Losing the Tax Issue

Ramesh, in today's NYT:

What Mitt Romney and Rudy Giuliani — who have made the most detailed remarks on taxes of the top-tier candidates — are really saying is that they will make sure that taxes on capital gains, dividends, estates and high earners will stay low. Not many middle-class taxpayers will benefit directly from any of those policies.

... Both Mr. Romney and Mr. Giuliani speak vaguely about making sure the alternative minimum tax doesn’t affect any more middle-class families. That is a step in the right direction. But it isn’t a tax cut.

Mr. Romney has also proposed an initiative to make the return on middle-class savings tax-free. It may also be a step in the right direction, but it’s small change. The primary focus of the Romney and Giuliani tax plans remains high earners.

What would be a serious middle-class tax cut? One answer is to expand the tax credit for children. But none of the candidates is proposing to do so, or any other big tax relief for regular folks. You might think that Mr. Giuliani would want to do everything he can to appeal to social conservatives short of actually becoming one himself. But why should he offer a pro-family tax cut when even the hard-core social conservatives in the race aren’t interested? Mike Huckabee wants a national sales tax and Sam Brownback wants a flat tax. Either proposal would increase taxes on a lot of middle-class families.

The Republicans in Congress are no better. For much of the right, the great passion of the moment is to make sure that the carried interest at hedge funds is taxed at what look an awful lot like preferential rates. For years, liberals have said that Republicans talk about “family values” but won’t do anything to meet the economic needs of families. Right now, on taxes, that charge hits home.

Read the whole thing. I would only add that while smart liberals may not think much of Barack Obama's tax plan, it seems likely to have a lot more mass-market appeal than anything the GOP candidates are proposing.

Update: Reihan adds his two cents here.

Comments

The old-time Republican formula has been to mix mild tax cuts for the middle class (and sometimes for the poor) with extensive tax cuts for the rich. As a liberal, I don't think much of this, but I must admit its political potency.

Ramesh is pointing out something that is key to that potency-- you actually have to include the tax cuts for the middle class for it to work.

Posted by Dilan Esper | September 20, 2007 2:57 PM

This is a losing proposition for Republicans. If the competition is between which party can make the tax code even more progressive, Democrats will win that battle every time. Republicans, like Bush, feel compelled to lop more low-income folks off of the income tax rolls, as part of their middle- and upper-class tax income tax cuts, but they'll never get any political credit for that. Even worse, they are forced to pony up more "refundable credits" (transfer payments) in an attempt to buy off their next round of tax cuts; on top of that, since they keep shrinking the rolls of net income tax payers, the constituency for income tax cuts shrinks relative to the population.

Instead of patronizing the proles by mimicking the Dems' Robin Hood/Santa Claus economics, the Republicans should broaden the issue to address the fiscal and economic effects of taxes, i.e., what tax policies will help spur economic growth, more high-paying jobs, etc.? We might have to concede that the world won't end if we have slightly higher top income tax rates, but we could keep the low cap gains taxes, and maybe get a cut in the corporate tax rates to help us attract more high-paying jobs here.

Posted by Fred | September 20, 2007 7:58 PM

Fred:

That's certainly another direction to go in. What strikes me is that you are actually trying to come up with a plausible policy (not one I ultimately agree with, but I concede it is quite plausible).

But I don't think that the Republican Party has done much actual thinking about tax policy for a long time. They just want to sell mindless tax cuts, with the bulk of them going to the wealthy.

Posted by Dilan Esper | September 21, 2007 12:28 AM

Dilan,

There's mindlessness on both sides, but you're right that Republicans don't seem to have done much actual thinking about tax policy. Otherwise, they would realize that Ponnuru's proposal is an obvious loser.

In a progressive tax system where the wealthy pay the bulk of the income taxes (e.g., the top 1% pay 37% of all income taxes), of course the bulk of any across-the-board tax cuts (in dollar terms) will go to the wealthy. While it's true that Reagan helped liberate the American economy by slashing the top marginal income tax rate from 70% to 28%, it is mindless for Republicans like Kudlow to pretend that there would be a similarly large economic impact if the top rate changed by a percentage point or two in either direction.

The Democrats' class warfare rhetoric is also mindless. How can you demand the wealthy pay "their fair share", when the top quarter of tax payers pay 85% of the income taxes and the bottom 50% pay 3%? Aside from the fairness questions of shifting nearly all the country's fiscal burden onto a minority of its most productive citizens, this is mindless even from a lefty Utilitarian standpoint. It's a big world out there, with lots of welcoming places to live and do business. There comes a point where your zeal to stick it to rich individuals and corporations causes collateral damage for everyone else: private equity funds move to London, leaving their $90k secretaries behind without jobs, mid-sized American multinationals move their headquarters to Ireland and other lower-tax, business-friendly, first world countries, etc.

Posted by Fred | September 21, 2007 2:39 AM

The Democrats' class warfare rhetoric is also mindless. How can you demand the wealthy pay "their fair share", when the top quarter of tax payers pay 85% of the income taxes and the bottom 50% pay 3%?

Well, there are other ways to measure fairness, e.g., how much the wealthy can afford to pay in taxes; what their disposable income amounts to, etc.

Aside from the fairness questions of shifting nearly all the country's fiscal burden onto a minority of its most productive citizens, this is mindless even from a lefty Utilitarian standpoint. It's a big world out there, with lots of welcoming places to live and do business. There comes a point where your zeal to stick it to rich individuals and corporations causes collateral damage for everyone else: private equity funds move to London, leaving their $90k secretaries behind without jobs, mid-sized American multinationals move their headquarters to Ireland and other lower-tax, business-friendly, first world countries, etc.

This is an emperical question. I can't claim that tax policy has nothing to do with these sorts of decisions. But it isn't controlling in many instances either. People site their businesses where there is a labor force, where labor and land costs are low, where their managers would like to live, where their products or services can be conveniently transported, etc.

I certainly would not want to see a return to the 94 percent marginal tax rates of the 1950's. But there really isn't any evidence that our top bracket tax rates are driving companies to move elsewhere. Certainly the 1993 tax increase-- called the largest in history by partisan Republicans-- didn't cause the posited rush to the exits by American companies.

That said, I do agree the Democrats aren't thinking much about tax policy either. They are simply playing defense (and not very well at that) against Republican tax cut proposals.

Posted by Dilan Esper | September 21, 2007 6:33 PM

"Well, there are other ways to measure fairness, e.g., how much the wealthy can afford to pay in taxes; what their disposable income amounts to, etc."

From each according to his means? Imagine if anyone believed this enough to apply it consistently: You and I go to the store to get a quart of milk and I get charged a dollar for it, since I make $20k a year, but you get charged $10 for it because you make $200k. How this is fair isn't readily apparent to me. Feel free to explicate.

"This is an emperical question. I can't claim that tax policy has nothing to do with these sorts of decisions."

Well you're right, it is empirical, and a meta-objection I have to American politics is that policies aren't based on empirical study enough. You're also right that tax policy isn't the only factor companies take into account when they decide where to locate their operations. But it is a factor. Another factor is regulation - specifically mandates such as family leave, ergonomic standards, etc. A third factor is the cost of class action lawsuits. On all these factors, Republicans tend to advocate positions that would make America a more welcoming place for businesses and the jobs they bring.

"Certainly the 1993 tax increase-- called the largest in history by partisan Republicans-- didn't cause the posited rush to the exits by American companies."

It may have been the largest tax increase in history in dollar terms, but the increase in the top individual income tax rate still left that rate competitive with most other first world countries. The capital gains tax cut, which happened later during the Clinton administration was a boon to investment (as was Bush's further cut of that rate during his first term). Where we are less competitive is with the corporate income tax rate. Even Sweden has a lower corporate tax rate than us.

"That said, I do agree the Democrats aren't thinking much about tax policy either. They are simply playing defense (and not very well at that) against Republican tax cut proposals."

I disagree here. The Republicans, as Ramesh laments, aren't really proposing a lot of new tax cuts; mainly they are campaigning on making the Bush tax cuts permanent. The Democrats are campaigning on new entitlements (free health care) and an even more steeply progressive tax system.

Posted by Fred | September 22, 2007 1:07 AM

Everyone should pay taxes, no matter how little you make that year. For everyone in the country must feel like they are invested in the welfare (as in goodness, not handouts) of the country.

The focusing of tax cuts for the richest of our country, at the expense of the middle class, is reprehensible. It does, in fact help drive the voters to the Democrats from the Republicans, if they were ever there in the first place.

What a successful candidate should do, is explain the why of taxes and how they work, not 30 seconds of a sound bite that gives no illumination to the normal people. Of course, it does provide grist for the economic wonks who will be able to justify a job by explaining to the poor normal people, what he really meant (and allows the pol to later say,'they misinterpreted what I meant.').

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