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Anti-Tax Orthodoxy Runs Deep–and Wide

June 6th, 2011 . by economistmom

gingrich-and-norquist

Here’s a really excellent front-page story by Lori Montgomery in today’s Washington Post, where she focuses on Grover Norquist’s so-far-successful super-gluing of blinders on the GOP when it comes to the idea of reducing tax expenditures.  Lori explains that the growing sensibility of some of the Republican party’s wisest fiscal policy leaders on this issue have not yet swayed Norquist away from his self-contradictory, ideological stance (emphasis added):

On Capitol Hill, Norquist has admonished Coburn (Okla.), Crapo (Idaho) and Chambliss (Ga.) for suggesting a tax option for tackling the debt: reducing credits and deductions worth an estimated $1 trillion a year. Although most of the cash would be used to lower tax rates for everyone, a portion would be dedicated to restoring national solvency.

No good, says Norquist’s group, Americans for Tax Reform. Under the pledge, raising revenue in any way requires an equal tax cut elsewhere to avoid expanding the size of government. And, yes, that sometimes means protecting tax breaks that Republicans view as bad public policy, Norquist and his supporters say.

The GOP’s three-decade-old campaign against taxes has clearly had a significant impact. Neither major party would advocate a return to the 1970s, when people earning more than $200,000 a year faced a top rate of 70 percent. But the top rate is now half that and, partly because of the recent recession, tax collections have fallen to their lowest level as a share of the economy in 60 years.

Major tax cuts in 2001 and 2003 also contributed to the decline in revenue — and helped drive up budget deficits. Today, the spiraling debt ranks well ahead of too-high taxes on the list of economic concerns. And the GOP’s hard line on the issue stands, alongside Democratic resistance to cutting federal retirement benefits, as the biggest obstacle to a bipartisan agreement to tackle that problem.

“Grover’s not realistic,” said former senator Judd Gregg of New Hampshire, a self-described “Reagan robot” elected to Congress in 1980. Gregg retired last year after serving with Coburn and Crapo on the bipartisan fiscal commission that recommended stabilizing borrowing by trimming tax breaks and sharply cutting spending.

With the number of people on Medicare and Social Security set to double, Gregg said, “your government is inevitably going to grow. And you’re either going to have to finance that, or you’re going to end up running the country into the ditch.”

In recent weeks, prominent Republicans have urged a more flexible approach to taxes. Former Federal Reserve chairman Alan Greenspan joined the chorus Friday, dropping his support for the 2001 George W. Bush tax cuts. Greenspan told CNBC he’s so “scared” by the debt that he now favors a return to the higher rates of the Clinton administration.

Martin Feldstein, a Harvard economist who served as chief economic adviser in the Reagan White House, supports the commission’s approach to raising money by ending tax breaks.

“When the government gives a tax credit to homeowners who buy solar energy panels, it’s just like giving them a cash subsidy to buy those panels,” Feldstein wrote last week in the conservative Weekly Standard magazine, suggesting that the value of deductions and credits be capped at 2 percent of adjusted income.

“Although government accounting rules treat the end of a tax credit or the limit of a tax deduction as a revenue increase, the economic effect is the same as a cut in spending,” Feldstein wrote. “Anyone who favors less government spending should also favor cutting tax expenditures.”

But Norquist argues that equating tax breaks with spending “is a threat to the modern Republican Party’s worldview,” which calls for a vastly smaller government and “dramatically reducing the tax drag on the economy.”

That worldview supports eliminating tax breaks, Norquist said, but only if all the proceeds are used to push tax rates “down as far as possible.” The work of reducing the national debt must be done entirely by shrinking government, he said. Any compromise that includes taxes would hinder that goal and taint the Republican brand.

Norquist compared Coburn, the most outspoken of the Senate trio, to a “malignant” cell in the body politic. “So,” Norquist said, “we use chemo and radiation to protect all the healthy cells around it, so it doesn’t grow and metastasize.”

So Norquist opposes reducing tax expenditures even though he knows and acknowledges it would improve the efficiency of the tax system, simply because it (alone) would raise revenue and therefore must mean (in Grover’s mindset but not Feldstein’s) that it would grow the size of government.  As I’ve commented several times before but most recently on Paul Ryan’s plan, all is not hopeless here.  The key to getting bipartisan agreement on this is not to bully the Republicans into giving up their “anti-tax orthodoxy”–but to enable them to discover (among themselves even) that reducing tax expenditures–even if the extra revenue is not spent on rate reduction–is actually consistent with their anti-tax orthodoxy.  And I think we can get somewhere on this issue even if we stick to “civilized” means, such as the way the “Gang of Six (Now Five)” has been doing.

This “anti-tax orthodoxy” isn’t confined to the most conservative of Republicans, however.  Last Friday the top Democrat on the tax-writing House Ways and Means Committee, Sander Levin, had this to say about reducing tax expenditures:

The discussion so far has been dominated by those calling for a sweeping cut to the top tax rates and paying for them through the elimination of tax credits and deductions – the largest of which benefit America’s middle class. Some of the more concrete proposals, such as one of the options put forth by the bipartisan fiscal commission, have called for the elimination of virtually all of these provisions in order to pay for lower rates.

The discussion of tax credits and deductions needs to recognize that the vast majority of these provisions – by value – benefit individuals, not businesses…

So to reduce the top marginal rate for the wealthiest people in this country to 25%, Republicans would need to eliminate many provisions that benefit – and indeed helped build – the middle class of this country. There is a growing assumption that tax benefits, and itemized deductions in particular, primarily benefit the wealthy and that their elimination, in conjunction with lower rates, would benefit the middle class. I don’t believe this – my experience and, more importantly, the data support the reality that many of these provisions have helped support and build the middle class…

[I]t is hard to see how the tax reform outline in the Republican budget would benefit working families. While a top rate of 25% may sound tantalizing to some, to raise the revenue necessary to keep the reform revenue neutral, you would have to eliminate virtually every tax incentive for middle-income and poor families. Even if proponents of such a rate eliminate the capital gains and dividend preferences, a rate that low still likely means a tax cut for many of those at the top, and a tax increase for broad portions of the middle class.

We should simplify the code to reduce overlap and unnecessary complexity. We should make sure that tax incentives are working as intended. But we should not blindly cut back the policies that helped to build a strong middle class in order to remake the rate structure in a way that benefits those at the top.

The need for tax reform also comes at a time when we need to find common ground on a balanced framework for immediate and long-term deficit reduction that allows for investments in economic growth…

In a nutshell, he’s saying the Democrats don’t want to reduce tax expenditures either. Except this bit of “anti-tax orthodoxy” is dressed in the very different clothing of a (legitimate) concern for adequate “progressivity” in public policies.  There are some civilized conversations to be had here, too.

First, Levin’s criticism of the principle of reducing tax expenditures seems limited to the notion of outright eliminating all tax expenditures–rather than just paring back on them, which Levin doesn’t seem to want to admit could be done in as progressive a manner as we desire, by (for example) capping or otherwise limiting the value of the tax expenditures to those amounts that benefit households at all income levels more equally.  Second, what Levin really objects to in the fiscal commission and Ryan tax reform plans is not the deficit reduction that would be achieved by reducing tax expenditures, but the spending of much of the extra revenue that would otherwise be raised on tax rate cuts–which indeed are there to sweeten the deal for Republicans because tax rate reductions do disproportionately benefit the rich and are more consistent with (at least the adequate financing of) smaller government.  That’s why I’ve tried to explain that “Piece #1″ of Paul Ryan’s tax plan is actually something we can build on in terms of bipartisan agreement on tax reform for deficit reduction.

Once we convince Republicans that reducing tax expenditures is reducing the size of government, they won’t be so hell-bent on opposing the increase in revenue (and reduction in the deficit) that results.  And once the Republicans then give up that “Piece #2″ of the Ryan tax plan, Democrats could better focus on the fact that reducing tax expenditures is one of the most progressive (and pro-growth) ways we could come up with to reduce the deficit.

Those of us who see the wisdom and necessity of reducing tax expenditures as a major part of deficit reduction just need to keep talking, in a way that respects what’s really behind the different forms of “anti-tax orthodoxy” held by both sides.

Can the Gang of Six Become the Gang of 535?

June 3rd, 2011 . by economistmom

The co-chairs of the President’s fiscal commission–Alan Simpson and Erskine Bowles–sure hope so.  From today’s Washington Post:

To be sure, we are encouraged by the positive tone of the bipartisan negotiations being led by Vice President Biden. Those discussions have the potential to produce an agreement on a substantial down payment on deficit reduction…

But even under the most optimistic scenario, it seems unlikely that those discussions will yield savings large enough to truly stabilize our debt, let alone make the structural reforms to our entitlement programs and tax code that we so desperately need…

We understand that what the Gang of Six is working on is obviously no one’s first choice. Both House Budget Committee Chairman Paul Ryan and President Obama have presented plans — and those plans have certainly pushed the debate forward. But as the budget votes last week proved — producing a soapbox for heated rhetoric but no progress — those proposals are not going to cut it. Both plans have come under intense criticism from the opposing party, and it is clear that neither can earn the type of broad bipartisan support necessary to enact and sustain a credible fiscal plan.

Meanwhile, we simply cannot afford gridlock and delay as each party stubbornly holds out for its ideal solution.

The truth is, there is no perfect plan — we all know that. We also know that the only way this works is through a bipartisan effort where everyone prods their own sacred cows into the cattle chute, and everyone gives up something they like to protect the country they love…

Members of both parties and both houses must publicly support the work of the Gang of Six. This is the time for heroes. The country is ready for leaders in Washington to put politics aside, pull together — not apart — put national interest ahead of political interests and put the next generation over the next election.

Pray for the Gang of Six.

(Imaginary) Conversations Between Paul Ryan and the President

June 2nd, 2011 . by economistmom

paul-ryan-and-barack-obama

Len Burman and Ruth Marcus have both dreamed up their own fantasized versions of “adult conversations” between House Budget Committee Chairman Paul Ryan and President Obama–or as they both refer to them “Paul and Barack.”  Check them out.  If only our policymakers could be so openly and honestly communicative with each other.

(I maintain this is one important way in which policymaking probably would go differently–and I believe better–if we had more women in charge.  Note that Len’s version, while more truthful than the real conversations, is still more “tit-for-tat” compared with Ruth’s “heart-to-heart” version.)

Emphasizing the “Win-Win” of Deficit Reduction

June 1st, 2011 . by economistmom

Watch live streaming video from fiscalsummit at livestream.com

Like President Clinton at the Peter G. Peterson Foundation’s “fiscal summit” last week, I believe we need to do a better job emphasizing the positive of deficit reduction. Politically, compromise is a lot easier to achieve when both sides see something to gain (mutual benefit) rather than just stuff to lose (mutual “sacrifice”). I tried to make that point in a column that appears in this week’s Christian Science Monitor magazine (now available online here):

“Compromise” on the issue of deficit reduction has become a dirty word in Washington.

Politicians assume that fiscal responsibility is a zero-sum game – that if they agree to any policies that are consistent with the priorities of the other side, they give up their own priorities. If the other side wins, it must mean they have lost. But that’s all wrong.

The best ideas for the most effective ways to reduce the federal budget deficit happen to be win-win ideas, “bipartisan” in that the goals and priorities of both Democrats and Republicans are promoted rather than sacrificed. It’s time we emphasized what both sides (and the rest of us) have to gain from such compromise.

I give four examples of these “win-win” benefits of deficit reduction, that create good things that both political parties like:  (1) strengthening our economy; (2) increasing intergenerational equity; (3) reforming the entitlement programs to reduce costs while strengthening the safety net; and (4) reducing tax expenditures to achieve a more efficient and fairer tax system.

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