February 22, 2007

ISN'T IT THE YEAR OF THE PIGOU:

Read My Lips: Raise Taxes: The era of the tax revolt is over. How Democrats have an opportunity to redefine the politics of government (Mark Schmitt, Jan/Feb, Washinton Monthly)

Public opinion polls suggest that making the system fairer and simpler might be far more appealing than tax cuts ever were. A poll by Greenberg Quinlan Rosner Research in 2003 found that when people were asked, "What bothers you most?" about the tax system, 77 percent said it was either complexity or the feeling that wealthy individuals and corporations don't pay their fair share, while only 14 percent said what bothered them was the amount they themselves pay in taxes. Nonetheless, people are notoriously averse to "tax the rich" proposals if they see them as punitive. The idea of treating investment income and income from work identically, which was a centerpiece of John Edwards's 2004 campaign, would seem to finesse that paradox by establishing a neutral principle that applies to rich and poor alike.

But while fairness should be the main goal of reform, fairness alone will not raise revenues adequate to meet government's needs. One of the brilliant tactical moves of the mid-'80s tax reformers was to first agree that reform would be "revenue-neutral," so that issues of raising or lowering taxes would not get in the way. At a recent press conference with Bradley, Wyden sounded nostalgic for those days, answering questions about revenues with a promise that reform would do no more than "lower rates and close loopholes." But revenue neutrality is not a luxury that 21st-century reformers can afford. In place of revenue neutrality, they will have to adopt some predetermined target level of revenues that will keep pace with the natural growth of entitlement programs because of the aging population and health-care inflation--the main drivers of the so-called "entitlement crisis." Even with a target level of revenues much higher than today's 17 percent, they will still be unable to avoid significant cuts to the two fast-growing entitlements, Medicare and Medicaid, or a wholesale revision of the health system. This, too, creates an opportunity for bipartisanship.

If the tax reformers of the future are to make good on the promise of lower rates, as well as surrendering the revenues from the AMT, as well as paying for an aging population, they will have to go well beyond the boundaries of the income tax. And here is where the greatest opportunities for an entirely new political configuration may be found. Conservatives have always been interested in taxing consumption as a way of encouraging savings and investment, and liberals in need of revenue will have no alternative but to reconsider their historical aversion to consumption taxes as regressive.

Taxing consumption is usually synonymous with some version of a Value-Added Tax, (VAT) which is slowly gaining acceptance among liberals. (See "Value Added," by Jeffrey Birnbaum) An alternative would be a tax either on gasoline (always unpopular) or more broadly on energy use, which could be built with incentives and subsidies for clean-energy technology and thus help address climate change as well as ameliorate dependence on the Middle East. Broad energy taxes have an unfortunate political history (old-timers in Congress will not soon forget the phrase "we got BTU'd" from 1993, when House Democrats voted for a politically risky energy tax based on BTU usage, only to see the Senate drop the plan). But the politics of an energy tax today would be very different, offering the potential to reconfigure our relationships in the Middle East, address climate change, and create jobs in cleaner, more efficient innovations, a field that many believe will be the next driver of the American economy. Washington insiders will also note that when the BTU was killed, it was because Democrats from oil states such as Louisiana, Texas, and Oklahoma dominated the Finance and Energy Committees, as they always had. Soon afterwards, those states threw their lot in with the Republican right. Today, the oil industry has lost its influence in the Democratic Party and is unrepresented on the Finance Committee. Oil companies are a ripe, unprotected target.

There is also renewed interest in energy taxes on the moderate right. A former Bush economic advisor, Greg Mankiw, recently announced the formation of the Pigou Club (named for the British economist Arthur Pigou, a colleague of John Maynard Keynes), an informal and involuntary alliance of economists and commentators who advocate carbon or energy taxes, or other "Pigovian" taxes that have the simultaneous effect of raising revenues and reducing consumption of something undesirable. Pigou Club members are deemed by Mankiw to have "signed up" when they say something in public favoring such taxes, and range from Alan Greenspan and Martin Feldstein to Al Gore and Paul Krugman.


What's beautiful about the situation is that the federal tax burden is indeed quite low in reality, but the Left has spent so much of its time and energy yapping about the overburdened middle class that folks still perceive it as onerous, making any meaningful hikes impossible. Taxes will be reformed, not raised, and reformed in a conservative direction.

Posted by Orrin Judd at February 22, 2007 4:07 PM
Comments

You raise taxes and people will hammer you for it. That era never ends.

Posted by: pchuck at February 22, 2007 4:25 PM

""What bothers you most?" about the tax system, 77 percent said it was either complexity or the feeling that wealthy individuals and corporations don't pay their fair share"

Um, perhaps those two responses should be separated rather than combined? I suspect that Mr. Schmitt is trying to pull a fast one here...

Posted by: b at February 22, 2007 6:29 PM

Go ahead donk. Make my day.

Posted by: Bob Hawkins at February 22, 2007 8:03 PM
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