The art of grilling a tax/budget deal

A dozen or more years ago, I wrote a press release announcing the opening in Manhattan of the Greek seafood restaurant Milos Estiatorio.  The owner, Costas Spiliadis, explained to me that in cooking fish, timing is everything. At Milos they keep it simple, and concentrate on getting it off the grill at the right instant.*

Perhaps that is the Obama theory of bipartisan budget negotiation? The WSJ's Damian Paletta and Naftali Bendavid, reporting on progress in Senate bipartisan "Gang of Six" negotiations toward a comprehensive tax/budget reform deal, has this to say about the White House posture:

 The success of the senators' efforts will depend on whether it is endorsed at some point by President Barack Obama. White House officials have been briefed on progress but have mostly stayed on the sidelines, people familiar with the matter said.

 White House budget director Jacob Lew said, "We think it's a good thing to have members looking for bipartisan conversations where they are exploring ideas."

Obama, the bully pulpit, and the battleship

For those of us juiced by the prospect that Obama might make comprehensive tax reform a focal point of the remainder of his term -- kicked off, as eloquently urged by William Galston, by a vision laid out in the upcoming State of the Union address, Matt Yglesias tosses some cold water in the soup ("juiced?" "soup"? -- never mind):

It sounds silly to call for less presidential leadership, but I think the evidence suggests that what’s needed here is actually a very vague and generic endorsement of the concept of tax reform plus some themeless pudding. Frances Lee’s important book Beyond Ideology: Politics, Principles, and Partisanship in the U. S. Senate argues persuasively that what happens when a president tries to “lead” on an issue like this is that a dynamic of partisan polarization kicks in. What you really need to get tax reform is for some hard-working members of congress from both parties to take the initiative in hammering out a framework and building support on the Hill. If such a thing happens, the White House should of course try to play a constructive role. But jumping all over the issue and a creating a dynamic where tax reform becomes “a key priority for the Obama administration” that opportunists on the right want to kill for the sake of a political win would not be a constructive intervention.

That is food for thought (and I've ordered Lee's book). In rebuttal, I would point out that political vets seem in any case to be assuming that getting a tax overhaul enacted will be at least a three-year process, and that while "polarizing" the debate early by "presidentializing" it may slow that process, doing so may also a) help Obama politically, and b) improve the ultimate outcome, since his approach to revenue-raising, federal spending, and tax burden distribution is far more reality-based than the Republicans'.  Not that I'm saying Yglesias is wrong - who am I to game out political strategy?

I do think that Lee's observations go a long way toward explaining Obama's policymaking approach up to this point, however.  Obama's abdication of bully pulpit "leadership" at key moments has been so pointed that I think there's got to be a method behind it. The battle of the Bush tax cuts is the most recent example. Ever since the news of Obama's deal with the Republican broke, and I took in the list of stimulative goodies for the nonwealthy piled up on Obama's side of the ledger, I've suspected that the president may not have wanted the tax cuts for the top 2% to sunset right now. His silence when effectively invited to promise a veto of any bill extending those cuts has been deafening at least since September 9, when George Stephenopoulos asked him four times, and he demurred four times. Ever since the Republican landslide become a strong likelihood Obama may have been desperate to buy whatever stimulus he could while he could -- and the sunsetting tax cuts were his only currency.

Two directions on tax reform

Demolishing AEI president Arthur Brooks's claim in today's WSJ that Americans do not favor progressive taxation, Jonathan Chait cites a public opinion snippet that raises a fundamental question about tax reform (my emphasis):

The Quinnipiac University poll found that 60 percent of Americans among both major political parties think raising income taxes on households making more than $250,000 should be a main tenet of the government's efforts to tame the deficit. More than 70 percent, including a majority of Republicans, say those making more than $1 million should pay more.

The question is: leaving aside the precise optimal level for the top marginal income tax rate, why is the highest bracket fixed at a mere $250k in family income?  Matt Yglesias and Nate Silver batted this question around in March '09. Silver:

 What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.

How will Obama raise tax revenue?

Robert Reich hypothesizes that Ben Bernanke is helping the Obama administration prepare the ground for new taxes on the wealthy:

But Bernanke also wants to deliver a message to Congress, a message the White House doesn't want to deliver because it's politically awkward: Congress will have to raise taxes on the wealthy in order to finance universal health care and reduce looming budget deficits. Such tax increases won't slow down the economy because the wealthy don't spend that much anyway (that's what it means to be wealthy -- you've already got most of what you need), but may be necessary, at least to ward off inflation fears.

What sort of higher taxes on the wealthy? Bernanke didn't say, of course, but the White House has already floated limits on deductions and seems willing to consider taxing employee-provided health benefits for employees over a certain income. And maybe lifting the cap on Social Security payroll taxes, at least for workers earning over $250,000 a year.

More radical ideas batted around by Matt Yglesias and Nate Silver a couple of months ago: create new tax brackets far above the current top level of $357k -- or make tax brackets "infinitesimal," i.e. ratcheting up proportionately for every extra dollar earned. As Silver pointed out, the current top bracket threshold is anomalously low compared to those of prior eras.

Bracketing up: will Obama soak the superrich?

Given Americans' immersion in low tax ideology, how can Obama fund his ambitious plans long-term? Matthew Yglesias floats an idea that occurred to me years ago:

some day I should write again about the idea of making tax brackets infinitesimal so that there is no “top bracket.” This would have been unworkable 100 years ago, but with computers there’s no reason we can’t do it.

In other words, there should be an algorithm for perfectly progressive tax rates that ratchet up infinitesimally for every dollar earned, rather than bumping up abruptly at fixed thresholds.

More prosaically, Yglesias floats the idea of adding new marginal tax brackets above the current top level ($357k). While he minimizes the potential for raising significant revenue this way, Nate Silver starts the math and finds otherwise:

What the discussion over the top marginal tax rate ignores, however (and what Ygelsias picks up upon) is that this rate has been assessed at very different thresholds of income. In 1940, for example, the top marginal tax rate was 81.1 percent -- but this rate only kicked in once you made $5,000,000 or more in income, which is equivalent to about $75,000,000 in today's dollars.

But today, the threshold where the top tax bracket kicks in isn't $75 million, or $5 million, or even $1 million ... it's a mere $357,700. The progressivity of the tax code stops there....

The question, of course, is why there isn't a millionaires tax bracket now ... or even a multi-millionaires tax bracket. I haven't run the numbers, but I'm guessing that if you established a new tax bracket at, say, 40.5 percent, that started at incomes of $1,000,000 or more, this would bring in as much revenue to the government as restoring the $250K tax bracket (which is really $360K now given indexing to inflation) to 39.6 percent, as it was under Clinton.

Brushing this subject without quite hitting on it, meanwhile, Clive Crook gives the rationale for creating new upper-level brackets -- though he himself favors the regressive but broader-based VAT:

Not everybody would regard two-earner households with an income of $250,000 a year as rich; and many of the taxpayers in question have seen their retirement savings, college funds and housing equity destroyed. The scandal of widening inequality that still animates the Democrats' thinking is a story about the top fraction of one per cent of the income distribution, not the top end of the middle class.

I wonder if Yglesias hasn't in fact stumbled on Obama's as-yet-veiled long range tax plans. Obama claims that he is going to tackle the long-term sustainability of the Federal budget; he's meanwhile planning large increases in Federal spending while promising not to raise taxes on anyone earning under $250k; and a core commitment in his campaign was to roll back the galloping rise in income inequality that Crook alludes to. There is a lot of wiggle room to raise taxes on the superrich while staying well below past U.S. norms. It's probably either that or a VAT. Or both...