Saturday, December 8, 2012

Why Are Republicans Losing the Tax Debate?

Why Are Republicans Losing the Tax Debate?

by Steven Hayward in Federal debt and deficit

In the No-Good-Deed-Goes-Unpunished Department, one of the maddening aspects of the current tax debate is that the tax rate reductions of the last 30 years have made the income tax much more steeply progressive. As the figures below from the Tax Foundation show, the total income tax burden has shifted substantially to higher income groups, while people in the lowest income groups actually have a negative income tax burden, as they collect on refundable tax credits even when they have no income tax liability at all.

Figure 1

Figure 2


Figure 3
When you see the data, several things become clear. First, the liberal “tax the rich even more” theme represents a purely punitive expression of envy—the only one of the seven deadly sins, George Will points out, that doesn’t provide even short-term pleasure. Worrying about income distribution and inequality of incomes is fine, but exactly why is taking more money from the affluent—in other words, lowering income at the top—a better remedy over finding ways of raising middle incomes? The old Ten Years After lyric from the 1960s comes to mind: “tax the rich/feed the poor/till there are/no rich no more.” Sounds likes today’s liberalism. Wait—what? “Till there are no rich no more”? Should the object of egalitarian tax policy to raise the incomes of the poor, rather than tear down the rich? What good does it do for the poor just to take away the wealth of the rich (especially when most of it goes to Washington bureaucrats rather than the poor)?
Second, raising rates on the rich has always been a liberal cover for raising taxes on everyone. Obama doesn’t seem to know much about economics, but he certainly knows that taxing the rich alone won’t begin to resolve the deficit. The real money has always been found in taxing the middle class. The great jump in federal revenues began in World War II when the income tax was changed to reach much further down the income ladder of the middle class. (See Figure 4.) This is why I think Obama actually wants to go over the fiscal cliff, slam the middle class, and blame it on Republicans.

Figure 4: Notice how the tax share of GDP jumps in WWII when the income tax was broadened to more of the middle class.
So why in the world is the GOP on the defensive in the tax debate? I’d give a simple explanation: the Left is arguing Rawls (justice as fairness), while the GOP is still arguing the Laffer Curve, that is to say, the GOP is arguing utility, i.e., raising taxes on the 1 percent hits job creators, stifles investment, and might even reduce revenues. Likewise, the argument that the Bush tax cuts made the income tax more progressive concedes the liberals’ entire premise about tax policy.
To be sure, this is an expression of the superior economic literacy of Republicans. But justice or fairness always beat utility. Republicans won’t begin to turn the tax debate around until they begin to develop the argument that it isn’t fair to place the burden of paying for the government on just a portion of the population. What exactly is fair about taking half of someone’s income to pay for out of control government? In other words, at some point Republicans need to develop an argument that challenges the idea of tax progressivity itself. That will be the ground of moving to a flat tax through fundamental tax reform.
POSTSCRIPT: In the comment section, Paul Landskroener brings up a point often made that lower income people still pay a lot in payroll taxes. True! In many cases more than income tax obviously. But two points should be kept in mind here. First, payroll taxes are essentially a form of social insurance or forced savings, not a revenue source for the general government. That is, on average you will get back for your own benefit all that you pay in (actually more in the case of Medicare; that’s why it’s badly under water over time). In other words, people who only pay payroll taxes are contributing little or nothing to the general government, i.e., defense, or Medicaid (which is not payroll tax funded), for example.
Second, as this additional Tax Foundation chart below shows, millions of low income tax filers receive more in refundable tax credits than they are paying in payroll taxes. So it remains true that millions of American are still enjoying zero tax liability of any kind on the principal revenue sources to the federal government. Fair?

Figure 5. Supply your own caption.
Recommend this Power Line article to your Facebook friends.

http://www.powerlineblog.com/archives/2012/12/why-are-republicans-losing-the-tax-debate.php

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