The Coming Tax Crisis

Income tax day brings out a lot of easy symbolic stuff – Tea (Taxed Enough Already) Party rallies; hopeless Senate “Buffet Rule” votes; hopeless House “Small Business Tax Cut” votes – but the heavy damage will come at the end of the year with a lot of things that President Obama deferred until after the election. For that discussion it is worth remembering what taxes are for, beyond demagoging. Three perspectives.

1. We need to pay for government and, as Justice Holmes noted, “taxes are the price which we pay for a civilized society.” We seem to have temporarily found a way around this as 42 cents on the dollar of what the federal government spends is borrowed as a result of the “Bush tax cuts”, Obama’s increase in federal spending to 24% of GDP, and the ongoing Obama economic malaise. The Grover Norquist view is that we need to shrink government back to 19% rather than increase any taxes; the Simpson-Bowles Commission recommended three for one spending cuts over tax increases. With a $15 trillion dollar deficit, conservatives want a Balanced Budget Amendment like almost all states have. Most discussion is on the Republican side of mid-field.

2. We need a tax code which stimulates rather than inhibits the economy. Our corporate rates are the the world’s highest (for those who pay them) and encourage companies to keep their foreign profits offshore. Republican orthodoxy sometimes claims that the Laffer Curve (lower rates lead to higher economic activity and more tax revenue) offers much opportunity, but we are probably around the break-even point now. (Pick your economist.)  The personal tax code (which also applies to most small businesses) also contains decades of lobbyist-driven complication – deductions; credits; capital gains rates; dividend rates; estate taxes; alternative minimum taxes; income from Limited Liability Companies; health savings accounts; estate taxes; gift taxes; and on and on. Nobody but the lobbyists and paid tax-preparers likes it.

3. Unequal taxes can make an unfair society a bit more fair. As it is, globalization and technology have greatly increased income inequality in most countries, and we have responded by exempting almost half of our workers from paying any income taxes. (In fairness, all do pay Social Security, Medicare, and sales taxes.)  A majority of voters believe that high end earners should pay a larger share than their current 35% – a historically low rate unless you add up to 10% state levies in many Deep Blue states. Increasing taxes on somebody else is quite popular. Advantage Democrats.

The good news for Republicans, taxes will be a big issue as Romney turns from Santorum et al to Obama:

Paul Ryan and Mitt Romney recommend that we eliminate loopholes which distort economic activity and reduce rates to be about revenue neutral. If Romney wins and has a Republican Congress, there will be a battle for the right balance between the “lower the taxes” and “lower the deficit” constituencies. IMHO the Tea Party will be in the latter camp, accepting some net increases.

—  The Obama alternative – an automatic increase of $600 to $700 billion per year as all of the “Bush tax cuts” expire on December 31, Social Security taxes go back up, the Obamacare Medicare tax kicks in, capital gains and dividend taxes double or triple, estate tax levels escalate, and a whole passel of other Obama rulings take place.

The period of easy demagoguery will soon move to a real policy debate for which Romney seems the much better prepared.


My apologies for the negativity of last week’s “Deliberate Mean-Spirited Distortions” posting. Here’s David Axelrod endorsing Mitt Romney. Well, almost.

And a bonus for those who look to California to see America’s future – an opinion piece from the former mayor of San Diego.