A taxing moment

August 8th, 2017 at 10:08 am

I wrote a bit on what real tax reform would look like for yesterday’s WaPo, and the NYT editorial board followed up w/ a similar piece today. Both pieces make an important distinction between tax cuts and tax reform.

The definition of the former is obvious, and in R’s hands, tends to be regressive cuts that hemorrhage much-needed revenues. Real reform, OTOH, avoids exacerbating market-driven income and wealth inequalities, while raising the revenues needed to meet the challenges we face.

That last bit may sound esoteric, so let me give a very concrete e.g. of what I mean. According to CBO, demographic and others pressures are such (see my piece) that by 2027 it will take 2.5 percentage points more of GDP to meet our obligations to Soc Sec and public health care programs. We either raise that in revenues, cut spending elsewhere, cut benefits, or put it on the debt (adding “or we grow at some unrealistic growth rate” not allowed).

The NYT piece is very up front about raising revenues and suggests lots of great ways to do so, including a link to my old financial transactions tax oped. I still like that idea and do not understand why an FTT generates so little buzz among progressives.

In fact, some on the left, or at least center-left, argue that the NYT approach to tax reform is misguided. To lead with your chin like that–to explicitly lean into revenue raisers–in the hurly-burly of the debate just reduces to “R’s want to cut taxes; D’s want to raise them; you choose.”

D’s can counter that they just want to raise taxes on the rich, sometimes adding that they want to cut middle-class taxes. Here’s my take on that:

Between now and 2040, the share of our population over 65 is expected to rise by more than a third (from 15 percent to 20 percent), generating pressure on both the spending and revenue sides of the budget. Global warming, rising sea levels and weather changes will require investments in infrastructure and science. Increased inequality leads to stickier poverty rates, diminished mobility, and the need for increased investment in children’s education and their parents’ well-being.

Politicians, and not just conservatives, are in denial about much of the above. Even many Democrats fear that to come clean on the need for ample revenue to meet these needs would lead to defeat at the polls. Maybe they’re right, but while Republicans make empirically indefensible growth predictions to pretend to offset their tax cuts, Democrats have long been reluctant to explain to constituents that the necessary role of government they represent will require more tax revenue than we can raise from solely the top 1 percent (though that’s the right place to start).

Progressives cannot beat Republicans in a fight over tax reform as currently defined — i.e., if tax reform means tax cuts, we’ve already lost. As their health plans revealed, Republicans’ goal is to shrink government and give the proceeds to the rich. Democrats’ response cannot be that they’ll instead cut taxes for the middle class.

Instead, they should explain what true tax reform is, why it is so necessary and how it must support a robust role for a government that is amply funded to meet the steep challenges we face.

This morning on Bloomberg radio, Tom Keene asked me if we’re overtaxed. My response was that this is not a simple question. First off, it’s important to point out that contra Trump, we’re low in terms of revenues we collect at all levels of gov’t as a share of GDP relative to other countries (about 27% here compared to ~37% among our comparables, according to OECD data).

But as I went on to say, the sensible way to answer that question is to look around and ask yourself if we have the revenues we need to ensure that our social insurance programs remain intact, if not improved, our public goods–schools, roads, water systems–are world class, our preparedness for climate change and geopolitics are adequate. I think not, ergo I’m for #RealTaxReform.

What are you for? And why don’t the D’s have a coherent alternative to the R’s tax cuts? As my old Obama-team compadre Tim Geithner used to say: “plan beats no plan!”

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4 comments in reply to "A taxing moment"

  1. spencer says:

    The problem is that the republicans and democrats are not talking about the same thing when they say tax reform. But the republicans have won the propaganda war because the democrats have not made the simple, straight forward argument you just made. Name a reporter or major newspaper editor who thinks about tax reforms in the way you just did.
    For that matte,r name a single democratic politician who talks about tax reform the way you just did. The republicans have crafted a very believable narrative about their economic theory that reporters and the public accept even though it has failed over the last almost 40 years to deliver on their promise. Republicans act as if their policies that have been enacted over the last 40 years have been a roaring success when is should be obvious that those policies have not delivered. Rather they are responsible for the rising inequality and slow economic growth we have experienced in recent decades.

    Democrats should be banging on their drums with that message and force republicans to explain why their policies have not worked.Every time a republican says tax cuts for the wealthy and business lead to greater growth force them to explain why business fixed investment peaked as a share of GDP under Jimmy Carter. The evidence is overwhelming that their policies have not worked, but why do the democrats let them get away with claiming that they work. Every one should think Larry Kudlow is the greatest fool in the country for the claims he makes. But on CNBC his claims are treated with respect while your facts are ignored.

  2. JF says:

    As for taxing the very wealthy more I look at the voodoo economics that began under Reagan as using the public’s govt to enrich people. The windfalls gained fir doing no more work by all these tax grants over the decades should be recovered via a windfall profits tax exacted via the estate tax, a recovery surcharge added.

    We should move toward a primary surplus targer for the annual fiscal affairs by first bringing the tax definitions and rates back to the very healthy 1960s (while returning payroll tax rates back to that period too, now it is 7.65 percent for employees, in 1968 it was 4.4 percent, employers pay the same; and we should not wonder why we rapidly lost a competition with foreign workers).

    People need to be reminded of what occured. We can all see what happened.

  3. Bob Wyman says:

    Teddy Roosevelt was not alone in arguing that the essence an income tax is “a question of the proper adjustment of burdens to benefits.” Yet, today, it seems we speak only about the distribution of the burden, never about the distribution of benefits.

    Some may claim that the Democrats are for taxes, while the Republicans have, as Rep. Collier said 1920: “never believed that the wealth of the country should contribute anything except campaign contributions,” but I think it important to note that Democrats have always argued for what TR advocated: a more fair balance of burdens to benefits.

    Clearly, those with the greatest wealth benefit most from the actions of government and consume a relatively high portion of public goods. Today, those with the greatest wealth do not pay their fair share for the benefits they receive. The Democrats should reframe this debate as one about fairness rather than one simply about finding the money needed to fund necessary programs. As long as the GOP is able to keep the discussion focused on the burden of payment, while ignoring the fairness of the exchange, there is no hope of avoiding “tax reform” as anything other than lower taxes on the highest incomes while “broadening the tax base” and thus increasing the tax burden on those who receive relatively less.

    So, the “correct” answer to the question: “Are we overtaxed?” should be something like: “Some of us are and some are not.” Those with the greatest wealth are, of course, those who are not overtaxed. Those who benefit the most from government pay the least.

    • JF says:

      Totally agree. It is the benefit principle in taxation design. We may be constrained by legal holdings to the use of income tax regimes in order flexibly to raise financing contributions but we do not need to analyze from that persoective alone. All revenue system designs should report contribution levels by net worth ratios.

      Indeed, in a more thoughtful Administration, who probably does not need any change in law to do this, we could see marginal income tax schedules provided that have a net worth worksheet pointing them to the schedule that applies to the filer/household (and helping in the gathering of useful economic data too, so policymaking can improve the evidence base).

      For people of high net worth, are not all new income dollars on the margin from a proper economic equation of their capacity? Yes this is true (it is misleading to only look at income flow for the period to define marginal capacity).

      This proposal is just defining marginal income taxation bases differently, not a net worth tax.