It's the Taxes, Stupid

Today's big story with the wonks is the early reporting from the co-chairs of the deficit commission.  Brightside observations and doomsday scenarios abound.  Ezra Klein points out that this is just the co-chairs speaking. And anyway, the commission doesn't actually have any power. And Yglesias tweets:

Deficit commission proposes gas tax hike. #focusonthepositive

The main story, pathetically small gas taxes aside, is that this report provides absolutely no evidence of progressive participation in the deficit commission.  None.  Matt Yglesias highlights the most obvious slight to progressive values, arguing that "it is worth noting that raising the Social Security full benefits retirement are is [sic] basically the very most regressive way to reduce entitlement spending."  While cuts to entitlement spending (i.e. Social Security and Medicare) are surely part of any long-term deficit-reduction proposal, any changes should reflect the progressive values motivating the entitlements to begin with. Improved means-testing is an obvious example of truly progressive safety-net policy, but I don't want to get diverted by entitlement reform. In the meantime, I'll simply suggest we stop calling them "entitlements".

The story I really want to talk about here is the failure of the Democratic Party to change the narrative on taxes.  It's not like they've been caught off-guard: for decades Republicans have been arguing beyond any reason that lower taxes are always better--while frighteningly escalating fiscal deficits. Republicans have succeeded so many times in convincing the American public that taxes are too high that the Democrats have stopped trying to debate that point directly. This cowardice on the central issue of American politics is precisely why the Democrats are continually doomed to rhetorical and electoral failure.

Look, fiscal policy is hard. And most Americans' eyes have glazed-over by the time you mention the third number.  But this is terrain that Democrats cannot afford to yield.  The best primer for pretty much anyone to understand the tax debate comes in Matt Miller's The Tyranny of Dead Ideas.  You should read it, but I'll summarize the highlights of the chapter on tax policy:

• Wagner's Law: The greater a nation's GDP, the greater its demand for public services
• Tax increases are inevitable, from the current rate of 18% GDP to at least 22% GDP in the near term
• The Republicans have shown little tolerance for ideological heretics in their ranks who have publicly acknowledged the structural inevitability of tax increases
• Behind closed doors, GOP realists acknowledge that the 2025 tax rate will be in the neighborhood of 25%
• The vehicle for extracting government revenue from the economy has changed over time from tariffs to income taxes; there is no reason not to change it again.

I would merely add:

• 22-24% GDP assumes current policies (with trims), what if we want to pay back the debt?
• Progressives should expect this rate to be closer to 27 or 29%, given that they may also want to address the nation's infrastructure, energy and education problems
• Democrats could embrace the "simplify the tax code" and "tax reform" rhetoric from the other side, injecting their own values to ensure more progressive taxation than the status quo--changing the vehicle is just fine, it's the values we care about.

So what has the Obama-appointed bipartisan deficit commission suggested as goals:

• Cap revenue at or below 21% of GDP
• Lower Rates

I don't think this commission is going anywhere in the near term. But this is how badly the Democrats are losing a debate where they have the facts on their side.  Krugman summarizes the frustration among realists well:

OK, let’s say goodbye to the deficit commission. If you’re sincerely worried about the US fiscal future — and there’s good reason to be — you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies — goodies that fairly obviously, even without having the details, would go largely to the very affluent.

I mean, what’s this about? There is no — zero — evidence that income taxes at current rates are an important drag on growth.

Oh, and they’re talking about raising the retirement age, because people live longer — except that the people who really depend on Social Security, those in the bottom half of the distribution, aren’t living much longer. So you’re going to tell janitors to work until they’re 70 because lawyers are living longer than ever.

Still, I guess this is what it takes to get compromise, if by compromise you mean something the center-right and the hard right can agree on.

What is going somewhere in the near-term is the debate on the so-called Bush tax cuts (or, "job-killing Obama tax hikes", depending on who you ask).  There seems to be growing consensus on the pundit left that this is Obama's Waterloo.  And they may be right. If he does not stand up and fight--and Democrats with him--for the very tax policy that he ran on in 2008, then Democrats may lose the political terrain forever.  And the White House in 2012. 

The good news is that the conditions are right to have this fight now.  There is no doubt that extension of the Bush tax rates will disproportionately benefit the Super Rich.  Democrats' tax message must target the Middle Class.  While economic realities may lead to a slightly larger tax bill for us in the middle, that's a small price to pay for more fairness and greater fiscal solvency.  Our children will thank us.

To make this work, Democrats need to make clear that they are willing to cut spending where appropriate and go out of their way to undermine the caricature that suggests they only know how to solve problems by "throwing money at them."  Democrats also need to be receptive to market solutions--and conspicuous in doing so.

Government is a matter of priorities.  And it is the responsibility of those in government to discuss the priorities in such a way that the American people can participate in a meaningful way.  To date, the Democratic Party has shown a persistent failure to communicate with the American public on the central issue of taxes--obscuring it from the public debate on priorities.  Matt Miller wrote a WaPo column today discussing exactly the messaging I have in mind.  Miller suggests that a potential third-party candidate ("Johnson") might use honest direct language to win elections in the current environment:

"Actually, Republicans and Democrats aren't giving you an honest picture," Johnson says. "The truth is that once the economy's back on track, taxes are going to rise in the years ahead no matter which party is in power, because we're retiring the baby boomers. That means we'll double the number of people on Social Security and Medicare. We've already got trillions in unfunded promises in these programs. Even if we trim their growth, and cut other spending, which we need to do, the math doesn't work at current levels of taxation. And we can't borrow the whole boomers' retirement from China. So the idea that we can keep overall taxes where they are now, let alone cut them, is a Republican hoax.

"But Democrats are kidding you when they make it sound like we can solve the problem by taxing a few people at the top. The truth is that to pay for the boomers' retirement, taxes will have to go up some on everyone. But there's also good news - if we're smart about it, and change the way we tax ourselves, we can pay for the boomers and still keep the economy humming. That's the conversation we need to have. Here's the kind of tax reform it would take. . . ."

This need not be the message of a third-party.  Indeed, it expresses core values that the Democratic Party can still claim as its own, such as seriousness and a commitment to the Middle Class. The American public would not only tolerate such a message, they would respect it.  Just today  Progressive Change Campaign Committee released a poll suggesting that Tuesday's voters would prefer increased taxes on the wealthy to cuts in Social Security benefits. And polls can be moved.

I will have more to say about tax rhetoric in a future post.  If you're concerned about fiscal realism, you can start by signing a petition to not extend the Bush tax cuts.