Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Is Taxing Capital Income Fair?

    Sep 28, 2012Mike Konczal

    In light of Mitt Romney's recent tax returns, the economic blogosphere has been kicking around the issue of capital taxation. Ryan Chittum at Columbia Journalism Review has an excellent overview of what people have been writing with "The capital gains preference." This is a response to Dylan Matthews and Matt Yglesias, who each present arguments from economists that capital gains taxes should be lower than other taxes, even potentially set at zero percent.

    Many economic arguments are about tradeoffs, but the argument for the zero tax rate of savings, also similar to the arguments for a consumption tax, is usually phrased as an argument about fairness. In order to frame the fairness argument, economists bring up a story of two similar individuals with one as a saver and one as a spender. Yglesias has the framework in his post:

    You imagine two prosperous but not outrageously so working people living somewhere—two doctors, say, living in nearby small towns. They're both pulling in incomes in the low six figures. One doctor chooses to spend basically 100 percent of his income on expensive non-durables. He goes on annual vacations to expensive cities and eats in a lot of fancy restaurants. The other doctor is much more frugal, not traveling much and eating modestly. Instead, he spends a lot of his money on hiring people to build buildings around town. Those buildings become houses, offices, retail stores, factories, etc. In other words, they're capital. And capital earns a return, so over time the second doctor comes to have a much higher income than the first doctor. [...]

    In the world where investment income is taxed like labor income, the first doctor says to the second "man you're a sucker—not only are you deferring enjoyment of the fruits of your labor (boring) but when the money you've saved comes back to you, it gets taxed all over again. Live in the now.  And the thinking is that world number one where people with valuable skills take a large share of their labor income and transform it into capital goods is ultimately a richer world...

    Taxing savings by having an income tax punishes the Saver Doctor relative to the Spender Doctor. If you just taxed what they consumed, they would be treated equally.

    Yglesias leans on the idea that we'll be a richer world without taxing savings, because people will respond to the incentives against savings here. I don't believe the research bears this out. I'm not an expert, but I believe the impact, if any, is small. In their excellent summary book on taxation, Taxing Ourselves (2004, 3rd edition), Joel Slemrod and Jon Bakija conclude that a "large number of studies have attempted to address these problems to some degree, and they generally come to the conclusion that saving is not very responsive to incentives."

    But if the efficiency argument is weak evidence, the fairness argument is assumed to make the case, and make it for zero percent taxation. It is unfair to tax the Saver Doctor even a penny more than the Spender Doctor. Scott Sumner gives a similar example at The Economist: "The proper tax rate on capital income is zero [...] To see why this is so, consider twin brothers who each make $100,000 in wage income. Most people would regard these two people as equally well off, even if one freely chose to consume his income now, while the other chose to consume later. But not advocates of the income tax. They insist the more patient twin brother is 'richer' and deserves to be taxed at a higher income tax rate." Gilles Saint-Paul argues in the same forum that fairness requires that we shouldn't "penalise future consumption relative to current consumption."

    In Joanathan Gruber's popular undergraduate textbook Public Finance and Public Policy, the two people are actually Homer Simpson and Ned Flanders!

    Consider two individuals, Homer and Ned, who are identical except for their preferences for saving. Both live for two periods, earning $100 in the first period and nothing in the second period. Homer is impatient: he wants to consume his entire income in the first period and nothing in the second period. Ned is more patient; he wants to consume in both periods. Initially, they are both subject to an income tax, which taxes all labor earnings and interest income at 50%.The interest rate earned on savings is 10%. [...]  In present discounted value (PDV) terms, Homer pays only $50 in taxes across both periods, but Ned pays $51.11. Thus, savers such as Ned are penalized in an income tax regime.This tax treatment of savings is both horizontally inequitable (because Ned is taxed more simply for making a different choice) and inefficient because it may reduce the incentive to save (because savings leads to higher tax payments).

    Let's stick with Homer and Ned. Is this fairness argument against the "inequitable" treatment of Ned either impressive or conclusive? I'd argue no. I'm going to rely on arguments from Barbara Fried's excellent "Fairness and the Consumption Tax" for the following to identify some problems, and I'd recommend her essay if you are interested in learning more.

    The first issue is the assumption that Homer and Ned should pay in accordance with their consumption, or that equal spenders should have equal tax burdens, or, technically, that the present value of their tax burdens should be identical. This presupposes what is up for debate, which is what the appropriate tax base is. If the tax base is explicit wealth, then income from savings should also be taxed. There are significant advantages to owning wealth, including security, peace of mind, power, the ability to direct private investment, political control, and much more. It isn't clear why these shouldn't be part of the tax base.

    A second issue is that it assumes that all income from savings is the result of delayed compensation, when much of it doesn't even come from the individuals themselves. We don't know how much of the United States' capital stock comes from the gifts, bequests, or inheritance that constitute intergenerational transfer, though averages of studies say about 50 percent. Fairness arguments become a lot more complicated here.
     
    A third issue is the assumption that, since Homer and Ned are equally ranked in well-being in a no-tax world, they should be equally ranked after any tax comes into play. This equal ranking is the engine behind a lot of the fairness arguments -- as Gruber says, we don't want to penalize Ned for "making a different choice." Since a tax on savings would fall on Ned the Saver but not Homer the Spender, they would no longer be equally ranked, as Homer would end up better off than Ned with an income tax. It isn't clear how much savers would be disadvantaged relative to spenders, as some of that tax will fall to borrowers. But the general point remains.
     
    But even granting this, a new question arises: why do we care about maintaining equal ranking from a "no-tax" world, and why would it be unfair to change it? This is only a claim to fairness if Homer and Ned, or savers and spenders more generally, have a claim to their relative ranking in a "no-tax" world. It's not clear that they do. They certainly don't under an entitlement theory, as the value the saver gets in this example is just the random quirk of his or her preference structure. It also presumes that the ranking in a "no-tax" world was just in-and-of-itself and thus worth preserving, which requires a lot of libertarian heavy lifting.
     
    It also presumes a myth of ownership, or the idea that you can conceptualize the economy without the government or that tax policy isn't just one of many ways that the government affects interest rates. Sumner and Yglesias, for instance, believe the Federal Reserve should do some major things to raise nominal GDP, which would have a dramatic effect on the relative ranking of savers and spenders compared to a non-Federal Reserve world. How are they any different from this tax policy, other than the fact that they justify it within a larger set of social institutions, especially ones that produce the patterned world of full employment?
     
    fourth thing to consider is the issue of generalizing this critique to other examples. Another way of reading the fairness issue in the example is that since both Homer and Ned start off equal, and had equal capability to generate wealth, they should have an equal tax burden, akin to an endowment or faculty tax.
     
    If a tax on savings is removed, taxes on wages would have to go up. Now imagine that, in addition to Homer and Ned, there's Barney at time zero. Barney hates working but loves leisure, so he doesn't work at all but enjoys just as much utility as Homer and Ned when they consume their net present value of $100. Raising taxes on wages leaves Homer and Ned equally well off but punishes them both relative to Barney. Should taxes on wages therefore be set to maintain their ordering? Would we have to abolish taxes on consumption then? If so, then it isn't clear we can have a coherent tax policy period.
     
    But we could have a coherent tax policy, especially if we focus on what kind of economy we want to build and use tax policy as one of many levers, working in concert with all the others, to create it.
     
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    Simpsons images used without permission from 20th Century Fox.

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  • New Article on QE3, Plus the Kocherlakota Move

    Sep 24, 2012Mike Konczal

    I have a new article on understanding QE3 at The American Prospect which I hope you check out.

    Several people have commented on it already, but I want to note that Narayana Kocherlakota is now in favor of more monetary action.

    I have a new article on understanding QE3 at The American Prospect which I hope you check out.

    Several people have commented on it already, but I want to note that Narayana Kocherlakota is now in favor of more monetary action.

    To put this in perspective, here's the September 21st 2011 FOMC statement: "Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time." Kocherlakota also voted against this action in August.

    At this time, he was making arguments that since "the U.S. economy has experienced large increases in the federal budget deficits, contributing substantially to the overall federal debt" and "In response to the recession, the federal government extended the duration of unemployment insurance benefits," this could have caused the natural rate of unemployment to shift so that "the implied u* is 8.7 percent." That the natural rate of unemployment was incredibly high was an argument Kocherlakota had been pushing for some time: here he is in August 2010 arguing mismatch had pushed the NAIRU up 3 percentage points in this recession.

    A month later, in the November 2nd, 2011 FOMC statement, there was the first dissent on behalf of the unemployed and in favor of more easing during the entire Great Recession. "Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time."

    Now, almost a year later, Kocherlakota is arguing a version of the Evans rule: "As long as the FOMC satisfies its price stability mandate, it should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent." He explicitly credits Evans with this rule, noting "President Charles Evans of the Federal Reserve Bank of Chicago has also proposed what I’m calling a liftoff plan...Those familiar with his plan will see that my thinking has been greatly influenced by his. This is perhaps hardly surprising, since he sits next to me at every FOMC meeting!"

    Even though this is a relatively conservative version of the Evans rule, there are two important consequences. The first is that dissent is now taking place on Evans' terms. During 2010-2011 the debate, especially on the hawks side, was about "structural unemployment" and whether or not the Federal Reserve should accept that unemployment should remain well above 8%. Now it is about what the Fed is willing to tolerate to get unemployment below 6%. This is a major sea change.

    This also takes away the intellectual firepower of the monetary hawks. Kocherlakota is an academic's academic, and his arguments were always based in the dense mathematics of job search models and job-opening ratios. Now that he's moved over to Evans' framework on tradeoffs, it isn't clear that there will be anyone at the regional levels of the Federal Reserve producing numbers arguing that we should focus mainly on how to match workers to job openings. That's a major victory towards a more sensible monetary policy going forward.

     

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  • The War on Crime as a Conservative (and Progressive) Assault on Liberal Philosophy

    Sep 21, 2012Mike Konczal

    In case you didn't see, Aaron Schwartz just had an absurd level of felony charges brought against him for allegedly trying to mass download JSTOR by prosecutors. You can support him here. Meanwhile Twitter turned over the account records of Malcolm Harris to the New York criminal justice system.

    In case you didn't see, Aaron Schwartz just had an absurd level of felony charges brought against him for allegedly trying to mass download JSTOR by prosecutors. You can support him here. Meanwhile Twitter turned over the account records of Malcolm Harris to the New York criminal justice system.

    How can we theorize innovations in criminal justice policy over the past decades as a reaction to liberalism? Not liberalism like the New Deal or the Great Society, but liberalism as in the philosophical theory of the modern era. Let's start with the policy innovation driven by neoconservatives, and then examine how the progressive assault on classical liberalism also functions in the war on crime.

    The Conservative Assault

    One part of liberalism is about formal equality--liberty to participate as well as equal freedom from government interference. The War on Drugs and aggressive quality of life initiatives, beyond filling our jail cells, are about getting a lot of low-level charges and convictions on as many people as possible. From 1994-2000, arrests for smoking marijuana in public view (MPV) were up 2,670%. Why does this matter? They interact with three-strike laws to build to large sentences out of minor charges. This also allows for the creation of hierachy through a law ostensibly dedicated to equality and liberty. Once people have been prisoners, they face serious legal impediments, such as limits on access to voting, public housing, public employment, and public assistance. Tens of thousands of legal restrictions regulate the ability of ex-convicts to function and exist in society. There are also certain presumptions against individuals, especially felons, that deny any type of formal equality before the law. When Michelle Alexander talks about a New Jim Crow system of segregation through the legal code and policing, this is the dynamic she is discussing.

    Another part of liberal philosophy is that if the state wants to use its power to act against an individual, say for violating a crime, they need to make their case through an institution that is skeptical of that power. In the United States, that means trial by jury, under the supervision of a judge. The judge and a jury of one's peers are supposed to be the key agents in a court.

    Another key policy innovation of neoconservatives is attacking the relative independence and power of judges. There have been a host of conservative policies designed to reduce the power of judges, of which mandatory minimums are one of the most important. As judges lose power, prosecutors gain it. Prosecutors are now the major presence in the courtroom, overseeing the overwhelming majority of cases that are run through plea-bargains.

    When the evangelical Harvard law professor William J. Stuntz writes that the American criminal justice system has collapsed, this focus on the prosecutor as the arbiter of justice in the courtroom, rather than the judge and the jury, is what he means. Stuntz: "Prosecutors now decide whom to punish and how severely...To a degree that had not been true in America's past, official discretion rather than legal doctrine or juries' judgments came to define criminal justice outcomes....criminal law does not function as law. Rather, the law defines a menu of options for police officers and prosecutors to use as they see fit."

    Notice how the prosecutor overseeing Aaron Schwartz's case just decided to charge him with 13 felonies, mostly for violating the Terms and Services "terms of service" of a website. At 13 charges, it looks like the prosecutor is trying to stack the deck on overreaching and arbitrary charges so they can have as much leverage as they can get when it comes time to go to court. That isn't a rule of law, it's a rule of prosecutorial discretion as justice. This is what a collapsed criminal justice system looks like.

    The Progressive Assault

    Part of the progressive assault on the laissez-faire of classical liberalism was creating the idea that there is no pre-political distribution in the economy. Property is a creation of government, and therefore the distribution of that property is also created by the government. Governments must balance conflicting boundaries of property, and must do so democratically, because appeals to "natural rights" or "economic liberty" will ultimately be empty. Matt Bruenig has several recent posts - one, two, three - spelling out this "myth of ownership" argument over distribution and property rights that are worth checking out.

    This progressive approach to property and the state is absent in contemporary talk on economic policy, but it is being theorized and applied in the most avant-garde ways when it comes to criminal justice policy. Let's talk about dogs that do drug searches. If the police wanted to search your suitcase, or look through it with hypothetical x-ray goggles, they'd need a warrant. That would be an illegal search of your property, which is protected by the Constitution. However if a drug dog sniffs your suitcase and smells drugs, that doesn't count as a search.

    Why? As Justice Stevens argued in United States v. Jacobsen (1984), "Congress has decided -- and there is no question about its power to do so -- to treat the interest in 'privately' possessing cocaine as illegitimate; thus governmental conduct that can reveal whether a substance is cocaine, and no other arguably 'private' fact, compromises no legitimate privacy interest." Since the dog can only "see" contraband such as cocaine when it sniffs, that sniff doesn't count as a search of your property, because you have no right to contraband.

    You have a legitimate privacy interest in your property, except when you don't, because the government doesn't recognize your property as "property." Even though drugs are excludable, rivalrous, and have their price determined in large part by supply and demand, they aren't property the government recognizes, so the bundle of rights that go with property don't apply. The distribution of property outcomes is overwhelming determined by the government here.

    People have talked about property this way in the past, but less so now. We talk about inheritance as almost a right now, but John Stuart Mill, for instance, argued in Principles of Political Economy that while "the right of bequest, or gift after death, forms part of the idea of private property, the right of inheritance, as distinguished from bequest, does not." Your right to receive inheritance doesn't exist outside of political framework, which can be held democratically accountable. (For those who think the war on drugs should be stopped and that you receiving an inheritance should be thought of as a type of quasi-contraband, the current policy framework is very backwards.)

    There's not enough space here to really dive into it, but there's a mind-blowing legal realist seminar on the "Myth of Ownership" taking place in the realm of "asset forfeitures" criminal justice policy right now. The government sues property and money for being illegitimate under civil law; the government can seize the proceeds of the trade of contraband as well as property instrumental to that transaction. If you drive a car solely to sell contraband, and use the surplus of those sales to buy a home, what property claim can you have to own that car or that house? Here the government is actively creating and policing the boundaries and relationships of property through denying its existence as legitimate "property," all done under criminal law.

    This brings us to Malcolm Harris' Twitter account. Who owns a tweet? Who has the ability to turn it over to a third party, and who has the ability to block it? The property claim of a tweet is now being determined through the ability of the government to take it for criminal justice purposes.

    A New York criminal court had demanded Twitter hand over Malcolm Harris' tweets, and Twitter did so last week under extensive pressure. The court argued that "Here, the defendant [Malcolm Harris] has no proprietary interests in the @destructuremal account’s user information and Tweets between September 15, 2011 and December 31, 2011...While the Fourth Amendment provides protection for our physical homes, we do not have a physical 'home' on the Internet." They are determining that Harris has no legitmate property claim on the tweet and no right to prevent a search of his account on Twitter's mainframe.

    It is fascinating, though problematic, to see the idea, boundaries and relationships of online "property" being determined through the criminal justice system. Here the "property" of online records are carved out and created based on where it will be easiest for cops and prosecutors to access them. Hence all the more reason to have Congress re-establish baselines on what our privacy expectations are online, in the opposite way it has been dissolving privacy and property claims under the banner of the War on Drugs.

     

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  • The GOP's Zombie Dodd-Frank Would Lose the Core Logic of Financial Reform

    Sep 20, 2012Mike Konczal

    Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

    Republicans might not repeal Dodd-Frank outright, but they'd eliminate the system of rules that make it work.

    It was just announced that Tim Pawlenty will become the head of the bank lobbying group Financial Services Roundtable. The powerful financial lobbying group, which represents groups like JP Morgan and Bank of America among other big financial sector players, appears to be aligning itself more closely with the Republican Party and betting on the idea that Republicans will control at least part of Congress. But what do they want? Earlier in the year, I argued in Washington Monthly that they'd like to repeal the core parts of financial reform.

    Recently, Phil Mattingly had an article at Bloomberg Businessweek about how the GOP and Mitt Romney would approach Dodd-Frank. This is with a hat-tip to Reihan Salam who notes that this article "has confirmed something I’ve heard from well-informed insiders" and makes additional arguments [1]. So it seems well-sourced.

    Mattingly's argument is that it is unlikely that the Republicans will outright repeal Dodd-Frank. "Instead, President Romney would likely try to give the financial industry something it wants more: a diluted financial reform law that would relax restrictions on some of its most profitable—and riskiest—investments but maintain enough government oversight to give the banks cover."

    So what would the Republicans try to dilute and remove? Mattingly:

    "Wall Street wants to loosen rules governing the swaps market, which generated $7 billion in revenue in the first quarter of 2012, according to government records. The banks would also get rid of restrictions on bank investment in private equity and hedge funds, pare back the power of the new federal consumer protection agency, and block the Volcker Rule, which bars banks from trading with money from their own accounts, a practice that can put customer deposits at risk. [...]

    Wall Street doesn’t oppose everything in the law. Banks support the “resolution authority” that spells out how and when the government can seize and wind down struggling banks before they catastrophically fail."

    So they want to go after derivatives rules (swaps), the Volcker Rule and the related law on restrictions on hedge fund investments, and also the CFPB. It's important to understand this isn't like removing random parts of the bill, as strict as they may be, but is instead gutting the core logic of the law. It's the equivalent of Republicans saying they'd keep the Obamacare bill, but stop the exchanges, remove the individual mandate, and lose the ban on pre-existing conditions while getting rid of the means-tested subsidies and Medicaid expansion. We'd understand that all of the parts of this system are interconnected and inseparable; the ban requires everyone to be in the market, which requires subsidies and well-developed markets.

    Let's make sure we understand how derivatives, the Volcker Rule, and the CFPB all work together. Imagine that we're car engineers, and we want to design a car and road system so that if the car crashes, it does so as safely as possible. There are four things we can do. We can put airbags and seatbelts in the car and other cars so that when it does crash the damage is limited and controlled. We can design the car with things like a brake override system so that if it hits a rough patch the driver can keep control of it and make it less likely to crash.  We can put some speed limits on the road, as well as clear traffic signals to guide cars from running into each other. And we can have some protection for pedestrians, like cops watching for DUIs or barriers to prevent cars from driving into crowds of people. Easy, right?

    Now let's think of Dodd-Frank. There are the legal powers that deploy to resolve a firm if it fails, like an airbag, which are called resolution authority. This allows the FDIC to take down a failed financial firm as if it were a bank, subject to serious rules and restrictions.  And, like requiring certain car features, there are specific policies for large, systemically risky financial firms, like enhanced capital requirements, limits to investments in risky hedge-funds, and the Volcker Rule, which are designed to make it less likely for a firm to crash.

    Dodd-Frank also introduces speed limits and rules of the road in the financial sector, designed to make the system as a whole less likely to crash or spiral out of control when a panic does happen. One primary place it does that is through derivatives regulations. And "cops on the beat" is the metaphor for the Consumer Financial Protection Bureau.

    So there's Dodd-Frank law to allow a firm to fail, law to make it less likely a financial firm fails, laws to prevent the interconnected financial markets from going into crisis if a firm does fail, and law to gives consumers a representative in dealing with the regulatory field. This is like thinking of Dodd-Frank as a system of deterrance, detection, and resolutiion, a related model we've developed elsewhere.

    If Wall Street and the Republicans are looking to seriously gut the Volcker Rule, derivatives, and the CFPB, then they're looking to gut the entire logic of the bill. Interestingly, they are less interested in "resolution authority," the legal process to fail a financial firm. This is evidently no problem with everything else removed, perhaps because they believe congressional bailouts will then happen. This should remind us that resolution authority is strengthened and made more credible by other strong regulations, including things not in Dodd-Frank, like size caps or Glass-Steagall. Preventing these diluations is crucial to building a regulatory system for the financial sector that works in the 21st century.

    [1] Reihan notes that banks "also understand that [Dodd-Frank] favors incumbents over new entrants, particularly incumbents with the legal acumen and lobbying resources to shape the emerging regulatory regime. My strong preference, very much in line with conservative and libertarian sensibilities, would be for a financial reform that would aim to facilitate rather than stymie entry."

    I'd like to see more on how Dodd-Frank as blocking new firm entry works. While this is a generic complaint of regulations in general, I'm not sure in what ways it applies to Dodd-Frank. Parts of Dodd-Frank actually are designed to scale up with size and risk, e.g. Sec. 171 requires capital requirements to scale with "concentrations in market share for any activity that would substantially disrupt financial markets if the institution is forced to unexpectedly cease the activity," which is not for new entries. The idea is to hold larger and riskier firms to tougher standards and higher capital, which is regulation that scales with size.

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  • Four Histories of the Right's 47 Percent Theory

    Sep 20, 2012Mike Konczal

    As you've likely heard, Mitt Romney was recorded at a fundraiser saying that "there are 47 percent who are with [President Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [...] These are people who pay no income tax."

    As you've likely heard, Mitt Romney was recorded at a fundraiser saying that "there are 47 percent who are with [President Obama], who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it [...] These are people who pay no income tax."

    The right is splitting over whether or not the 47 percent argument is worth defending. It's important to understand that, while it is true that 47 percent of households don't pay a federal income tax, the distribution of the tax burden isn't what the 47 percent theory is about. The 47 percent theory is all about grand political battles. My colleague Mark Schmitt has one examination of where this theory comes from hereBrian Beutler also investigates the background of the 47 percent meme, and Kevin Drum does a history of the EITC here.

    Digging into different arguments, there are two distinct parts to a good 47 percent theory. The first is who creates and sustains the 47 percent as a political agent. This can't be the bipartisan set of policymakers who wanted to do income support through work requirements as well as expand certain credits, particularly the child credit; it needs to be agents with specific, outside political goals. Those who pay little or no income tax are a coherent group that acts like a special interest or a class. Instead of the young and the old, as well as the working poor moving into and out of the EITC, this group of people is stable enough that it can act as a coherent political class, but it needs to be created and sustained. Who does it?

    The second part of a good 47 percent theory is that the consequences need to be terrible because the stakes are so high. Rather than successfully transitioning people out of poverty and into work, the consequences are negative for our country. But how high are those stakes, and what do they represent?

    Let's start at the beginning. Where does this meme start?

    1. Trickle On Trickle Down: The Lucky Duckies of the Wall Street Journal Editorial Page: Let's look at the Wall Street Journal's opinion page, November 20, 2002, "The Non-Taxpaying Class: Those lucky duckies":

    "Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education [...] The 1986 tax reform, for example, with its giant increase in the personal exemption and standard deduction, took six to seven million people off the tax rolls [...] This complicated system of progressivity and targeted rewards is creating a nation of two different tax-paying classes: those who pay a lot and those who pay very little. And as fewer and fewer people are responsible for paying more and more of all taxes, the constituency for tax cutting, much less for tax reform, is eroding. Workers who pay little or no taxes can hardly be expected to care about tax relief for everybody else. They are also that much more detached from recognizing the costs of government.

    All of which suggests that the last thing the White House should do now is come up with more exemptions, deductions and credits that will shrink the tax-paying population even further."
    This argument was developed in future editorals. A few weeks later, in  "Lucky Duckies Again: Look at who won't pay taxes under Bush's plan", the Journal noted that "No doubt the Bush team proposed this tilt toward lower income taxpayers to mute the class-warrior critics, not that we've noticed any lower decibel level."
     
    Who? Interestingly enough, this looks like an internal fight among conservatives and Republicans. That's how Krugman read it at the time, and it seems obvious from that last sentence. The Bush tax cuts are going to be across all families, and the editorial is warning that this is the wrong approach. It should focus just on the rich, corporations, and capital income holders. The editorial is clear that they don't want to raise taxes on those who are exempted from the federal income tax; they just fear that these across-the-board tax cuts will knock a lot of people out of the system.
     
    This was a correct assertion, as this number skyrocketed after the George W. Bush tax cuts. To whatever extent the Bush team didn't want to do this, they felt boxed in politically. As a top Bush administration official later told Ezra Klein, “Do you think we wanted to include a welfare payment to people who don’t pay taxes and call it a tax cut? No. But that’s what we needed to do to get it done.”
     
    Consequences? The editorial warned that this policy would buy them no room with the "class-warrior critics," and that's probably a fair assessment. Repealing the Bush tax cuts has been a consistent goal for Democrats, and their preferred approach is even worse than the Wall Street Journal could have imagined. The Journal just wanted tax cuts on those making over $250,000, and warned about cutting at the bottom end of the spectrum because of the lucky duckies. Now the situation is reversed, and President Obama is looking to keep the tax cuts for those making under $250,000 and repeal the rest.
     
    There's the idea that as a policy matter workers will simply not care for cutting taxes or for tax reform more broadly. This is why Romney can say "So our message of low taxes doesn't connect." But this isn't played up in apocalyptic terms. The editorials seemed more concerned that the federal tax code will retain its progressivity under this tax cut, rather than the lucky duckies initating a new culture war. This is in stark opposition to:
     
    2. The Battle: Right Wing Think Tanks and the New Culture War: Let's jump forward, and see how the expensive, Washington D.C. think tanks react to President Obama. President Obama is a wonky technocrat, and much of his policy borrows from conservative policy of the 1990s (health care) or bipartisan policy of the 2000s (cap-and-trade) or policy that was new and open to debate (post-crisis financial regulations). The new president of the American Enterprise Institute, Arthur C. Brooks, writes a book called The Battle: How the Fight between Free Enterprise and Big Government Will Shape America's Future. How does he think of the 47 percent? Focusing on "long-term strategies to keep the young in the 30 percent coalition," he writes:
    Federal tax policies are ensuring that an increasing number of people in our society will never develop a pocketbook interest in free enterprise. Even as they grow older, develop their careers, and earn more money, many will never pay a dollar in federal income tax because they'll never catch up with an increasingly progressive tax system.
     
    To put a modern twist on an old axiom, a man who is not a socialist at 20 has no heart. But a man who is still a socialist at 40 has no head-or pays no taxes. The current trend will increase the percentage of Americans who are permanent net takers from our society, who use more in public resources than they contribute, and for whom a free-enterprise system of entrepreneurship and limited government holds few obvious personal rewards. In a nutshell, the strategy is to make fewer and fewer people pay all the taxes and bear the brunt of paying for a growing government [...] After President Obama's budget stimulus and the proposed tax changes of 2011 [...] this proportion will increast to almost 47 percent. [...]
     
    Simply stated, in the future there will be fewer and fewer people with "skin in the game." Nonpayers will outnumber the payers. We will enventually reach a threshold beyond which most Americans have no economic incentive to defend free enterprise because it is so far from their interest to do so. The young sympathizers of socialism today may be the grown-up defenders of socialism tomorrow.
    As Mark Schmitt wrote, "this theory that we're headed toward a radical egalitarian state is being developed is the American Enterprise Institute, the oldest of the conservative think tanks and one that, much like Romney, has forsaken the traditional business-minded conservatism of, say, the first President Bush, for hard conservatism in which everything is a grand showdown of incompatible worldviews." And The Battle was the first statement that President Obama was at the vanguard of a new culture war on economic issues. Instead of wanting a government that consumes 25 percent of GDP and has a public welfare state versus one that consumes 19 percent and has a private welfare state, he is the economic equivalent of Robert Mapplethorpe. The right takes this book seriously; the author of the most prominent critical review of the book from the right was canned from his think tank job a month after it came out.
     
    Who? The "30 percent" are the ones behind this expansion of people who don't pay federal income taxes, and they'll continue to expand it. Now before you think you wandered into a Wu-Tang song, we should clarify Brooks' definition of the 30 percent and the 70 percent. The 30 percent are a group of people who "reject the free enterprise system culturally." The free enterprise system stands in "stark contrast to European-style social democracy." The 30 percent "twists equality of opportunity into equality of outcome." Any idea that American liberalism stands in contrast to free market laissez-faire and Marxism isn't explored; the 30 percent are entirely the bad guys, waiting to fundamentally change the country. Jonathan Chait wrote an excellent review of the book here,
     
    Consequences? The big consequence is that this locks young people into socialism and the intellectual space of the 30 percent coalition, building their power. Having never paid taxes, they and others who benefit will think of government as free. So the 30 percent are then capable of continuing to seize more centralized control of the economy and defeat the cultural forces of free enterprise. The Battle is obsessed with how President Obama won in 2008; one conclusion is that the 30 percent doesn't need to win people over intellectually, but just needs to keep enough people not paying taxes so that they'll form a coherent base, particularly the young. But the 30 percent culture allows Romney to note that those who oppose his message "are dependent upon government [and] believe that they are victims."
     

    3. The Hammock. During the Q&A part of this 2011 Paul Ryan speech at Heritage (19m35s), Ryan noted:

    I think it's 49 percent of people who don't pay taxes today, though there are other taxes. Here's the danger I think we have. We're coming close to a tipping point in America where we might have a net majority of takers versus makers in society and that could become very dangerous if it sets in as a permanent condition. Because what we'll end up doing is we will convert our safety net system - which is necessary I believe, to help people who can't help themselves, to help people who are down on their luck get back on their feet - we could turn that into a hammock that ends up lulling people into lives of dependency and complacency, which drains them of the incentives and the will to make the most of their lives.

    Who? The do-gooders who created the social safety net.  It's too generous, too unconditional and not tied enough to work. In a practical way, it is the safety net itself that is creating this condition. Rather than the correct interpretation that people who are not paying taxes are receiving income support that requires work or various, purposely chosen tax credits, this indicts everything from health care to unemployment insurance (which, by definition, you needed to have worked to receive). This is a smart approach, because while going after the "30 percent" isn't really a political platform, dramatically reducing the social safety net is.

    Consequences? It's not clear what "complacency" means in this condition, but dependency means that more and more income will come from the government. As this happens, their ability to take personal responsibility will fall apart. People will be beyond the ability to help themselves, hypnotized as they are by the siren's call of the welfare state. This is why Romney can say "I'll never convince them that they should take personal responsibility and care for their lives."

    4. Takers and Public Choice:
     
    From Reason Magazine a while ago:
    DeMint: Almost half of Americans are getting something from government, and the other half are paying for it. And we're on a track where 60 percent are getting something from government and 40 percent are paying for it. You can't sustain a democracy with that mix.
     
    Reason: Because the 60 percent is going to be voting a bigger and bigger share of the 40 percent's money?
     
    DeMint: It's hard to win elections when you're talking about limited government if the constituents want more from government. You see that phenomenon on display in Greece. When the country is going down in flames, there are still people in the street, demonstrating for more government benefits. We've got to understand we're in trouble, that we don't have much time. 
    Or this from Steve Doocey on Fox and Friends: "Coming up! A controversial question. With 47% of Americans not paying taxes – 47% – should those who don’t pay be allowed to vote?"
     
    Who? The 47 percent themselves. As predicted by Public Choice theory, those at the bottom half of the income scale vote into office people willing to take from the top half of the income scale. Since the average is above the median in income, there's always redistribution from the average to the median to be done. Here the intellectuals of the 30 percent, or the welfare state, or GOP strategy are all secondary; the ravages of democracy are the culprit.
     
    Consequences? The system eventually collapses into itself, as those at the margin work less and also join in demanding more. DeMint alludes to Greece, where the collapse of the government seems almost to be part of the plan to then take over the state, which is consistent with the right's conspiracy theory of the Cloward-Piven strategy. But this focus on stop-gating the median voter allows for Romney to think "What I have to do is convince the 5 to 10 percent in the center that are independents."

    Presumably there are more. What else is missing?

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