April 14, 2012 – 12:56 p.m.
Political Economy: Not So E-Z
By John Cranford, CQ Columnist
It’s tax week, a time for celebration and reflection on the benefits of living in the United States, right? Well, no. It’s really a time for procrastinators to get their paperwork finished for Uncle Sam. But, as an important moment in time, the filing deadline does accentuate the public debate about all things taxes.
And the evidence is clear: Hardly anybody who knows about the U.S. income tax system is happy with it. To some, it’s basically unfair (although there is disagreement over just who is punished by the way taxes are levied). To others, it’s overly complex in ways that distort economic behavior. To still others, it’s structured to raise insufficient revenue to finance the needs of government.
The range of things that make people unhappy about the tax code is quite broad. And proposals to make changes in it are often contradictory. So, for now, that doesn’t really get us anywhere.
That won’t prevent lawmakers of both parties from trying to use taxes to gain political leverage, even if their efforts don’t go far toward addressing the real issues.
So, this week will mark the opening salvo in what promises to be a yearlong tax fight when the Senate debates the Buffett Rule, which is designed to appeal to those who think the tax code unfairly favors the rich. It would raise relatively little additional revenue and, undeniably, make the code more complex, not less. It also upsets those who contend that Americans who pull in higher incomes already pay the bulk of federal taxes.
The Buffett Rule started out as the broad notion that people of means (such as Berkshire Hathaway Chairman Warren E. Buffett) should pay a higher effective tax rate than those much further down the income scale (such as Buffett’s secretary). It has morphed, however, into a specific proposal to levy a 30 percent tax that would be phased in for those with $1 million or more in annual income.
Senate Majority Leader
Not to be outdone, House Republicans are likely to bring a bill to the floor soon to grant any company with fewer than 500 employees a deduction equal to 20 percent of its profit. This bill is sure to pass the House. But a lack of support from Democrats — who complain that it doesn’t target its benefits to companies that actually add workers — means it will probably die there.
Moreover, the measure would lose revenue for the Treasury and add to the tax code’s complexity. But Republicans see this one as a winning political gambit, so they will press ahead anyway.
Economists in Agreement
All of this is a reminder that Congress doesn’t so much debate tax policy these days as obfuscate it. Donald Marron, the director of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, made just that point at a timely conference last week titled “Should the Rich Pay Higher Taxes?”
As if anticipating the way lawmakers would talk about the Buffett Rule and other tax issues this year, Marron was blunt: “Tax policy debates often feature more rhetoric than substance and a lot of fiction mixed in with occasional bits of fact.”
Political Economy: Not So E-Z
What was interesting about the conference, which starred five prominent (by Washington standards) economists, was the extent to which they found themselves agreeing, although they represented somewhat divergent points of view.
It would be fair to say that all would like to see changes in the tax code. And, remarkably (or maybe not, since they were economists, after all), there was relatively little dispute among them about the facts. They also engaged in little of the typical rhetoric about what the facts meant. To that end, they didn’t sound like lawmakers.
The group found general agreement on a key point. Over the past three years, federal revenue has been lower as a share of the economy than at any time since 1950. Diane Lim Rogers, a “deficit hawk” from the Concord Coalition, hammered on the idea that putting the government on a sound fiscal footing will require more revenue. The others agreed. That was true even of Douglas Holtz-Eakin, who heads the conservative think tank American Action Forum and advised
Most conceded that lower tax rates and a broader tax base with fewer tax breaks would be preferable — even if there is little proof that such a tax structure would generate much economic growth on its own. The only dissent came from David A. Levine, a former chief economist for the asset management company Sanford C. Bernstein, who calls himself a “poster child” for rich people who think they should pay higher taxes. Levine would prefer higher tax rates first.
But not even Levine was enthusiastic about the Buffett Rule. And most in the group expressed concern that narrow tax benefits don’t always yield the desired result.
There was even a sense that — given enough time — the group might have found common ground on ways to make the tax code less distasteful. But none of them, of course, are elected officials who can make such decisions and be held responsible for the outcome.