simply by limiting annual spending growth to 2 percent.
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[…] I’m a fan of some of Eli’s work, particularly his efforts to bar discriminatory taxes on foreign reinsurance companies (here’s my similar take on the issue). On the other hand, I’m distressed that Eli recently endorsed higher taxes. […]
For me the biggest disincentive that Obama created is not the 3% or whatever tax increase. But the fact that he told me that if I make less than $88K per year, then someone else will pay most of the $15K health insurance premiums for my family, while if I make more than $88K I will not only pay my own premiums but someone else’s too, since I’ll have to raise after tax income, in the higher brackets, to pay the full amount of my 15K in premiums. That for me represents a HUGE marginal tax increase and will be by far the greatest dis-incentive to work. And that economic bomb does not even explode till 2014.
So come 2014, “hasta la vista muchachos!” I’m retiring to a quiet place making little and spending no more than 60K. I will buy little from others (what a stimulus!) and produce even less (more stimulus) but be relaxed and happy. The rest of you work for hope and change. I’ll let you stress out building the iPhones, iPads and push the frontiers of knowledge inventing new medical cures.
Make 150K, pay 50K in federal, state and various other taxes plus 15K health premiums. Make 60K working 15 hours a week, keep most of it, healthcare paid by others and live in paradise with plenty of family time. What do you choose? How many people addicted to money do we really have to rely on? We’ll find out.
As leftists typically say, there are a lot more intangible things besides money that can bring happiness. Well, now, as an ever-increasing portion of my labor gets confiscated to serve the public, I’ll finally take their advice! Hope it makes them happy.
So no! Don’t throw in the towel. Pick it up and head to the beach. Permanently!
Brandon,
The US is growing at 3% (and the current incentives to produce environment may have already reduced that to a permanent Europe-like baseline of 1-2%). Meanwhile, 2-3 billion people (India, China and a few others) are growing at 7-10% annually. In that environment “performing not too much worse than before” (as your point implies about moderate tax increases not being that disruptive after all) is just not an option for maintaining the leading standard of living that Americans have become accustomed to in the past 100 or so years. Besides, as we start performing even just a little worse than before, voters will start hurting a little more than before, and inevitably will vote for even a few more taxes than before. The resulting vicious cycle will quickly unfold America’s currently enviable position of prosperity in the world.
Americans have done many self destructive things in the past century (most notably in the 30’s) but this time is different. The conditions under which America was founded endowed this country with so much freedom compared to any other country of the late 18th century, that in spite of all the suicidal things that Americans did to themselves in the past 100 or so years, this country maintained a large margin of advantage (economic freedom) compared to the rest of the world. Things are different now. The margin of advantage has finally been all but used up and as large portion of the world is now starting to mimic our economic freedom, ours is stalling (if not reversing course) and our margin of advantage has indeed become very thin. We have no more room for even moderately detrimental economic policies. The scale is about to tip and the resulting vicious cycle will knock us off our enviable current position in a mere couple of decades.
How sure are you guys that big business owners, and esp. small businessmen, are thinking, “Oh, jeez! Obama’s gonna raise my taxes an additional 3%! How am I gonna survive?” I think there are a lot of OTHER things Obama and the Dems have done recently that contribute to regime uncertainty more so than a mere possible 3% tax increase on the top 3% of American families making $250,000 or more.
Plus, if any tax cuts should be done or kept, shouldn’t they be geared towards investment and business DIRECTLY, such as a corporate tax cut perhaps 5-10% (at least)? Or a capital gains cut? Why complain so much about an income tax cut? I’m not so sure the evidence is there that wealthy Americans, esp. business owners, look at a high tax rate on PERSONAL income and say “Well, this is gonna hurt my chances of being successful in business. Better not to invest.” Wouldn’t a CORPORATE TAX INCREASE be much more harmful in that manner? Where’s the evidence that people making 250 grand or more really connect personal income with corporate? Do a lot of people just make this odd assumption that the wealthiest people, esp. those who run companies already, donate a portion of their after-tax income to the company’s bank account? I dunno about you, but no matter how altruistic I felt, as a businessman, I’d rather keep my earnings and live the good life, so to speak.
As long as the business is doing pretty well, I don’t think they’d be all that concerned with a mere 3% tax increase on non-corporate personal income. Have any libertarians or right-wingers even asked or interviewed big businessmen or the wealthiest Americans to get their thoughts on whether a 3% increase on a small rate would REALLY make them less likely to invest on a massive scale?
It seems to me that supply-side economics makes a lot of assumptions, assumptions which seem to have either never been tested or have little data to back them up. Even in the days of 70 or 90% tax rates, we still had high growth. Of course, I would never recommend going back to those rates, but it’s worth mentioning that we still had high growth despite them.
Supply-side economics MAY work if you’re reducing taxes from a high rate of 70% to 28%, but reducing them from 39 to 35%, as in the Bush years, never made much sense to me as economic stimulus. Cutting taxes from a low rate to a slightly lower rate is not gonna give you a whole hell of a lot more take-home pay. It would seem that supply-side economics and the Laffer Curve are mainly relevant when you go from one high rate to a drastically lower one. Or an anti-stimulus when you go from a low rate to a high one.
In the end, is it really worth complaining about a mere 3% on the wealthiest? The middle and lower classes will still keep THEIR cuts, and surely that must account for SOME stimulus, little as it may be nowadays. Allowing the other classes to keep more money to spend does have a stimulus effect of its own, as we all know.
I understand the basic argument against raising taxes, esp. in a recession, but I’m not sure people are putting it all in perspective. Wouldn’t the tax increase on people making 250 grand or more only be about 3%? 3% on top of an already-low rate of 35%. It would still be 39%, which is still pretty low for an advanced, industrialized country. Doesn’t the U.S. still have the lowest (or some of the lowest anyway) taxes of any wealthy nation? Corporate taxes are another issue, but surely an income tax of only 39% can still be pretty growth-enhancing?
Is a mere 3% increase REALLY gonna be the death knell for our economy at the moment? Plus, what small business makes over 250,000? Don’t they start calling it a medium-sized business (and thus closer to big business, at least in size), at least, if it starts making THAT much money?
But, just to clarify, when people say “Bush tax cuts” nowadays, are they referring to ALL the major tax cuts Bush made, including the one on the estate tax, or just the income tax cuts which reduced all brackets of income tax by 1 or 2% and almost 4% for the wealthiest? I’m inclined to believe it’s the latter, but the way people on the Right and some libertarians are complaining so much about such a small increase on an already-low rate, it seems to me there’s more to it.