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December 30, 2006
But Can He Raise Taxes?
Mark Schmitt reminds, correctly, that the country will need more than an acceptance of moderate deficits over the next few years: It'll need revenue increases. Whatever enthusiasm John Edwards generates for rejecting fiscal conservatism should be tempered by the knowledge that, without tax increases, he'll have very little room for social spending. Relevant here is a question asked at the press conference following his announcement speech. The reporter asked whether tax increases would be necessary to fund Edwards' social spending. Edwards replied:
Well, I'll give you a few examples: We ought to be patriotic as americans, not just as a government, though the government plays a critical role in helping to rebuild New Orleans. We ought to be patriotic in doing something about global warming. And I don't mean in an abstract way -- we walked away from Kyoto unilaterally which was a very serious mistake...[long digression on global warming, which I don't have the energy to transcribe]
Q: Taxes, Senator?
Oh, I'm sorry, the answer to that question is, we do need, in my judgment, to get rid of some of the taxes cuts thats have been put in place, particularly for people at the top. I think it may be necessary to put in place a tax on some of the windfall profits the oil companies are making in order to put in place some of the changes I've just talked about [on global warming], I think it's also really important to be honest with people: we've gotten into a deep hole in terms of our deficit, we have investments that need to be made, I've talked about some of them: investments to strengthen the middle class, investments in poverty, universal health care, which I'm completely committed to do, some of the energy proposals I've talked about today -- these things cost money. So we're going to have to invest if we're going to transport America the way it needs to be transported to be successful in the 21st century, which is going to require rolling back some of these tax cuts.
So Edwards sort of dodged initially, then answered that he'd roll back the tax cuts and possibly impose a windfall tax on oil companies. Even assuming the latter is a good idea (and I'm not really sure about that), it'll generate a paltry amount of revenue, so we're really looking at a rollback of the tax cuts. Add in redeployment in Iraq and he'll have some extra money to work with, but not an extraordinary amount, particularly not early in his hypothetical term. But a real term might be different than a hypothetical one.
Were I advising Edwards, I'd sooner quit than sign off on him pulling an early Mondale. The American electorate remains enamored of low taxes and high spending, and since your political competitors won't join in a spontaneous explosion of fiscal truth-telling, he can't, either. Nevertheless, Edwards, in his deficit reduction answer, said that his top priority -- well, below that of getting elected -- is investment, and he appears serious about that. So not proposing tax increases doesn't necessarily mean he won't seek them, it means he thinks he can't sell them.
That said, I'm a little less certain than others that taxes are intrinsically unsellable. Dedicated taxes -- a VAT for health care, say, or a gas tax for renewable energy research -- seem somewhat more politically defensible than mere increases in marginal rates. If the American people know precisely what they're getting, it's a bit more concrete a conversation -- more like a purchase than a donation, and there's a fair amount the government can sell that the public may want. Too often, taxes are but a vague plea to fund government, which seems far more wasteful in the abstract than it does in the specific, and so they're easy to trump with the concrete promise of money in your pocket; you know, after all, where that money will go. Conversely, payroll taxes, which directly fund Social Security and Medicare, have been far safer than general revenue in recent years. When politicians try and cut them, they're cutting something voters can see and feel and touch. That's harder. And so I'd think it'd be proportionally easier to sell taxes in the same way.
On the other hand, I don't actually have to win any elections, so I've the freedom to muse optimistically about tax increases. Three cheers for the fourth estate!
Also at Tapped
December 30, 2006 | Permalink
Comments
"So not proposing tax increases doesn't necessarily mean he won't seek them, it means he thinks he can't sell them."
I'm reminded of M. Schmidt's comment on why Bush was unable to push through his social security bill: he didn't run on it. Without an election victory on an unpopular thing you want to do, you can't convince any congressers to go along with you. look foward to an uneventful 4 years.
Posted by: dan | Dec 30, 2006 5:18:48 AM
One way to make tax increases more popular might be to propose a revenue-positive program that also shifts the tax burden upward. Rolling back the Bush income tax cuts from the current 28% bracket on will not increase the tax burden on people making under $75,000 a year, but still net the government about $100 billion a year. Reinstating normal corporate taxation will apparently save the government just as much. Eliminating the FICA cap will increase receipts by $170 billion a year.
Meanwhile, reducing the 10% bracket to 0 will cost $90 billion a year.
Posted by: Alon Levy | Dec 30, 2006 6:05:12 AM
I think you can come out for tax increases as long as you can sell them as necessary and linked to an attack on your opponent as being unwilling to fund their own programs etc etc.
Of course no Democrat can do that with the DC Press Corps.
Posted by: Sandals | Dec 30, 2006 7:11:41 AM
Be nice, though, to get the payroll tax off the backs of folks who work for a living. *sigh*
Posted by: NBarnes | Dec 30, 2006 7:48:31 AM
1)Are you, Ezra, or we , the left including myself, because I should give it thought, redistributionist in principle? Because our opponents are, which may give them advantages. It sounds nasty to just take from the rich for its own sake, but there are decent arguments that gross inequality is damaging and dangerous for a society. Thoma posted another article recently, quoting Edward Bellamy.
2) Progressive taxation has been sold and enacted, and the history might be usefully studied. If I am remembering correctly, those actions were somewhere in the vicinity of a war and maybe the early Depression, so the next decade might an opportunity we can't afford to miss.
Posted by: bob mcmanus | Dec 30, 2006 9:58:00 AM
In a more perfect world, politicians who can speak so eloquently about compassion, fairness and social justice would also clearly articulate, to the best of their ability, how much their agenda would cost to implement and who is supposed to pay for it. While the details of types of taxes and distribution of the burden across the income spectrum can be left to Congress (with input from the White House, of course), some sense of where taxes need to be as a percentage of GDP would be enormously helpful. For reference, the post World War II average tax burden across the economy is 18% of GDP and reached slightly above 20% in the late 1990's when an enormous, unanticipated flood of capital gains tax revenue poured in.
Unfortunately, the American people, in their infinite wisdom, don't want to hear what they don't want to hear. Thus, they tend to reward pandering and demagoguery. Accordingly, it is not surprising that politicians pander and demagogue.
To Ezra's point about dedicated taxes, I agree that it would be an easier sell because it is more like buying a product. Any government service that lends itself to direct pricing should be financed that way – drivers licenses, passports, highway tolls, etc. Financing healthcare with a payroll tax, value added tax, or some combination of those two would be far preferable to financing it out of general revenue because costs would be so much more transparent. Tools like the EITC can lessen the burden on lower income people.
To move the ball forward on a huge issue like universal healthcare, a presidential candidate is going to have to campaign on a proposal (including a financing mechanism) and win. It's time for leadership, not another commission. Hopefully, the electorate will demand it, and, if they like what they see and hear, reward it with their votes.
Posted by: BC | Dec 30, 2006 10:05:26 AM
The big, important fact is that the man is clearly committed to rebuilding a sense of trust and respect for Government.
It is, I imagine, very hard to craft an answer that avoids all of the rhetorical pitfalls that the right wing (and the complicit media) have continuously reinforced over the decades.
Good for him.
And hey, how about the aggressive campaign roll-out? Edwards didn't just declare, he's starting to campaign already.
Posted by: chimneyswift | Dec 30, 2006 10:43:55 AM
Universal health care will not require raising taxes. It will require paying premiums just like most people do now. The difference is who they are paid to.
Posted by: Emma Zahn | Dec 30, 2006 10:56:19 AM
"some sense of where taxes need to be as a percentage of GDP would be enormously helpful"
Yglesias on Revenue ...Mark Schmitt, 5/12/2005, so the MY links may not work
I think, and maybe I should research more carefully, from this post that we are currently around 16-17% GDP Federal and 36% including state and local. Part of the Reagan Federalism Revolution involved moving responsibilities away for the Federal Gov't, with sometimes a corresponding state tax increase.
"Yes, if you tell me that we're going to need 28% of GDP for federal taxes in FY 2006, my reaction is "Yikes," too. But why should that be so frightening ten or twenty years from now? We've just seen a swing of 5 percentage points in this figure in four years, without notable economic benefit" ...MS
Schmitt is right. For a lot of reasons, eg we are unlikely to be able to slash defense and there will be expensive consequences of global warming and the macroeconomic policies of Greenspan, we are going to need a bushel of revenue to maintain a liberal society, and a willingness to extract it. A complete reversal in national ethos from the Reagan years. We are probably talking a total top marginal tax bite of at least 45-50%. A very hard sell.
I have argued for a draft, in part to rebuild the sense of community that the country shared after WWII, when the GI Bill and 90% marginal rates were possible. I am open to other suggestions.
Posted by: bob mcmanus | Dec 30, 2006 11:39:31 AM
Correction: that is 45-50% of GDP in government revenue.
Posted by: bob mcmanus | Dec 30, 2006 11:41:19 AM
Before we talk about any direct increases in tax rates, why can't we talk about cleaning up the tax code by allowing fewer deductions and special codes? There have to be a few estimates out there for how much revenue this would raise. Does anyone know of some? I mention this because it probably seems easier than raising rates, as the eliminating of deductions affects people but in a less direct, less easy-to-advertise way. In fact, is it possible to actually lower some tax rates but increase the base, like they did in 1986? (At least that's what I have been told or read. After having a conversation earlier this week with my conservative godfather who is involved in tax work, I remain more confused than ever.)
Posted by: Brian | Dec 30, 2006 11:49:11 AM
Perhaps it is past the optimal time (if that ever occurs) to bring up and out the 'comparative burden' data both as 'education for patriotic taxation' and ammunition against the inevitable conservative argument (read propaganda) that we will price the US out of the world market is we raise taxes by even a nickle.
Most Americans have no idea how we compare to other countries. Let's make this a 'we should be the best' discussion. Why should we pay more for health care and also have more people uninsured/untreated?
First, comparisons of the both Federal Taxes and Total Taxes (in percentage rates of GDP) in the top 25 countries/economies in the world.
Then break down spending of those taxes by category: health, defense, education, etc.
Then show how revenues to those countries are spread across income groupings, in percentage terms.
Then show how our income/expense could be altered by a combination of smart moves to reduce loopholes and phony incentives, proportional burden sharing by income, new revenues (or types of revenue) for new programs.
The point here is that this data is in the minds of wonks but not in the minds of the average voter - who very likely has a very distorted view of how much we pay for government (comparatively) and how it is spent. This must be a leadership project by politicians, media, and progressive groups.
I'm not naive about whether people really care about this stuff, but assuming they care not at all surely leads to both the irresponsible belief that we can spend more without paying more, and to the use of bad data by conservatives to push their fantasies upon the public.
I'm not opposed either to some populist talk to make all of this info more attractive for the public to ingest. Let's fight the fight for once, instead of yielding the battlefield.
Posted by: JimPortlandOR | Dec 30, 2006 12:35:12 PM
I'll repeat the transcript I posted on the earlier Edwards/deficit thread.
[...]
QUESTION: Senator Edwards, back to you. Considering the growing federal deficit, what is the earliest that Americans can expect a balanced budget under your administration, and how would you do it?
EDWARDS: That's a question -- if somebody gives you a straight answer to that question, you can't trust it -[Laughter] - because here is the reality. The reality is, everybody on this stage is talking about spending money. They're talking about spending money on education. They're talking, in varying degrees, about spending money on health care. In my case, I'm talking about helping middle-class families be able to buy a house, be able to invest, be able to save. All that costs money.
There is a tension between spending money and reducing the federal deficit. We should be straight with people about that.
So every time you're talking about investing in things that will move America forward, get the economy going again, keep the economy going, you're also increasing the federal deficit. There are judgment calls that have to be made. So I've made those calls.
Here is what I believe I can do. I can pay for everything that I have proposed by stopping Bush's tax cuts for people who make over $200,000 a year; doing something I don't think anyone else up here does, raise the capital gains rate for those who make over $300,000 a year; close four corporate loopholes. Pays for everything that I want to do, plus reduces the federal deficit.
QUESTION: Thank you, Senator.
EDWARDS: Does not eliminate the federal deficit over the next three to four years.
--Des Moines, Iowa, Presidential Debate, January 4, 2004
[...]
What is it with this tendency among Democrats to keep trying to reinvent the wheel every election cycle? We've faced these questions before. We have a history. Bill Clinton took much the same stance in 1992 that Edwards is taking now with regards to the deficit vs. investment. Wait until Edwards gets in office and Bernanke tells him that if he doesn't ditch his social programs and focus on deficit reduction, steep interest rate hikes are coming soon. That's what Greenie did to Clinton in '93.
Posted by: Chris | Dec 30, 2006 2:25:48 PM
Bob,
Thanks for the link. According to the most recent data from the Congressional Budget Office (CBO), federal revenue for fiscal 2006 (August estimate) was estimated at 18.3% of GDP vs 17.5% for fiscal 2005. The breakdown is: Individual Income Taxes, 8.1%; Corporate Income Taxes, 2.6%; Social Insurance Taxes, 6.4%; and all other taxes, 1.3%. Federal spending was estimated at 20.3% of GDP. If we went to complete taxpayer financing of healthcare via some combination of payroll taxes and a dedicated VAT as a replacement for the current employer based system (plus 17 million people buying insurance in the individual market), federal spending would rise by 8 - 9 percentage points of GDP by that change alone. Throw in state and local spending of 13% of GDP or so, and that would take us to total public spending of roughly 40% of GDP.
There is a general consensus among economists that, at some point, high taxes will stifle economic growth. However, nobody has a good handle on just where that point is. Moreover, some taxes cause more economic harm than others. Consumption taxes are generally viewed as least harmful and high marginal tax rates most harmful to investment and risk taking. That said, I think the long term capital gains tax rate could easily be raised back to 25% from 15% while dividends should be taxed as ordinary income as they were until a couple of years ago. The major European economies, where taxes consume 50% of GDP or more have long been plagued by anemic growth and high unemployment.
You can argue for soaking the rich all you want, but there just aren't enough of them to raise serious money even putting aside the real potential for behavior changes that could hurt economic growth (and federal revenue). It is the middle class that will have to pay for most of the costs of a progressive agenda. If politicians aren't honest about that, shame on them. If middle class voters are led to believe that they can have a free ride if we just soak the rich, they are likely to be sorely disappointed. One small example: the 1990's luxury tax that instead of soaking the rich, resulted in widespread layoffs among people building luxury cars and boats. The tax was ultimately repealed as a result.
Posted by: BC | Dec 30, 2006 2:26:31 PM
Chris: "Wait until Edwards gets in office and Bernanke tells him that if he doesn't ditch his social programs and focus on deficit reduction, steep interest rate hikes are coming soon. That's what Greenie did to Clinton in '93."
If that happens, Edwards needs to confront it head-on and tell Bernanke that if he doesn't fall in line, he's fired. Bernanke wasn't elected by anyone, and if he starts to act like economic dictator, he has to be slapped down. Clinton's failure to discipline Greenspan is the root of a lot of the problems we're experiencing now.
BC: "The major European economies, where taxes consume 50% of GDP or more have long been plagued by anemic growth and high unemployment."
Horseshit. Their growth rates have surpassed ours in the past couple of quarters. And comparing unemployment is meaningless since we hide a lot of our unemployed people in prison, in the category of "discouraged workers", etc.
Posted by: Firebug | Dec 30, 2006 3:20:51 PM
Firebug, and when Bernanke points out that his term as Chairman doesn't expire until 2010, and that the President can't fire him, what should Edwards do?
Posted by: Steven desJardins | Dec 31, 2006 12:37:39 AM
Posted by: BC | Dec 30, 2006 11:26:31 AM You can argue for soaking the rich all you want, but there just aren't enough of them to raise serious money even putting aside the real potential for behavior changes that could hurt economic growth (and federal revenue)
Horse puckey, the top 20% of income earners receive over half of US income, and the top 5% over a quarter, and with much lower marginal tax rates than they paid in the 50's and 60's.
The way to avoid behaviour changes is to change the tax incidence in a way that reduces tax subsidies to higher income households. The most direct approach is to replace as many tax deductions as possible with standard rate tax credits, so that the government pays the same tax subsidy for the activity no matter whether it is a rich person or a poor person doing it.
Posted by: BruceMcF | Dec 31, 2006 10:31:55 AM
If we went to complete taxpayer financing of healthcare via some combination of payroll taxes and a dedicated VAT as a replacement for the current employer based system (plus 17 million people buying insurance in the individual market), federal spending would rise by 8 - 9 percentage points of GDP by that change alone.
Uh, no. The US already has one of the highest levels of public spending on health care in the world. All the countries Ezra profiled in The Health of Nations spend less per capita on health care both publicly and privately.
The major European economies, where taxes consume 50% of GDP or more have long been plagued by anemic growth and high unemployment.
Again, no. The major European economies have tax burdens in the low 40s. The ones with tax burdens in the 50s are in Scandinavia, which has perfectly healthy economic growth and unemployment. Norway manages to have the same GDP per capita as the US on a quarter fewer hours worked per hour.
Posted by: Alon Levy | Dec 31, 2006 12:57:07 PM
BruceMcF,
Believe it or not, I agree with you that, from a policy standpoint, tax credits are preferable to tax deductions (which are worth more to high income people). However, since the Clinton tax increases of 1993 and still in effect under Bush, high income people gradually lose their deductions and personal exemptions beyond a certain income level depending on their filing status. For very high income people, they can lose up to 80% of the value of their deductions and exemptions that they would otherwsie be entitled to if their income were below the phaseout trigger level.
When assessing the potential economic and behavior effects from marginal tax rates, it is not sufficient to just look at the top federal income tax rate in isolation. You have to include the effect of the deduction and exemption phaseout, the top state marginal income tax rate (if any), and in the case the second earner's wage income, the FICA tax rate (including the employer share which most economists agree is actually absorbed by the employee if the form of lower wages than would otherwise be paid). So, even under current law, the working spouse of a high wage earner would pay a federal marginal rate of 35% under current law, plus 1-2 percentage points related to the deduction and exemption phaseout plus 15.3% in FICA taxes, plus the top state income tax rate, which in NJ is 8.97%, less a modest offset from federal deductibility. So, the total top combined marginal tax rate in a high tax state can easily approach 60% under current law. Even a high income taxpayer without a working spouse, again in a high tax state, will pay a combined marginal rate on wage and interest income in the mid 40's under current law.
While I think there is certainly room to raise the federal capital gains tax rate back to 28% which was the rate under the 1986 Tax Reform Act, from the current 15% rate, or include it in the income base for the purpose of calculating the Alternative Minimum Tax, I don't think raising the top ordinary rate beyond the 39.6% that existed under Clinton would be wise or would raise as much revenue as advocates estimate. Qualified dividends should also revert to being taxed as ordinary income vs 15% under current law.
Posted by: BC | Dec 31, 2006 1:09:38 PM
The problem with dedicated revenue sources is that since money is fungible, a portion of the money is often taken for other uses. It's pretty much a given that any VAT for health care will be higher than it needs to be, which will end up being part of general revenue.
In any case, Edwards won't win on a tax and spend platform. And he's leaving himself so wide open it's sad. Mondale was an experienced pol. Edwards is still a neophyte and is going to get creamed on this platform, and rightfully so. He's a living relic. His platform is almost an exact match of LBJ's.
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