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Thursday, September 20, 2007

"A Serious Middle-Class Tax Cut?"

National Review editor Ramesh Ponnuru wonders why Republicans are pushing tax cuts that don't benefit the Party's lower income supporters:

Taxing the Hand That Feeds Us, by Ramesh Ponnuru: Republican presidential candidates can’t get elected without owning the tax issue. So far, the current crop is giving it away. ...

Republican contenders for 2008 are promising to keep all of Mr. Bush’s tax cuts. But the Democrats are not threatening the child tax credit or Mr. Bush’s reductions in the lower-level income-tax rates. Those issues are off the table.

What Mitt Romney and Rudy Giuliani ... are really saying is that they will make sure that taxes on capital gains, dividends, estates and high earners will stay low. Not many middle-class taxpayers will benefit directly from any of those policies.

Mr. Romney adds that he will try to cut the corporate tax rate, which his adviser Glenn Hubbard calls “a drain on competitiveness.” ... Cutting corporate tax rates may or may not be a good idea, but we don’t need to make it a priority to preserve our competitiveness.

Both Mr. Romney and Mr. Giuliani speak vaguely about making sure the alternative minimum tax doesn’t affect any more middle-class families. That is a step in the right direction. But it isn’t a tax cut.

Mr. Romney has also proposed an initiative to make the return on middle-class savings tax-free. It may also be a step in the right direction, but it’s small change. The primary focus of the Romney and Giuliani tax plans remains high earners.

What would be a serious middle-class tax cut? One answer is to expand the tax credit for children. But none of the candidates is proposing to do so, or any other big tax relief for regular folks. You might think that Mr. Giuliani would want to do everything he can to appeal to social conservatives short of actually becoming one himself. But why should he offer a pro-family tax cut when even the hard-core social conservatives in the race aren’t interested? Mike Huckabee wants a national sales tax and Sam Brownback wants a flat tax. Either proposal would increase taxes on a lot of middle-class families.

The Republicans in Congress are no better. For much of the right, the great passion of the moment is to make sure that the carried interest at hedge funds is taxed at what look an awful lot like preferential rates. For years, liberals have said that Republicans talk about “family values” but won’t do anything to meet the economic needs of families. Right now, on taxes, that charge hits home. ...

Republicans believe, in general, that the tax code should generate its revenue in a way that does the least damage possible to the economy. So they seek tax reforms that cut taxes on investment returns and thereby increase economic growth. What they ignore is that we overtax investments in children, too. ... Yet the tax code does too little to recognize parents’ investments.

True, an expanded tax credit for children wouldn’t increase economic growth. Growth is good, and more growth is better. But present tax rates are perfectly compatible with healthy long-term growth. There is no pressing need to bring them down to improve growth.

A few conservative strategists have designed tax reform plans that modestly cut corporate tax rates and simplify the tax code while also helping families. (One idea is to make up the lost revenue by bumping affluent childless people into higher tax brackets.) So far, the candidates have not been interested.

As the Republican Party has gotten more socially conservative, its voter base has become lower in income. Many of the working-class social conservatives on whom the party relies are parents trying to make ends meet, or young people who want to start families but have financial worries. They have no particular attachment, or hostility, to free-market principles. A Republican Party that found a conservative way to meet their economic needs would both hold and expand its base.

As he notes, the goal of the tax cuts he is advocating has nothing to do with economic growth, i.e. this is not a supply-side economics policy (though he shouldn't be so quick to dismiss the idea that helping middle and lower income families, e.g. through improved health and education, would have a positive impact on economic growth). This attempts to buy the votes of lower income households by manipulating the tax code, and, though there is some hand-waving at revenue neutrality toward the end, implicit in the call for tax cuts is that government is too large. No surprise that a conservative holds that position, and if one must worship at the tax cut alter, there are worse proposals than to reduce taxes on middle and lower income households (see estate tax).

The problem is that this avoids the real question. At some point we have to ask ourselves, what do we want government to do for us? Given our resources and capabilities, what goods and services should government provide and who should pay for them? There are legitimate debates about the proper size of government, the extent to which the deficit should be adjusted to combat business cycles, and about the appropriate level of the deficit or surplus we should have at any point in time, and we should have those debates, but talking solely about tax cuts misses the essential part of the equation. The tax structure determines who pays - it determines whether it's the poor, the rich, this generation, next generation, and so on - but it's the level of spending that determines the size of the bill.

So don't just tell people how much they will benefit from a tax cut with charts and tables showing how this or that household will fare under a particular tax cut proposal, be honest enough to tell people what they have to give up too. For too long conservatives have sold tax cuts as though there is a free lunch - as though the tax cuts pay for themselves - and it's time for those who are intellectually honest to begin fully spelling out the consequences of their tax cut proposals. If you think government is riddled with waste and inefficiency, then point fingers and tally amounts - tell us who's lazy, incompetent, doing unnecessary things - show us there's enough waste to finance your tax cut proposal. If you advocate tax cuts to improve economic efficiency, fine, but the efficiency gains won't be large enough to pay for the tax cut. Tell us what programs will be cut, or if programs can't be cut, who will have to pay more taxes, or how much of the burden will be shifted to future generations. Maybe people will agree that government is too large, maybe not, but let's debate the real issues and quit selling tax cuts based upon misleading claims that serve to hide the true goal of the policies.

    Posted by on Thursday, September 20, 2007 at 02:34 AM in Budget Deficit, Economics, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (38)


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