Neither Side is being Reasonable on Taxes

Ryan - ObamaAs the election draws near and the competing interpretations of deficit bean counting becomes louder and louder, taxes, specifically income taxes, will be occupying a more pronounced amount of the political space. On the one side, Republicans, who oppose raising taxes on anyone for any reason, and who have been so dreadfully frightened by Grover Norquist and his ridiculous tax pledge that its reasonable members don’t dare speak honestly. On the other side–because we only have two sides after all–are the Democrats, who oppose raising taxes on anyone making less than $250,000. How the Democrats arrived at that number has been the subject of debate, but the party has sufficiently pigeon-holed itself on that number, so it is just as if Moses himself carried it down the Capitol steps and announced it as God’s will. Neither side is correct, and neither side is moving.

The Republican position is uniquely barbaric. Assuming no legislative change from status-quo, the top wage earners in the United States in 2012 will pay a top rate of 35% on incomes over $388,350 and 33% on incomes roughly over $218,000. Comparatively, most European nations carry a top tax rate of over 40%, and significant sales taxes and luxury taxes. Germany has a top income tax rate of 42%, and is currently the only thing standing between Europe and total economic destruction, rightly or wrongly. The Republicans are demanding not only that the top tax rate not be raised, but rather that it and other taxes affecting top earners be lowered dramatically, to 25%. Each of the lower marginal tax brackets would be lowered to 10%. They offer no compromise on this position.

Democrats on the other hand are standing pat on the position that taxes should be raised to pre-Bush levels for top earners of as high as 39.6%, and proposing that marginal tax rates for lower income earners not be changed from current levels for families earning less than $250,000 and individuals earning less that $200,000. There is also a surtax on unearned income at the higher income levels of 3.8%. Further, any individual earning more than $1 million would pay a minimum income tax rate of 30%.

Setting aside any debate concerning the United States’ arcane corporate tax code, neither party is being reasonable. First, the Republican plan leaves the government $6.2 trillion short on revenues and would necessarily lead to drastic cuts in discretionary spending, be it from programs boosted by Democrats, or from Defense. Second, the Democratic proposal, although much more equitable, also leaves in place the irresponsible Bush tax cuts for lower wage earners. It isn’t smart economics or smart politics to propose tax changes that affect only a small group of taxpayers. Moreover, Obama and the Democrats had their chance to avoid this fight altogether in late 2010. With the Bush tax cuts set to expire, they instead chose to negotiate with the Congress for a two-year extension. That decision was neither politically smart or economically responsible. With deficts almost certainly to be a more resounding issue during the 2012 campaign than tax rates, the Democrats, primarily out of fear, intentionally exacerbated the deficit by signing the 2010 agreement, playing directly into the Republicans’ wheelhouse. Allowing the Bush tax cuts to expire for everyone would have been a much easier political sell for the President and Democrats if they had painted the Republicans as unreasonable and focused on the shared sacrifice inherent in allowing a return to Clinton era rates. Instead, Democrats must fight the battle battle again during an election year.

Income and other taxes are the mechanism through which we fund the necessary spending of the federal government. The tax code is not the proper conduit through which to remedy wage disparities, working conditions, and income inequality. The proper method for addressing those problems in through the enactment of statutory regulation and enforcement of current law. Whether or not what we receive in return for our tax revenues is also not properly addressed by the tax code. The tax code should simply represent a fair allocation of the public burden upon those subject to its various assessments. In cases where it becomes necessary to raise revenues to meet the payments due on programs and expenses legally required by passage of laws, increases in tolls should be allocated in an equally equitable fashion.

Ultimately that is what the current tax debate is all about–different perceptions of fairness. The Republicans assert, falsely, that cuts to high income tax brackets will create jobs and that placing too high a burden on high income earners is inherently biased because it is precisely these high earners that allow the rest of us to exist at all. The reality is that the cuts will not create jobs. The more logical explanation for their position is a desire to reenumerate those who fund their campaigns. They serve one master. The Democrats on the other hand serve two masters–their progressive base and those who fund their campaigns. Arguably a more precarious tightrope to walk. As a consequence, the Democrats must please their base by proposing tax policy that places a heavy burden on those who own the vast majority of the wealth. On the other hand, the Democrats must not place too high a burden on those earners, lest the dogs of war be unleashed upon them by the wealthy.

The Republican tax plan also has as part and parcel of its structure an extraordinary reduction in revenues that must be offset by spending cuts. The spending cuts will undoubtedly come from the hides of those on government programs such as Medicaid and Medicare. As such, the tax plan lacks credibility. As I opined earlier, the tax code is not to be used as a back-door technique to accomplish policy goals. The prior commitments made under government programs are in effect a bill that government must pay because it has promised to do so, and any tax plan that can not fairly be estimated to meet that burden should not be taken seriously. It is also disingenuous to continue to treat capital gains as some special carve-out in the tax code. Capital gains represents real money and real income, and should be taxed as such. It is not a genuine offering.

The Democratic tax plan is also irresponsible. It is not an efficacious position to take that high income earners should have their taxes raised while middle and lower income individuals and families should not. It isn’t responsible to those it claims to represent to propose that capital gains rates be raised only marginally. The Democratic plan also proposes to remove subsidies from industries it views as unfriendly and retain subsidies for those industries that it supports. The tax code is no place to subsidize any industry without an open and honest discussion of the supposed benefits of doing so. The Democratic plan will also offer some extension of the Social Security payroll tax holiday.  The Democratic Party should never have toyed with the program to begin with, and in doing so it chose politics over policy. However, obviously, with fairness as your guide, the Democratic tax plan represents a more scrupulous and benevolent offering than the Republican farce.

The reality is that the best possible scenario for the American people–given the current reactionary posture of the Republican Party–is for neither party to get its way. Marginal tax rates would revert back to Clinton era levels and drastic funding cuts to government programs would be avoided. The more likely outcome is some mix of Democratic and Republican proposals, that continues to leave the government underfunded. Again, playing directly into the hands of the Republicans. Neither party is being honest with the American people concerning the tax debate. While the Democrats have the high road on fairness, the Republicans have the high road on transparency.