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Bruce Bartlett Says Republicans Are Rolling Over on Tax Policy

July 10th, 2009 . by economistmom

theelephantintheroom_1

In a Forbes column that remarkably echoes my blog post from a couple days ago, Bruce Bartlett argues that the Republicans are going to get what they deserve:  a big tax increase on the rich–just the kind of tax increase they most detest.  Bruce explains that the Democrats want to pay for health care reform but can’t seem to agree on a specific revenue-raising approach.  When forced to come up with specific tax increases, the Democrats’ tendency is to favor the “soak the rich” strategy, which does play well with the American public these days given the increase in income inequality over the past 15 years and the current state of the economy.  Republicans, meanwhile, are effectively “rolling over” by failing to step forward and reach out with any kind of alternative way of raising revenue that they, and maybe a lot of Democrats, too, would prefer.

What would thoughtful Republicans and Democrats likely prefer?  Maybe a broadening of the tax base that would allow revenues to rise without having to raise tax rates, accomplished by eliminating or reducing economically inefficient “tax expenditures” (such as the exclusion for employer-provided health care).  Maybe an expansion of the tax base to include things we don’t feel so bad about discouraging–such as carbon emissions, or personal consumption.  Bruce highlights Len Burman’s proposal for an add-on value added tax to pay for health care reform.  But before we have to go to those nobler, more fundamental changes in tax policy, or resign ourselves to the pat “tax the rich” Democratic response, I think these comments of Bruce hint at a much easier and obvious first step:

Even many liberals think that it is a bad idea to use soak-the-rich taxes to pay for health reform. “Financing a mass program with a class tax is not a good idea,” says Joseph Thorndike of Tax Analysts. “It obscures the connection between taxes paid and benefits received–a connection that’s necessarily tenuous for many government programs, but not for health care. It also undermines the notion that taxes are the price we all pay for civilized society, not just the price that some other (rich) guy has to pay.”

In the end, higher tax rates on the rich are inevitable if only because of expiration of the Bush tax cuts next year. Since that would just return rates to where they were in the 1990s when growth was robust, any claim that this will destroy the economy should be taken with many grains of salt.

Combining these two observations:  (1) that the “soak the rich” strategy could undermine support for any new health care plan (or even government programs more generally), and (2) that higher taxes on the rich are “inevitable” because of the scheduled expiration of the Bush tax cuts (and that returning to Clinton-era tax policy is no big deal), with the fact that increasing taxes only on the rich isn’t likely to produce enough revenue anyway, should lead us to fully notice/see the big elephant in the room (or on the beach as in the amazing image above!):  we need to at least consider letting all of the Bush tax cuts expire as scheduled.

The Republicans should realize that ironically, their calling for the expiration of the full complement of Bush tax cuts could turn out to be the easiest “compromise” position they could take on tax policy at this time.  And the Democrats should realize that they aren’t really as fond of the Bush tax cuts as they have lately been pretending to be just because President Obama promised to keep most of them in place.  Letting the Bush (deficit-financed) tax cuts expire, instead of turning them into the Obama (still deficit-financed) tax cuts, would raise more than enough revenue to pay for a health care reform with significantly expanded coverage, leaving some left over to help close the fiscal gap that already exists because of existing commitments.  And because the Bush tax cuts were broadly distributed to all taxpayers and yet highly regressive (providing the largest percentage increases in after-tax income to the richest of households), letting them all go away would be a broadly-distributed, highly-progressive way of raising revenue.   The Bush tax cuts are scheduled to expire under current law on December 31, 2010, at which point most economists believe the recession will be over.  And this would be a progressive and not economically harmful tax increase which would fund a progressive and badly needed health care reform, and yet would be a tax increase that Congress would not even have to vote on, and President Obama would not even have to sign.

It’s true that we’ll likely need to do more than return to Clinton-era tax policy to make a federal revenue system that’s sustainable over the longer term, because remember, even the “current law” baseline leaves us with a significant fiscal gap (3.2% of GDP over 75 years, according to CBO) and we’re now talking about expanding health care coverage.  So additionally we will need to consider more fundamental tax reform, including reducing tax expenditures and expanding the federal tax base to cover environmentally-harmful activities and/or economically-harmful excessive consumption.  But to me it’s clear that the big elephant already standing in the room (or on the beach) is (still) the Bush/Obama tax cuts.

6 Responses to “Bruce Bartlett Says Republicans Are Rolling Over on Tax Policy”

  1. comment number 1 by: Terry Carruthers

    If Congress uses the “tax the rich” approach to pay for health care, won’t there be future problems when the Republicans get control of the purse strings and revoke those taxes.

    Once a health care program is in place it will be hard for the Republicans to dismantle it (if they want to). They will be faced with inertia and the question of what to implement in its place.

    But they could strangle an existing program just by pulling the purse strings tighter. Seems like that leaves long term health care reform in jeopardy.

  2. comment number 2 by: Anandakos

    Terry,

    You are so right, and they’ll probably get their hands on those purse strings no later than January, 2013. Maybe even 2011.

    I think that we have discovered a new phylum of non-chordates: congressus democraticus.

  3. comment number 3 by: B Davis

    In the end, higher tax rates on the rich are inevitable if only because of expiration of the Bush tax cuts next year. Since that would just return rates to where they were in the 1990s when growth was robust, any claim that this will destroy the economy should be taken with many grains of salt.

    True. I’ve long thought that the Bush tax cuts were likely to morph into a middle and lower-class tax cut. That is because I believed that they were, as a whole, unsustainable. Once this became obvious, it seemed very likely that the upper-class tax cuts would be to first to be rolled back. Hence, this should serve as a lesson to Republicans not to push for an unsustainable broad-based tax cut.

    …with the fact that increasing taxes only on the rich isn’t likely to produce enough revenue anyway, should lead us to fully notice/see the big elephant in the room (or on the beach as in the amazing image above!): we need to at least consider letting all of the Bush tax cuts expire as scheduled.

    I agree. Under Bush, it seemed that nobody (except our military) was asked to sacrifice and under Obama, only the rich have been asked to sacrifice. While that may be somewhat understandable in our current economic situation, any call for sacrifice must eventually become much more broad-based. I can only hope that serious consideration will be given to letting all of the Bush tax cuts expire when the time comes. Until then, I think that it is very helpful that you and others are keeping this issue alive so that the extension of the tax cuts does not become a forgone conclusion.

  4. comment number 4 by: Janet Brown

    Our leaders in Washington must seriously consider new and innovative policies that promote a better, more confident, prosperous, and secure America in the 21st century. One of the things I think we can do to help make that happen is support American businesses and the U.S. Chamber of Commerce (http://bit.ly/oanAT). They’re doing things to reach out and show people that they can get involved, too.

  5. comment number 5 by: Josh Uy

    Isn’t the reason that tax cuts help the wealthy is because almost half of people in the US don’t pay any federal income tax? It would be impossible to cut taxes and benefit mainly the poor since the poor pay no federal taxes. So I see nothing wrong when tax cuts “benefit” the rich because the rich already are supporting a disproportionate amount of the govt’s budget.

  6. comment number 6 by: Jim Glass

    “Even many liberals think that it is a bad idea to use soak-the-rich taxes to pay for health reform”.

    Some of the disadvantages of “tax the rich” financing are pointed out at the distinctly non-right wing Tax Policy Center. Check the two follow-up posts too.

    They include the thought: “asking barely 1 percent of taxpayers to finance health reform largely on their own is not only bad tax policy, it is dreadful governance.”

    Years ago a progressive, Franklin Roosevelt, explicitly, even vehemently, rejected “tax the rich” financing for his flagship social insurance program. He said, if it is worth it for workers they will be willing to pay for it themselves and be better off for doing so … for they will have ownership of it from paying for it, “so no damn politician can ever scrap my social security program” … and the program also will be prevented from expanding into a wantonly wasteful vote-buying program, since the politicians won’t be able to add things to it that aren’t worth the cost to workers.

    Thus we have Social Security’s payroll tax funding, and very successful it has been 70 year too.

    What a principle! From a liberal! If it is worth it to workers they will be willing to pay for it themselves and should. If the aren’t willing to pay for it then it isn’t worth it to them, so don’t enact it.

    In stark contrast today we have Obama and his people all over the place selling health care reform to the average voter not as something “worth the cost”, but as a free lunch — to give you everything you have now and more and cost less too! One of countless examples….
    ~~
    “The president is committed to enacting reform that will lower costs, protect choice of doctors and plans, and assure quality and affordable health care for all Americans,” said Linda Douglass, a spokeswoman for the White House health reform office. “He has made it clear that we would not support a reform plan that would require people to leave their current insurance plans”… [sorry, only one link per comment]
    ~~

    Wow, “lower costs” for the insurance I have now, with better coming to me, and new insurance for millions of uninsured too!

    But of course, you can’t “lower costs” for average Americans as you promise by raising taxes on them to pay for the increased costs you say you are lowering, eh?

    Meanwhile, Ezra Klein and a host of plan supporters on the left are openly lamenting [again sorry no more links] that the middle class masses are not rising in support of this plan because they don’t see what’s in it for them. Woe.

    Which left my own Congressman Charlie Rangel yesterday explaining to the press that he had to push the whole tax cost of the plan on 1% of the population because “That’s where we had to go to get the votes”

    Which might leave Franklin Roosevelt, wherever he is today, saying: Then just don’t do it. Clearly the plan is not worth it to the people you are promising it to in their minds.

    Start again. Clarify your goal. If the goal is to insure the uninsured then say so, explain why that is worth the cost, don’t sell it as a free lunch. If the goal is to contain costs then how about this: figure out a way to have it actually contain costs before you start voting on it! That way some people might have reason to believe you about that.

    Then have the whole population vote to enact it and pay for it because it is worth it to them. Like with my Social Security.

    Otherwise, just don’t do it. Don’t, don’t enact a bad law, with bad financing, bad governance, that will make things worse, because it is politically so important to you to avoid a “defeat” that you have to enact a bad law rather than none at all.