PLANK DECEMBER 13, 2012
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There’s a great fiscal debate in Washington, and George W. Bush is winning it. In 2008, Barack Obama campaigned on a pledge not to reverse Bush’s tax cuts for the bottom 98 percent of taxpayers, a promise he has worked hard to honor. That locked in 80 percent of the Bush-era revenue losses. During the current negotiations, Obama’s initial offer includes $1.6 billion in new revenue over 10 years, which would leave intact about 60 percent of Bush’s tax cuts. Simply put, this is not enough: President Obama has conceded far too much to the policy framework of his immediate predecessor.
I’m an unrepentant Clintonian, and our current fiscal situation is one big reason why. Republicans unanimously rejected Clinton’s 1993 budget, and Democrats didn’t much like it either. But it was the right thing to do back then, and it remains relevant today. By the late 1990s, the Clinton tax code was yielding a bit more than 20 percent of GDP, roughly what we’ll need to run the government and stabilize the debt during the next decade—unless the American people are prepared to accept Paul Ryan’s budget cuts, which they aren’t. Bowing to that reality, John Boehner didn’t bother to put the Ryan budget on the table as his opening bid in the fiscal cliff talks.
I note for the record that during Clinton’s two terms, federal spending declined from 22 percent of GDP to 18 percent—the lowest since the late 1960s. So much for the Republican talking point that it’s pointless to raise revenues because Democrats will spend them—and more. A combination of tax increases and spending restraints worked well—macroeconomically as well as fiscally—in the 1990s, and with the necessary adjustments, it could do so again.
I think I understand why Obama took the position he did in 2008, and why he has held to it so tenaciously. Democrats have been on the defensive over taxes since the 1970s, and the middle class, whose incomes were stagnating even before the 2008 collapse, were in no position to absorb tax increases. But we can’t put off the day of reckoning forever. At some point, the American people will have to accept the need to pay for the government they say they want. And that can’t happen unless the middle class participates, one way or another. As Democrats like to say, it’s arithmetic.
Of course no one likes to pay taxes. Still, democracy stands or falls on the proposition that the people are capable of governing themselves, which can’t happen unless they can accept the truth. But how can they accept the truth if they don’t hear it? There’s no alternative: democratic leaders must bet on the maturity and common-sense of the people—not everyone all the time—but the majority in the long run. Surely they can understand that solvency means paying for what we want, the vernacular version of Justice Holmes’s dictum that taxes are the price we pay for civilization.
There is, of course, a reasonable debate to be had about how best to time fiscal changes. No one wants to risk strangling a still-fragile recovery. But there should be no doubt about the outlook in the long-run. Given inexorable demographics and immovable politics, we cannot hope to run the federal government on the average level of revenues—18 percent of GDP—that prevailed over the past fifty years. Even with significant adjustments in the big health care programs, we’ll do well to keep federal spending between 21 and 22 percent of GDP over the next decade. The Clinton-era tax code would bring in 20.6 percent over that period.
Few want simply to return to that code, of course, and for good reason. It’s far too complex, and it’s honeycombed with deductions and exclusions that are poorly targeted and inefficient. Instead, we need fundamental tax reform that yields the same level of revenues. That means some combination of a broader base, higher rates for many taxpayers, and new revenue sources. Forcing the income tax to bear the entire burden of increased revenues is almost certainly a mistake, which is why quiet bipartisan discussions about a carbon tax are taking places—not among elected officials, of course, but including a surprising array of policy experts.
But the bottom line is this: while we can and should ask upper-income Americans to pay significantly more, that won’t be enough to get the job done. America’s middle class will have to chip in as well. When Obama warns middle-income families that they face a post-cliff tax increase of $2000, he’s referring to the gap between what they pay under Bush’s tax code and what they would have paid under Clinton’s. (Although many Democrats have been loath to admit it, Bush cut taxes for everyone, not just the “rich.”) But in the long run, one way or another, the middle class will have to pay something more like Clinton’s taxes, or give up benefits they value highly.
If President Obama wants to set the country on a sound fiscal path, he’ll have to force the Republicans to break the Norquist pledge. And then he’ll have to break his own.
11 comments
US taxes (federal, state, and local) have gotten a whole lot less progressive over the past 25-30 years, so that today they aren't progressive at all. Even federal taxes (payroll and income) are barely progressive, and only at the bottom end. Sure, Galston is probably correct that everybody's taxes will have to go up, but the first priority should be to return to a progressive federal tax system. And that means an increase in both the number of income tax brackets and an increase in the top marginal brackets, an increase to a much higher rate than 39%. Galston might argue that it's unfair to focus on tax increases at the top, but I don't recall Galston objecting to the enormous tax increases, payroll tax increases, that ordinary working Americans have been bearing since the mid-1980s. As the taxes paid by the wealthy have been coming down during this period, the taxes paid by ordinary working Americans have been going up, and up by a lot; indeed, the tax increases paid by ordinary working Americans helped make the Bush tax cuts for the wealthy possible. I have argued that we should impose a surtax on wealthy Americans to repay the almost $3 trillion that has been borrowed from the social security trust fund over this period. Senator McConnell says we shouldn't use income tax receipts to repay the payroll tax receipts that were borrowed. So how would we repay the trust fund? That's right, with another enormous increase in the payroll tax, the tax paid by ordinary working Americans. I can hear the freight train coming, and I don't believe Galston is going to stop it.
- rayward
December 13, 2012 at 2:24pm
I agree with Rayward. At any revenue level, progressive rates are less damaging to the consumption based economy and easier for the IRS to collect. We don't need to soak the middle class as much as we need to get rid of the capital gains (and dividend) preference. It's not helping us now. When Reagan got rid of it, job growth went up and when Clinton reinstated it, job growth went down. I can understand that politicians like it because it is supposed to prop up the stock market (a key indicator of financial success for a president) but economic stability is far more important.
- Nusholtz
December 13, 2012 at 4:16pm
We have a lot more room to raise taxes at the high end. The top 10% has increased its share of GDP from 33% to near 50% since 1980. That represents $2.5 trillion in today's economy, enough to pay the entire operating budget of the Federal government. We could raise the zero bracket to $100,000 (or more), have a 50% rate above that, and run no deficit, provided no income is exempted or accorded preferential rates. Galston doesn't know how to do the arithmetic.
- roidubouloi
December 13, 2012 at 11:38pm
I don't like the idea of exempting a big majority of Americans from paying any Federal tax. It's important that everyone have skin in the game. Likewise, I agree with Galston that people need to understand the need to pay for what we buy--if Congress figured this out we wouldn't have a "fiscal cliff" to deal with. That said, I am quite sure that raising top taxes to the 40% range wouldn't crash the economy or hurt small business (even the "small businesses" like hedgefund managers pulling down seven-figures and up). Combined with the elimination of distortionary deductions and subsidies, sensible cost controls on healthcare, and rational defense cuts, the US is in a prime position for another boom. Dems would get the credit, and trickle-down economics would have a stake driven through its heart.
- Robert Powell
December 14, 2012 at 7:24am
"It's important that everyone have skin in the game." Not because that makes any sense policy-wise (it doesn't), but because it sounds like naked Twister, which everyone loves.
- Fishpeddler
December 14, 2012 at 9:29am
" . . . he’ll have to force the Republicans to break the Norquist pledge . . ." It seems to me that I read somewhere that Norquist had said that the sunset of the Bush tax cuts would not be counted as breaking the no tax increase pledge! That is the reason we need to go off the "cliff" and allow the death of irresponsible tax cuts! Hopefully when Obama proposes his tax cuts they will be both sunseted and reasonably responsible. DonMc
- NR138704
December 14, 2012 at 12:09pm
Norquist on expiration: http://www.washingtonpost.com/opinions/out-from-under-the-anti-tax-pledge/2011/07/20/gIQAoudbQI_story.html
- NR138704
December 14, 2012 at 12:34pm
I'm pleased to be able to agree with Robert Powell for a change - it doesn't happen often! The conservative hue-and-cry over top tax rates is overblown and serves mostly to demonstrate how thoroughly the GOP have fallen into their own trap. They are so terrified of suffering the consequences of legislation that they themselves passed while they controlled all three branches of government -- a tax cut bill with a sunset date -- that they turn every fight into THE fight, and forget that what they're making themselves look ridiculous over, day after day, is a lousy 5% rate hike on the 2% of the population who can best afford it according to every honest economic metric. Arguments over the integrity of principle taken to such absurd lengths are all well and good when times are flush, but in a crisis government has a responsibility to govern, and that means making deals. Americans of every stripe have had enough of the new millenium's Punch and Judy show.
- austinexpat
December 14, 2012 at 12:35pm
"I note for the record that during Clinton’s two terms, federal spending declined from 22 percent of GDP to 18 percent—the lowest since the late 1960s. So much for the Republican talking point that it’s pointless to raise revenues because Democrats will spend them—and more." For the record, Clinton enjoyed the post-Cold War peace dividend, and, with the Republican Revolution of '94, six years of adult supervision. The budget issue is sufficiently complex that any partisan can find some oversimplified statistics to support his position.
- simplulo
December 14, 2012 at 12:37pm
sorry RP, I don't buy that. Would you get rid of the EITC and deductions for children, mortgage interest, healthcare, and charity? If so I suppose my kids can survive on nothing but Ramen 6 days a week with one day of meat on Sunday. Oh, and college, that will be just for the rich. We need a middle class and the middle class of the 90's that could afford the taxes of the 90's now sees far more of their income go towards healthcare premiums and saving for college and paying for houses which most people are in underwater. Lets first get back to 6% unemployment and rising wages for the middle class before we pound them.
- blackton
December 14, 2012 at 3:12pm
blackton--no, I wouldn't get rid of the EITC and deductions for children, but I'd certainly axe mortage deductions for second homes and mortgages over, say, half a million bucks. Healthcare and charity? Depends on caps, what the healthcare environment is. And etc. Look, there's no reason a family bringing in a solid seven-figure income can't pay SOMETHING towards the commonweal, and the expectation that everyone, including the relatively wealthy, should forever take five bucks from entitlements for every three they pay in is just unsustainable. While struggling families should continue to get a helping hand, we are now in a situation in which some expect hard-working two-income families to subsidize the vacations or bass boats of people living comfortably themselves.
- Robert Powell
December 16, 2012 at 2:42am