Saturday, February 28, 2009

The Case For Higher Taxes

If you followed the debate in Congress (such as it was) as the stimulus package made its way to President Obama's desk, you may recall the GOP attempt to reshape the bill. It consisted of an "amendment" that was, for all practical purposes, an entirely new and different proposal, sharing only its price tag with the original. As "amended," with the exception of a modest extension of unemployment benefits, the package would consist entirely of tax cuts.

Not surprising, none of these tax cuts would be paid for with any reductions in spending; GOP tax cutting proposals seldom, if ever, are paid for at all. As it has been for three decades, the prevailing view is apparently the same: Tax cuts are self-financing, and require no sacrifices at all. Rather, they require the boundless optimism of Ronald Reagan, the "patron saint" of boundless Republican optimism (and other worse things, a subject for future posts). If only, the Gipper told us, we got government "the hell out of the way," the spirit and the initiative of the American people would magically do the rest.

Reagan's view may have had some resonance in 1980, at a time when a significant number of Americans felt that government had grown too big for its own good, as well as theirs. Even so, his view barely won him a majority of the popular vote against a deeply unpopular Jimmy Carter (as well as John Anderson, a limousine-liberal darling). Moreover, his own willingness to follow through on his words was somewhat compromised by harsh reality; as enacted, his initial tax-cutting proposals ballooned the national debt, and needed to be subsequently revised and largely reversed. It was these revisions, combined with the tight-money policies of Paul Volcker (appointed as Federal Reserve chairman by Carter, not Reagan) that really sparked the economic boom of the mid-1980s.

Another "harsh reality" compromising the gospel of tax cuts was the success of the Clinton Administration in bringing the federal government into surplus for the first time in decades. While the dot-com bubble played a role in making this happen, the foundation for the surplus was laid with then-President Clinton's budget plan which (gasp!) included tax increases. For that matter, the dot-com bubble followed the rapid expansion in the 1990s of Internet service, which was enabled to a large degree by legislation promoted by the then-Vice President, known to some of us as the real 43rd president of the United States. Al Gore may not have invented the Internet (he never said he did), but he had a major hand in promoting its growth.

So much for the argument that tax cuts always produce growth, and tax increases always kill growth. As the last eight years have taught us, however, truth on the ground--or anywhere else--is not what gets the Republican Party or its conservative supporters out of bed in the morning. One can easily imagine them doing a commercial, with reworked lyrics from an old food commercial:

Tax cuts in the morning,
Tax cuts in the evening,
Tax cuts at suppertime!
With tax cuts on the table,
You can have tax cuts every time!

If you need further proof of this, you can turn to the magazine section of tomorrow's New York Times. It contains a lengthy profile of Newt Gingrich, and his allegedly brilliant brainstorming with the GOP minority in the House of Representatives. (Remember Newt's "brilliant" stint as Speaker? Exactly my point. But let's move on.) Here's a sample of how Newt's "brilliance" doesn't exactly outshine the sun: He proposed substituting Obama's stimulus package with a three month federal tax holiday, for roughly the same price tag.

You might be forgiven for thinking that this repackaging of yesterday's dried-up goods shouldn't play in Peoria, or anywhere else for that matter. But, if you're a True Believer, it has the power of plutonium. Consider the following assessment of Gingrich by what the article describes as one of his proteges, a Wisconsin congressman named Paul Ryan. As quoted by the Times, Gingrich, according to Ryan, is "a total idea factory ... The man will have 10 ideas in an hour. Six of them will be brilliant, two of them are in the stratosphere and two of them I’ll just flat-out disagree with. And then you’ll get 10 more ideas in the next hour.”

Really, Congressman Ryan? Or will they just be ten more variations on the same, worn-out theme? The one that has been discredited by reality, over and over again? The one that has landed you and you party on the south side of both power and history?

The fact is that experience, including recent experience, makes the case for higher taxes, and absolutely nothing makes the case for cutting them. We have (a) a multi-front war against terrorists to fight, (2) a culture of excess consumption and financial corruption to cure, (3) multiple obligations to our most vulnerable citizens to meet, and (4) a credit crisis created in no small part because paying for (1), (2) and (3) were ignored for far too long. And all of us deserve some share of the blame for the ignoring. These are society's problems, and they can only be solved by society, working together. The system in which that happens is called democracy, and if some idiot ranting in the dark named Rush Limbaugh wants to call it creeping socialism, just remember to respond "You should know, Rush. You're pretty creepy yourself."

Experience, however, is a very cruel teacher, and the explosive growth of the national debt over the past 30 years is the cruelest reminder of all that tax cuts have not delivered the benefits that were promised. They have not been self-financing. They have not paved the way for a better future for America. And they have, subtly and not-so-subtly, eroded the standard of living for everyone, in the form of higher interest rates and degraded public benefits. I was around back then and trust me: You were better off 30 years ago.

But let's say you're talking to someone for whom reality, harsh and otherwise, simply isn't a reference point. You know these people. They're called the Bush Administration, and its amen corner in the right-wing chattering classes. Not to mention not a few of the people who voted for them and paid their bills.

Most of these people would call themselves business people. So much so, in fact, that they like to lecture people on the proposition that "government should be run just like a business." Well, I help run a business, and I seriously doubt that I could talk my partner into the idea that, if we took deep cuts in our fees, our ability to solve our clients' legal problems would geometrically grow like magic. (Yes, we're lawyers; we're also married, which compounds the problem of talking her into the idea, and rightly so.) But, guess what? Most of those business people don't run their businesses that way either. They ramp up their prices as high as they can for as long as they can.

And, when they get the private-sector equivalent of a "surplus," aka "a profit," they don't say "Oops! We overcharged! We're giving it back to you, because YOU make it all possible." They don't do that in part because it's smarter for themselves AND the people who make it possible to plow that "surplus" back into the enterprise and make it better, stronger, more efficient and more economical for everyone. (And they keep not a little for themselves; hey, even capitalists have to eat.) By the exact same token, government that runs a surplus should pay down debt, improve existing programs and THEN (without burdening anyone) fairly reduce taxes for all. Any private-sector analogy that argues to the contrary only exposes its own self-serving hypocrisy.

So much for the business-model argument. But their is also, of course, a strong populist argument in favor of higher taxes as well. That's the fact that lower taxes for the upper 1 to 5 percent of the population trickles down to no one. Instead, it trickles into the deeper pockets of the upper 1 to 5 percent (U1T5P hereafter)--except, of course, when it gets invested in offshore enterprises, or into Ponzi-style, get-richer-quick schemes. The truth is that 30 years of "supply-side" tax cutting has done nothing more than given the U1T5P more money than it knows what to do with. It certainly didn't fuel the only real growth industry apart from the Interet during that time, mergers and acquisitions. That was fueled by credit, which in turn could not be paid for by the resulting enterprises. Sound familiar?

The real patron saint of Reaganomics is not Reagan, or Arthur Laffer (no economist ever had a better last name). It's Bernie Madoff. Borrow now, live high, and get out before the crash comes. That's what happens when tax cuts cause wealth to trickle upwards from productive working people to unproductive, unprincipled con artists.

I started this entry (and, if you've made it this far, thanks for hanging with me) by talking about 30 years ago, and the then supposedly prevalent fear of big government that launched the so-called "tax revolt" in California. There, the late, unlamented Howard Jarvis co-sponsored a ballot initiative called Proposition 13, designed to cap property tax rates. His argument: the only way to prevent politicians from not using taxpayer money is to not give it to them in the first place.

Maybe. Maybe the only way to stop rich people from abusing your future with your money is not to give it to them in the first place. Here's hoping that we give that a try over the next four years.