Tax smartness

Well, I guess with tax day, that explains all the interesting columns and posts on taxes lately.  I’m going to go with the flow.  I especially liked this one from Paul Waldman about what a positive, liberal agenda on taxes should look like.  Lots of good ideas here, and most aren’t even really that hard (except, of course, for the Republicans’ theological opposition to reasonable tax policy).

In particular, I want to look at what Democrats can and should do now when it comes to making their case about taxes to the public.

This is a topic most Democrats don’t spend a great deal of time thinking about. You can make an (imperfect) analogy with health care. For years, Democrats proposed changes to the health-care system, while Republicans said, “Oh no, we can’t do that. That would be terrible.” But most Republicans never worried much about what kind of health-care system they’d prefer, even after Democrats passed the Affordable Care Act. In a similar way, Republicans have taken most of the initiative on taxes, because it’s an issue they care deeply about, just as Democrats care deeply about health care…

So what would an affirmative liberal vision of tax reform look like? I know what Democrats don’t want, but what exactly do they want? I asked a bunch of liberal economists about how they’d change the system if they could. Some answers:

  • Impose a financial transactions tax on Wall Street. Eliminate the corporate income tax and instead require corporations to give the government 25 percent of their stock, which would eliminate the incentive to game the system. (Dean Baker, Center for Economic and Policy Research)
  • Get rid of “privileged types of income, which invite avoidance for no good reason. I’d add a simple, minimum tax on foreign earnings and an FTT of a few basis points.” And acknowledge that we’re going to need more revenue, not less, to meet our future needs. “Let’s just progressively raise the revenues we need and call it a day.” Instead, we should focus less on taxes and more on other policies to help lower-income people. (Jared Bernstein, Center on Budget and Policy Priorities)
  • “As much as I think on paper tax breaks for socially beneficial things is a good idea, I would design a tax system that primarily tried to raise revenue off of social bads like carbon and then followed the fair, broad-based, and progressive schedule for an income tax … when designing progressivity we need to think about places where regressivity is optimal (a gas tax) and then correct for that regressivity through other types of taxes. Our federal income tax system is not currently progressive enough to counter all of the regressive federal taxes that exist.” (Betsey Stevenson, University of Michigan, former member of Council of Economic Advisers under President Obama)
  • A financial transactions tax; a carbon tax, “but not to raise much revenue — I’d like to recycle the revenue back to people”; more tax brackets at the high end, because “it seems odd that someone making $400,000 a year pays the same as someone making $5 billion a year.” In addition, “I might get rid of the corporate tax and have more progressive individual taxes,” since the corporate tax is so susceptible to manipulation. (Josh Bivens, Economic Policy Institute)

All these economists had many more specific ideas. But what they had in common was that none of them favored a top-to-bottom overhaul of the system. While some of the ideas, such as Baker’s plan to eliminate corporate taxes in exchange for giving the government 25 percent of corporate shares, are creative or even radical, none of them would entail a visible change in most people’s lives.

I love Baker’s radical idea on replacing corporate taxes, but that one is probably more fantasy.  That said, Democrats should absolutely coalesce around some of the more consensus ideas here: a (mostly) revenue-neutral carbon tax, a financial transactions tax, and the idea of taxing all types of income the same (I’m looking at you capital gains).

Obviously, getting those passed into law is anything but easy.  But they all make sense as policy and can all probably garner majority support from the public (obviously, how you sell the carbon tax is very important).

But, you know what’s a real winner?  Taxing rich people more.  Yglesias summarizes the latest Pew research on the matter:

Safe to say, getting those wealthy people to “pay their fair share” is a political winner.  Alas, politically, the problem is that, for Republicans, cutting taxes for the wealthy is their sine qua non.  Still, Democrats really ought not be afraid to hammer this point harder– the public is with them.


About Steve Greene
Professor of Political Science at NC State

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