Left and Right are Both Dead Ends for Tax Policy

Oct 18, 2011Bo Cutter


The tax debate can be about values without devolving into a battle between good and evil.

Some day, but certainly not until after the 2012 presidential election, we will have to arrive at an economic policy that supports our economy in the short run and brings fiscal deficits and the growth of federal debt way down in the middle to long run. When we do this, we cannot accomplish much without raising tax revenues -- and actually improving economic performance while we change our tax structure would be a fine thing. While this set of thoughts may be complicated, it is not particularly hard to understand, nor should it be impossible for a functioning political system to accomplish.

But given our current political structure, we won't. One reason is that both the left and the right in America see tax issues entirely through ideological lenses. The right sees any effort to raise tax revenues as either an attempt by socialist leftists to further impose the nanny state on an unwilling America or a drive to destroy entrepreneurship and free enterprise. The left sees taxes virtually entirely as a redistributive mechanism and an opportunity to whack the undeserving rich, and so tax policy is reduced to the Buffett Rule and a millionaires tax. Thus, virtually any tax debate is instantly transformed by both sides into an epic Manichean battle between good and evil, between those who are really trying to destroy free enterprise and those whose incomes, and perhaps existence, are an indication of evil at work in the world. Tax issues are hard enough to contend with, but the battle between good and evil will never, ever, be resolved.

But there is another, simpler, more pragmatic perspective. Tax policy right now ought to be about raising revenue in ways that are fair and that help, rather than hurt, the economy. How do you accomplish this while no one, with the exception of Warren Buffett, wants to pay higher taxes?

I've never understood why it is constantly pointed out that Americans favor taxing the rich as though this were some startling revelation. Of course they do. Most Americans do not think they, themselves, are rich. This opinion is simply a special case of the truest and most profound words ever spoken about tax policy, which consist of a poem often recited by Senator Russell Long of Louisiana: "Don't tax you; don't tax me. Tax that fellow behind the tree." This is as close as you get to absolute truth in politics.

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I believe that the tax policy that comes closest to accomplishing the more simple goal of raising revenues without doing too much damage and maybe actually improving the economy a bit is, as I've suggested before, the following:

1. End as many as possible of the current endless list of tax deductions from both personal and corporate income taxes and make the ones we keep more progressive.

2. Use much of the revenue this set of actions would free up to lower marginal tax rates for all classes of individuals and corporations. Reasonable top marginal rates would be around 25 percent to 28 percent. To reach these numbers, we would probably have to end special capital gains tax rates but lower overall rates. The argument that slightly higher capital gains rates would lower economic growth is hard to sustain.

3. Create a consumption tax of about 10 percent. If we really wanted to do some good, tax the consumption of "bads" -- carbon, pollution, green house gases. Bill Nordhaus calculates in the New York Review of Books this month that taxing "bads" could yield $300 million per year in additional federal revenue, or $3 trillion over a decade (three times the amount the Super Committee is trying to find in total). After the necessary exclusions, a progressive consumption tax would yield roughly 4 percent of GDP as net new revenue -- which, viewed over a long period of time, is about what we need.

This tax system, created as an integrated whole, would be much more progressive than our current system, encourage more investment, make America a bit less of a consumer economy, improve the environment, drive more economic growth, and raise the revenues we need. By any standard, this integrated tax system would represent radical change and an improvement over the present. And the seeds of this tax system were included in both the Simpson-Bowles and the Rivlin-Domenici budget proposals of last fall -- the ones the entire political establishment, including the Obama administration, rejected well before they were written. (Within the next year, that decision will be seen as one of the two biggest strategic mistakes of the Obama administration.)

However, this system does not meet the psychological needs of the left or right. Who cares if a pragmatic balancing of interests might solve a major issue, when instead you can have an interminable and unresolvable ideological debate? Nothing even remotely resembling an actual tax policy will be debated until after 2012, if ever. (Herman Cain's "9-9-9" plan has many of these elements, but its numbers don't make sense.)

All of which brings me to David Brooks's New York Times column on Friday. In a wonderful piece that is largely an appreciation of prosaic, dull efforts to recognize the real world and do something sensible, Brooks says about our politics, "nearly every practical question becomes a values question... It would be nice if there were more leaders...inclined to disenchant problems and stare at specific contexts. Sometimes circumstances compel you to raise taxes; sometimes circumstances allow you to cut them."

Values are always going to be, and should be, an intrinsic part of political debate -- nothing is ever just pragmatic. But there is a question of balance and of what we need right now. I believe, and it is reasonably clear there is a vast middle in the American electorate that also believes, that right now much more pragmatic movement toward actual decisions and real progress is desperately needed. Ask yourself how likely it is that we will get that pragmatic movement from either party over the next year.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic presidents.

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