Tax Policy II

I'm going to take Robert Frank's recent column on taxation and address it line by line -- a tactic known in the blogosphere as "fisking":

POWERFUL anti-tax rhetoric has made legislators at every level of government afraid to talk publicly about a need to raise taxes. The constituents of the few who dare speak are typically bombarded with attack ads that go something like this: “It’s your money, but your esteemed senator thinks the bureaucrats in Washington know how to spend it more wisely than you do.”

Which is true. It is your money. You earned it, not them. I also believe that people know how to spend their money in such a way to improve their lives better than bureaucrats do. The only compelling reason for sending money to Washington is to provide for public goods such as national defense and a legal system. Too much of our money is wasted in Washington on the trivial, the non-trivial and monuments of narcissism.

Because of our inability to talk sensibly about taxes, the United States has been sliding toward second-class status in the world economy. Our national debt, for example, has increased by more than $3 trillion since 2002. Once the world’s largest creditor nation, we are now its largest debtor. We are currently borrowing more than $800 billion a year from the Chinese, Japanese, South Koreans and others — loans that will have to be repaid in full with interest. These imbalances have sent the dollar plummeting.

True, the U.S. has been sliding deeper and deeper into debt, but this is a tribute to our lavish spending, not a lack of revenue. According to the Tax Foundation, the federal government collected $1.256 trillion in revenue in 2001 while spending $1.357 trillion. According to wikipedia the amount of tax revenue collected for 2006 was $2.2 trillion net of refunds. Think about that, revenue increased by about a trillion dollars in 5 years -- and yet it still isn't enough??? This is like someone working at McDonald's while driving a Porsche -- sure, making more money would help, but maybe they should downgrade to a cheaper car. Actually this is a terribly analogy -- the U.S. government is more like an investment banker that complains they still don't make enough money to maintain their lifestyle.

As for borrowing from Japan, well, they are no paragons of budget virtue themselves with the highest national debt of any industrialized country.

The situation is set to become worse. On the current trajectory, the national debt will rise an additional $5 trillion over the next decade. The retirement of baby boomers will require additional revenue to cover growing deficits in the Social Security and Medicare programs.

Seems to me the logical response here is to reform Medicare and Social Security rather than look for ways to sustain these deeply flawed programs.

And though an emerging consensus in favor of universal health coverage may mean better care for more people for less money over all, such coverage will also require higher taxes. Additional revenue is also needed to make up for the deferred maintenance that has placed many of our roads and bridges in dangerous disrepair.

Or, if we can't afford universal health care -- and it it by no means clear it would result in better health outcomes -- maybe that is another argument for not implementing it. As for additional revenue for our roads and bridges, it would be much easier for me to sympathize with this argument if we weren't spending money on bridges to nowhere. The money exists, and I refuse to bail Congress out for its obsession with building new shiny things rather than maintaining what we already have.

Anti-tax crusaders say that these problems can be solved by just cutting wasteful spending. To be sure, Congress could help keep spending in check by adopting a strict pay-as-you-go standard for all new legislation. But most existing government programs have powerful constituencies, and programs that lack such strong defenders are not always the most suitable candidates for cuts. Salient examples from recent experience include scientific research, infrastructure maintenance and security investments like cargo-container inspection and lockdown of loosely guarded nuclear materials in the former Soviet Union.

In short, realistic proposals for solving our budget problems must include higher revenue. But unless political leaders can develop strategies for dealing with the powerful anti-tax rhetoric that has sunk similar proposals in the past, the impasse will continue.

So, basically Frank says we should just accept the political realities -- essentially a "boys will be boys" approach -- and raise additional money. Disgusting.

One strategy would be to inform voters that the “it’s your money” argument is incoherent. Taken to its logical conclusion, it implies that it is illegitimate for the government to collect taxes. But if that were true, there could be no government and no army, in which case, the United States would have long ago been conquered by another country. Then we’d be paying compulsory taxes to that country’s government.

I can only think that Frank is willfully misunderstanding this argument. The argument isn't that government shouldn't collect taxes, it's that government should realize that they are spending other people's money rather than their own, and should accord it the respect it deserves. When money is spent on frivolities it becomes obvious that they have little interest in being good stewards of our money, and the money should be left to the taxpayers.

In the real world, governments not only maintain armies, they also provide a variety of public goods and services that would be impractical for private citizens to provide for themselves. Every government, including our own, has always levied taxes of some sort to pay for these goods and services.

Well, no kidding. But I don't really think we are struggling here to pay for the basics. Remember, this country survived and prospered long before most current government agencies came into existence.

So it’s strongly in our interest to talk about what services the government should provide and how to raise the revenue to pay for them. Politicians need to explain this clearly to their constituents. The argument is simple and would fit easily into a 30-second campaign spot.

I can't seriously believe he is advocating 30 second commercials as the basis for a public discourse on this subject. It's a real sign of how little seriousness he accords it.

Anti-tax crusaders sometimes brand proposals to make the tax structure more progressive as class warfare based on envy. This tactic has also been rhetorically effective, but, like the “it’s your money” slogan, it stifles an important conversation to everyone’s detriment.

Progressive taxation is not about envy. Top earners have captured the big share of all income and wealth gains during the last three decades. They’re where the money is. If we’re to pay for public services they and others want, they must carry a disproportionate share of the tax burden.

Well, at least he is open about it. This basically borrows from both Marx's "From those according to their ability to those according to their need" and the explanation of robbing banks "Cause that's where the money's at."

Anti-tax crusaders often bristle at taxes whose aim is not just to raise revenue but also to alter behavior. They label such efforts “social engineering.” But as even Adam Smith recognized, behaviors that are attractive to individuals are often harmful to society as a whole.

Activities that give off greenhouse gases, for example, are misleadingly attractive to individuals because their costs fall largely on others. Carbon taxes are the remedy of choice. When individual and social incentives diverge sharply, tax remedies of this sort are the least intrusive way to restore balance.

Now I actually have no problem with this in many instances. If certain behaviors impose a cost on others -- such as pollution -- we should tax them to capture that externality. Notice that this is different from social engineering under which you attempt to promote certain behavior simply because it reflects your vision of how society ought to function.

Nowhere have the carefully constructed slogans of anti-tax crusaders been more been powerful than in the case of the estate tax, which they like to call the “death tax.” Although voters in the bottom fifth of the income distribution are more likely to be struck by lightning than to leave an estate large enough to set off this tax, two-thirds of them support its repeal. This is bamboozlement of the highest order.

Perhaps because people find it immoral -- as Whoopi Goldberg explains.

FORTUNATELY, there is clear evidence that reframing the discussion often has a big impact on the way voters think about tax policy. In the spring of 2005, for example, I asked the Survey Research Institute at Cornell University to conduct two telephone surveys to investigate public attitudes about the Bush administration’s proposal to eliminate the estate tax.

In the first survey, respondents were simply asked whether they favored the proposal. Almost 75 percent said they did. In the second, respondents were first told that lost revenue from eliminating the estate tax would necessitate some combination of raising other taxes, borrowing more money from abroad and further cutbacks in government services. This time, almost 80 percent of respondents favored keeping the estate tax.

Given the effectiveness of anti-tax rhetoric, presidential candidates are understandably reluctant to tell voters what must be done to put the fiscal house in order. But voters are smarter than many cynics think, and they may be especially receptive to fresh points of view at this stage in the political cycle. The anti-tax rhetoric of recent decades is at the root of many of our current problems. Candidates with the courage to confront it head on may not only contribute to our economic recovery, but may also win additional votes.

Sorry, but advocating higher taxes for the rich (which are by definition a minority since rich is a relative term) and distributing the resulting largess to the many isn't exactly a profile in courage. Real courage is telling people that we are spending more can afford and making cuts. But Frank isn't interested in this. He likes government and can't do with any less. So then it becomes a matter of finding the money to pay for his vision of leviathan. Understand this and you understand the Democratic party -- and many of the Republicans.

Update: Another good point made by Greg Mankiw here.