Sunday, December 23, 2012

Tyler Cowen's modest proposal for an imaginary GOP

Tyler Cowen would have Republicans shake up the tax debate by proposing a tiny across-the-board income tax hike in addition to the moderate tax hike for the wealthy proposed by President Obama. Further tax hikes would then kick in automatically as (or if) spending rises. He regards this direction for tax reform as fairer and more sustainable than current proposals, as everyone would feel the effects of "paying" for whatever level of social services and other spending we collectively undertake. Here's the meat of it:
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount. 

Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice. 

If people already rationally expect these tax increases, this signal would do neither good nor harm, but perhaps such an approach would nudge political expectations closer to reality without draining the economy.
With respect to long-term tax goals, Cowen has a point. Countries with more robust social safety nets than the United States do ask their citizens to pay more in taxes than Americans pay -- and if Americans want to improve current benefits (e.g., via the ACA), or even sustain the ones we have, we will all have to pay more (though effective health care reform would take most of the pressure off by reducing the real cost of health care).

But Cowen is proposing that the GOP fight tax hikes hikes! Whose GOP? He might as well suggest that we wave a wand and replace the existing party wholesale as suggest that the GOP propose an explicit across-the-board income tax hike. The current GOP will happily stealth-tax the poor, by cutting mainly refundable tax credits, and even stealth-tax much of the middle class, by cutting the child tax credit. But a hike in the headline income tax rate?  You might as well ask them to sing the Internationale at the opening of the 113th Congress.

In a sense, too -- probably the only sense possible -- Republicans have followed Cowen's script, by pushing for chained-CPI, a slower and allegedly more accurate measure of inflation than the one currently used to adjust income tax brackets as well as Social Security benefits. Chained-CPI slows the upward adjustment of tax brackets, thereby raising everyone's income taxes over time as inflation and real wage growth push incomes upward. Raising taxes by stealth is not outside the GOP playbook, but raising them explictly is.

Cowen has a long-term argument that might resonate with a rationally tax-averse party:
There is something to be said for “pricing” big government by making an explicit connection to taxes, much the way utilities explicitly price water and electricity. And higher tax revenue now will decrease the extent to which interest on the debt consumes future budgets — and that probably means lower taxes in the future. Counterintuitively, raising tax rates sooner rather than later may be the true “low-tax policy” because it may increase the chance of limiting future taxes.
"Counterintuitive" doesn't fly in politics -- see "stimulus" -- particularly when the prospective benefits accrue years down the road. And "higher taxes now, lower taxes later" is not a battle cry to be taken up by anything recognizably like the current Republican party.

An imaginary GOP could indeed highlight the limitations in Obama's approach to tax reform by insisting that tax hikes gradually hit everyone.  But if such a GOP existed, Democrats would not be forced to limit their proposed tax hikes to the wealthy --they do so only because the fanatically antitax GOP makes any tax hike so politically toxic that Democrats are forced to fight to the death for even the most politically palatable scraps. If Cowen's GOP existed, we would not be in the hole we're in -- or, if such a party magically appeared, we could plug that hole in ten minutes.

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