Mark Schmitt

Roosevelt Institute Senior Fellow
Roosevelt Institute Profile

Recent Posts by Mark Schmitt

  • The Win-Win Tax Reform Fantasy

    Apr 17, 2012Mark Schmitt

    Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code.

    Bipartisan dreams of raising revenues while lowering rates skirt the real problems in our tax code.

    With your taxes due today, the Buffett Rule blocked in the Senate, and the next fiscal showdown (during the lame duck congressional session between the election and the seating of the new Congress in January) coming into sight, the phrase “tax reform” is beginning to be heard throughout the land. For those of us who have been pushing for comprehensive tax reform for many years, this should be a beautiful, thrilling moment.

    But count me worried, not thrilled. We seem to be approaching tax reform for all the wrong reasons, and politicians of both parties are possessed of some dangerous illusions about what tax reform can and can’t achieve.

    The push for tax reform is not based, as it was in the mid-1980s, on a shared belief by a wide range of politicians that the tax code is inefficient, overcomplicated, and unfair. Rather, it’s based on the fact that something called “tax reform” seems to be the only way out of the box that politicians have put themselves in. Obama has boxed himself in by his promise not to let taxes go up on any household with taxable income under $250,000. The Republicans have limited themselves even further by refusing to discuss any tax increases at all. Some Republicans, just a few, are willing to consider something called “tax reform” if it increases “revenues” slightly without increasing “taxes,” that is, tax rates. The option of letting the Bush tax cuts expire is unacceptable even to most Democrats, because it would raise taxes for the middle class, while a deal on extending the middle-class cuts is unacceptable to the Republicans because it would raise taxes on the wealthy.

    But as last summer’s debt limit deal expires at the end of the year, the only alternative to the brutal sequesters of defense and non-defense spending promised in the deal is some movement on revenues in order to facilitate a deal to cut spending. And all that is left is something called “tax reform.” In the current environment, tax reform is not a positive goal, built on a vision of a fairer and more efficient tax system. Instead, it seems to be just the only way out of a situation that should never have been created in the first place.

    And all too many politicians, including many Republicans and a good many Democrats, are caught in a fantasy: that tax reform might be a “win-win,” in which rates can go down and revenues go up, simply by “broadening the base.” Tax reform often represents a fantasy of a common-sense middle ground between the parties, one they could embrace if they just understood how easy it would be. Here’s John Avlon, a self-identified centrist and advocate for bipartisan solutions, on CNN last month: Tax reform is “the Bowles-Simpson idea. You can lower rates, close loopholes, and raise revenue. That should be a win- win. Only in Washington is that not a win-win.”

    In fact, the idea of a win-win is all too appealing in Washington. Lowering rates, closing the loopholes (also known as “broadening the base”), and raising more revenue is the idea that most Democrats, and a few Republicans -- including, without details, House Budget Chair Paul Ryan -- have latched onto. But to call it a win-win is deeply misleading.

    It’s useful to compare our situation with the circumstances of the mid-1980s, when the legendary bipartisan tax reform of 1986 was passed. At that time, tax rates were actually high (the nominal top rate was 70 percent) and the loopholes were many and insane. The top tax rates were effectively meaningless. The biggest loophole involved the deductibility of passive losses – investments in which the taxpayer didn’t actually take a risk. Even then, there were losers, particularly the oil- and gas-producing sectors, that relied on passive investment, and the powerful members of Congress who represented them. And even in that legendary win-win, only two of the three big goals were achieved. Rates were lowered. Loopholes closed. (Leaving many rich people better off, on net.) But revenues were not raised, because the goal of tax reform at the time was to separate it from arguments about raising or cutting taxes by making it revenue-neutral.

    If all three goals couldn’t be achieved in 1986, that’s even more true in today’s very different circumstances. Today rates are very low by historic standards (not quite as low as the 28 percent achieved in the cleaned-up system of 1986, but that was unsustainable), and loopholes are many – but many of them reach the middle class. We can broaden the base, but if we do so in the context of long-term deficit reduction, the revenues will have to go to that purpose first.

    And even doing that would require going far, far beyond the loopholes that President Obama has talked about (deductibility of expenses for private planes) and that Mitt Romney hinted he might close, in an overheard speech at a fundraiser, such as the deductibility of mortgage interest for second homes. (Or, in his case, third and fourth homes as well.) Neither of those are in the top 12 list of tax expenditures (the more formal term for loopholes, or spending through the tax code) maintained by the Tax Policy Center. To have any real impact on either revenues or tax rates, Congress would have to be willing to consider the big ones: the tax deduction for mortgage interest on high-end houses, the deduction for employer-paid health insurance (which would be far more disruptive than the Affordable Care Act), charitable contributions, or the special rate for capital gains. Much of the complexity of the tax code is now at the low end, in the myriad of credits that are partially refundable, such as the Child Tax Credit. While these should be simplified, the goal of doing so shouldn’t be to raise revenue, since it would mean raising taxes on lower-income workers.

    What we need is not tax reform, but revenue reform – a system that is not only fair and efficient, but brings in adequate revenues to support, over the fairly long term, the services we want government to provide. Nothing on the table right now – not the Buffett Rule in either its specific form (a version of the Alternative Minimum Tax for those earning more than $1 million) or the general principle, nor anything in Paul Ryan’s budget – constitutes anything like revenue reform. And when we do see real revenue reform, it won’t be a “win-win” for everyone. It will have to mean that those who have been the big winners in tax policy for the last 30 years will have to pay a bit more.

    Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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  • Rediscovering Government

    Forcing Both Parties to Get Specific About What Government Should Do

    Apr 9, 2012Mark Schmitt

    As part of the How We Value Government series, demanding that both Republicans and Democrats be forced to outline a real vision of government instead of proposing vague cuts or making specific defenses.

    As part of the How We Value Government series, demanding that both Republicans and Democrats be forced to outline a real vision of government instead of proposing vague cuts or making specific defenses.

    There's an old rule of thumb about Americans' attitudes toward government that's no less true for being familiar: Americans are "operational liberals" but "philosophical conservatives," the political scientists Lloyd A. Free and Hadley Cantril concluded in their 1967 book The Political Beliefs of Americans, based on their analysis of dozens of public opinion surveys. That is, we favor the specific services government provides, but we're distrustful on an abstract level and respond favorably to attacks on "big government."

    This small insight was true even at the peak of the Great Society and the era of "liberal consensus," and it fits as an explanation for much of the back-and-forth of American conceptions of government ever since. Whether it accurately represents public opinion or not, it's a good guide to the behavior of actors in the political process. Conservatives attack "government" as an abstract concept that has little to do with our real lives and mostly creates wasteful excess benefiting either bureaucrats themselves or other people. Liberals respond by trying to show the harsh reality of cuts to particular programs, especially safe ones that reach large constituencies. In 1994 and 1995, for example, voters were first drawn to Newt Gingrich's promises to eliminate entire cabinet departments, but as soon as the idea of cutting government was converted to the reality of shuttering national parks and slashing Medicare, the political tides turned swiftly in the other direction. George W. Bush won reelection in 2004 talking vaguely about the need to change Social Security, yet given the opportunity to put such a plan in action, he saw the public lose faith so quickly that he never found a single congressional sponsor for the legislation. Even Ronald Reagan, elected in 1980 in what we still see as a critical moment in shifting attitudes toward government, largely backed off from that agenda after the 1981 budget cuts and his own ham-fisted attack on Social Security.

    Mitt Romney's announcement recently that he would eliminate several large government programs, but wouldn't name them lest he face political criticism, represents the conservative tactical approach to Cantril-Free perfectly. (Except they usually remember not to read the stage directions.)

    The struggle over government thus often takes the form of this push-pull between the abstract, where anti-government conservatism reigns, and the specific, where people seem to appreciate government. The result, until recently, has been a happy dance through which both sides achieve their short-term objectives: Conservatives win their share of elections, which they can use to push through tax cuts, without worrying much about the size of government, while liberals get their turns at power and avoid major cuts to programs. The Cantril-Free paradox has even generated new paradoxes of its own. Conservatives often expand government as political insurance, albeit carelessly, as in the creation of the Medicare Part D prescription drug program in 2003. Liberals and Democrats are more likely to cut programs (such as the Medicare cuts of 1993 and 2010), both because they take government more seriously and in the hopes that showing a commitment to cutting waste and improving people's experience of government will ameliorate their abstract opposition.

    Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

    But what's missing from this well-rehearsed dance is any effort to force the question, to make a real choice about what we want government to do. That missing element has been devastating in the last few years, when it seemed impossible to convince the public or Congress that an emphatic government effort was the only way to prevent a long and debilitating recession.

    For the most part, as Romney's comment suggests, the 2012 election cycle is evolving into yet another battle between the abstract call for cutting government and the specific defense of popular programs, particularly those threatened by Rep. Paul Ryan's budget plan. But there are indications that the game might be changing. House Republicans have now tied themselves to the mast and voted twice for Ryan's radical plan. They've built up some defenses against the classic attacks about cutting Medicare and other vital programs: They've drawn a new line that defines Medicare and Social Security for current seniors and those over 55 as benefits that have been "earned," while for others they are unaffordable giveaways. They've redefined programs like unemployment insurance as if they were welfare. They've used deficit fever and misleading statistics to portray Social Security and Medicare as doomed, so that the only option is their cuts.

    Meanwhile, embracing the need to reform entitlement programs, Democrats have (correctly and responsibly) blunted their own ability to play the old game. As Slate's Dave Weigel wrote after the Republican victory in a special election in New York City last year, Medicare is "not really a wedge issue -- it's the slow death of a wedge issue."

    These two changes directly challenge the politics of "operational liberalism." Going forward, it might not be enough to pick a few appealing government programs that reach the middle class and use them as political ammunition. And that could be a good thing. Instead of focusing on narrow specifics, this change demands a full-throated defense of government as a whole -- programs that benefit "other people" as well as ourselves, programs that represent the shared benefits of our social contract. And it demands that we open up the "submerged state," which obscures government programs and encourages the illusion that government programs benefit only someone else.  It calls for a full-fledged commitment to making sure that government programs, especially Medicare, are in fact sustainable for the future.

    The biggest risk to the promise of shared prosperity, assisted by government, is that liberals and Democratic political operatives are living in the past and believe that they can replay the old Clinton game against Gingrich over and over again.

    Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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  • How Taxes Can Really Reduce Inequality

    Mar 29, 2012Mark Schmitt

    The progressive argument on taxes shouldn't focus exclusively on marginal rates. We need to rethink all the harmful incentives in our tax code to fight inequality.

    The progressive argument on taxes shouldn't focus exclusively on marginal rates. We need to rethink all the harmful incentives in our tax code to fight inequality.

    Just out in the Boston Review this month is a forum on inequality -- not just the problem, but what to do about it, featuring Roosevelt Institute Fellow Mike Konczal among the participants. The lead essay by David Grusky argues that progressives have rushed to assume that redistributive tax policy (that is, tax rate increases on the very rich) are the obvious remedy for inequality, neglecting the structural distortions -- what he calls, confusingly, "rents" or "market failures" -- that allow the very rich to build up an even greater share of wealth before taxes than after. Grusky argues that rather than hoping for redistributive taxes to ameliorate pre-tax inequality, we should address the structural forces. He mentions two: high CEO pay and profound inequalities in educational opportunity.

    Grusky is right that there is a limit to what modest changes to the progressivity of tax rates at the high end can do. Even assuming that economists Thomas Piketty, Emanuel Saez, and Stefanie Stancheva are correct in their contribution to the forum that the top individual income tax rate could go as high as 83 percent without adverse economic impact, there is a political limit which is no less real than an economic limit. Even progressives are reluctant to talk about raising marginal rates higher than 39.6 percent (the pre-Bush top rate) or the low 40s, and then only on those with incomes more than five times the median. Tax rate increases, absent a radical political transformation, will adjust for inequality only at the edges.

    Other than Piketty et al, the respondents don't disagree with that point, but doubt Grusky's basic assumptions about inequality from a variety of angles. Konczal, for example, points out that it's not just inequality of pure income we should be concerned about, but radical inequalities of voice and political power.

    But there's an important point that none of the respondents make, which is that there's more to taxes than marginal rates. The structure of taxation itself affects the "rents" or distortions that benefit the very wealthy and burden the working poor. Both of Grusky's alternatives show this. Take, for example, high CEO pay. Grusky argues that a higher tax rate would do little to change the structural incentives (captive boards, for example) that have driven up CEO pay. That may be right. But the tax code has created its own incentives for companies to overpay CEOs. For example, the limit of $1 million on the amount of executive pay that can be deducted as a business expense can be avoided if the pay is linked to performance. This not only permits high pay packages, it encourages CEOs to focus on short-term performance, which is often not in the long-term interest of the company or its employees.

    Join the conversation about the Roosevelt Institute’s new initiative, Rediscovering Government, led by Senior Fellow Jeff Madrick.

    Favorable tax treatment of stock options also encourages high CEO pay. And many economists believe that the 1986 Tax Reform Act, which brought the top individual income tax rate lower than the corporate tax rate, encouraged corporate executives to take profits as pay rather than let it stay in the corporation where it would be taxed at a higher rate. There is certainly a strong correlation, as the sharp climb in CEO pay begins at exactly that point.

    Which is to say, we can do more with the tax code than just fiddle with rates. We can change incentives in the corporate tax or the individual income tax to change the incentives on executive pay. We could even vary the corporate tax rate based on CEO or top executive pay, or the ratio of the CEO pay to average-worker pay, benefitting corporations like Whole Foods that both pay their CEOs less and average workers more.

    Grusky's other proposal is to radically broaden access to higher education, by "increasing the number of slots in higher education and committing to fair and open competition for them." He's not very specific about how to do that. But, again, the tax code provides some examples of how we already structure access to higher education in ways that benefit the better-off. Tax benefits -- deductions and credits -- form an ever-larger share of how we pay for higher education, totaling $14.7 billion in 2012. While one program, the (temporary) American Opportunity Tax Credit, is refundable, so that even families that pay no income tax can benefit, the majority are not, and programs such as 529 accounts for college savings benefit almost exclusively the well-off. A study by the College Board showed that households with incomes over $100,000 receive 26 percent of the benefits of higher education tax expenditures. Pell Grants, on the other hand, overwhelmingly benefit students from families with incomes below $50,000. Pell Grants are scheduled to be cut under last summer's budget deal. A shift from some of the tax expenditure programs to Pell Grants would preserve college opportunity for millions of low- and moderate-income students.

    There's more to the tax code than marginal rates. In many ways, the code's complex web of incentives and preferences represents the deep structure of our national priorities, one that often seems to benefit the middle class while largely benefiting the wealthy. Tax reform that looks at much more than the top rate can address economic inequality in exactly the way Grusky proposes.

    Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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  • Cato vs. Koch and the Importance of Nonpartisan, Opinionated Think Tanks

    Mar 21, 2012Mark Schmitt

    Think tanks that serve the interests of a particular party won't decrease the power of lobbyists.

    Think tanks that serve the interests of a particular party won't decrease the power of lobbyists.

    In yesterday's post, I discussed the theory of lobbying as a "legislative subsidy" to under-staffed members of Congress and discussed a proposal to diffuse the influence of lobbyists by paying congressional staff more. I argued that a major push by conservatives had been to dismantle or discredit independent sources of analysis, such as the Office of Technology Assessment, but that the same effect could be achieved by creating more shared resources.

    Another independent resource for information and analysis comes from think tanks, and this connects the debate over lobbying and money to the argument about whether think tanks are becoming "too political," as Tevi Troy of the Hudson Institute asked in an important recent article in National Affairs. That the question had immediate relevance became apparent when Charles and David Koch filed suit (that is, asked for help from the government) to take control of the libertarian Cato Institute. The dispute itself is confusing and seems to reveal a strange management structure in which Cato was controlled not by its board, like most non-profits, but by a small group of people who called themselves "shareholders." But the Kochs' underlying complaint seems to be that Cato was too independent and was not serving the political interests represented by other groups the Kochs back, such as Americans for Prosperity.

    Troy argued in the Washington Post last weekend that "the dispute is tarnishing Cato's reputation as a place that can provide nonpartisan, if not non-ideological, research." There's an important distinction here: Cato obviously has a viewpoint. It is libertarian. But as Troy implicitly accepts, having a viewpoint, or ideology, doesn't necessarily hurt the credibility of a paper or argument coming from Cato or another think tank. If I read something from Cato, I'm reasonably confident that it will be a solid libertarian argument for a particular position and that the facts in it will be basically accurate, even if I might draw a different conclusion. The distinction between "nonpartisan" and "non-ideological" that Troy draws works well in the case of Cato, because libertarianism exists orthagonally to the current political parties. Making Cato more useful to Republican candidates and causes, as the Kochs seemingly would do, would be a huge shift.

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    Having a viewpoint, especially one that is known and public, can be a great strength for a think tank. On the center-left, the Center on Budget and Policy Priorities, for example, has a general point of view about the importance of the social safety net, and its analyses are considered impeccable. As politics has shifted and become more sharply partisan, they may have fewer Republican friends and probably find themselves critiquing, say, Paul Ryan's budget proposals more harshly than Democratic ones. But their north star is not the current interests of a political party. As Troy shows (drawing heavily on the work of former Roosevelt Institute president Andrew Rich), think tanks naturally evolved from the technocratic quasi-universities of the Brookings Institution and the Rand Corporation to be more open and explicit about their ideological assumptions. That's a healthy development, just as it is healthy for the media to abandon the "view from nowhere" and be more open about their assumptions.

    But not everyone wants reliable, solid analysis. For the same reasons that the Gingrich Republicans eliminated the OTA, their 2012 counterparts would take down Cato and make it into something more reliably useful to their immediate interests. A think tank that serves the political interests of a party, or the economic interests of its backers, can't help at all in offsetting the legislative subsidy provided by lobbyists. In fact, it increases their monopoly.

    You don't have to agree with the Cato Institute to see that there's more at stake here than just the meaning of an old agreement among a bunch of libertarians.

    Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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  • Diffusing the Power of Lobbyists' "Legislative Subsidy" on Congress

    Mar 20, 2012Mark Schmitt

    How to make sure congressmen have the information they need without relying on special interests?

    How to make sure congressmen have the information they need without relying on special interests?

    Thanks in part to Lawrence Lessig's excellent book Republic, Lost, out recently, a new way of thinking about lobbying has entered public discourse: Lobbying as "legislative subsidy." In this view (which originated in an article in the American Political Science Review in 2006), lobbyists aren't entirely in the persuasion business. Rather, a large part of what they do is to help already friendly but under-staffed and not-always-smart legislators understand complex issues and figure out how to do their jobs. At The Atlantic, Pascal-Emmanuel Gobry proposes offsetting the leverage of lobbyists by "adding more money to the system," giving members of Congress $20 million staff budgets (versus about $1.3 million today) and paying congressional chiefs of staff $1 million.

    I can't tell whether Gobry's proposal is serious or satirical, but it's worth taking the whole idea, if not his numbers, seriously. Congress is under-staffed given the complexity of the issues members have to deal with, and staffers, like all public employees, are often underpaid. (Measured against the dubious standard of "what they could be making," rather than, say, the U.S. median household income.) The best tend to leave after a few years, whether for the more lucrative opportunities offered by lobbying or lawyering or simply for a more family-friendly work life.

    But as Lessig points out, "legislative subsidy" is hardly benign, especially when it moves from big questions like union organizing rights to more technical ones like financial regulation or copyright, the issue that drove him into thinking about money and politics. And there are issues on which lobbyists are standing by on all sides to offer their "subsidy." For example, Congress spent more time last year on the "credit card swipe fee" issue, which pitted credit card companies and their lobbyists against big retailers and theirs, than any other.  Issues like K-12 education have fewer lobbyists standing by to offer their friendly subsidy.

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    For a good picture of what "legislative subsidy" lobbying looks like in wonky real life, and how it intersects with campaign money, there's nothing better than this long article from 2010 by Huffington Post reporters Ryan Grim and Arthur Delaney, about the House Financial Services Committee's debate on financial regulation. Financial Services is known as a "cash committee," not because of its jurisdiction but because members are able to raise money from the industry they oversee. Newly elected members of Congress, worried about cash for reelection, clamor for spots on that enormous committee. New members in turn tend to have younger, less experienced staff, who may have stellar academic credentials but don't know anything about financial regulation. They, in turn, are easy prey for lobbyists.

    Gobry's proposal is classically libertarian: if individual members lack information, give each individual member more resources to develop information on his own and to hire people with more experience to sort out the competing claims. But there's no reason those resources have to go to individuals. They can be shared resources. For example, before the Republican takeover of Congress in 1994, there was an institution called the Office of Technology Assessment, which could undertake highly wonky analyses for members of Congress. There were caucuses with independent staff, such as the Northeast-Midwest Coalition, which provides all sorts of analysis on issues of importance to the two regions (and which still exists as a privately funded operation).

    Destroying some of these independent resources, and discrediting those that remained, was not just an irresponsible means of saving money. It was a central part of the conservative project, and remains so. One way to think of it is as a means to ensure that the "legislative subsidy" remains in private control.

    Another independent resource for legislators and other public officials is think tanks. That's why the current battle over control of the CATO Institute and the debate over the "politicization" of think tanks sparked by a recent article by Tevi Troy is so important and so connected to debates about money and influence. I'll have more to say on this in a second post tomorrow.

    Mark Schmitt is a Senior Fellow and Director of the Fellows Program at the Roosevelt Institute.

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