I don’t remember that much from my public finance class in graduate school except one thing: all taxes (except politically irrelevant lump-sum taxes) cause market distortions. In other words, they all cause dead weight losses. This is true of payroll taxes, consumption taxes, income taxes, capital gains taxes. Indeed, a popular exercise in public finance is playing with models to show the basic equivalence of different types of taxes. I support a regime based primarily on consumption taxes because I think that the less we tax labor and investment, the more of it we get in the long-run, and the more we grow. I favor growth over the fool’s errand of trying to massage business cycles. But in the end, all taxes are distortionary, and it is not clear one type of tax is vastly superior to another. What I like most is low taxes and low spending.
So, if I were a political consultant, my message to the GOP would be this: soak the rich. Republicans are trying to convince people that we have to continue the Bush tax cuts to the rich because we need to grow. Why not take this issue (which almost cost Bush the election against both Gore and Kerry), combine it with the populist feelings out there, and generate support among voters who will decide this (and future) elections: middle-class independents? This group is not doing well, is angry at both parties, and is unlikely to be convinced by arguments that lowering taxes on the rich will make the lives of the ordinary Joe better off.
If I were a Republican politician, I would do the following:
- Mostly extend the Bush tax cuts for upper-income people (a sharp increase in their marginal rates at this time is bad idea–both politically and economically). This is not the time for that. Actually, there is no time for that. Point out that Democrats are in favor of this very bad idea. Even an honest Keynesian wouldn’t recommend a sharp increase in marginal tax rates for anyone, even the rich, at this point in time.
- Completely extend the tax cuts to the rest of the country and even add a few highly visible ones targetted at increasing labor demand among small businesses and at letting working people keep a little more of their earned income (something like a series payroll tax holiday for both firms and workers).
- Argue for structural change in the long-term deficit picture that would fall mostly on the rich, such as a modest means-testing of Social Security and Medicare. This is going to have to be done eventually because these programs are unsustainable otherwise. And such a change now is particularly advantageous because Democrats hate means-testing. They want to maintain the illusion these programs are “social insurance” funded by “contributions” rather than ordinary entitlements funded by coercive taxes. Making the Democrats publicly oppose having the rich pay more puts them in an uncomfortable position. Ross Perot got some mileage from this issue. The GOP could, too.
Something big, like shifting to a consumption-based system, isn’t in the cards. But trying to shed the label as the party of the rich would have great benefits in both the short and long term.
During the Bush years, Republicans lost their street cred on being the party of fiscal responsibility with extravagant pork, expensive wars, and no real attempt at fiscal discipline. Whereas Democrats remain the party of “tax and spend,” Republicans have become the party of “don’t tax, but spend anyway.” So why not turn the tables on the Democrats and steal one of their issues?
I think (I welcome support or refutation of this claim) that the rich have mostly-hardened political opinions. These changes won’t move many opinions among the rich. Yes, you will make part of your base–the part that gives you a lot of money, I know–pretty ticked, but their numbers are small and you will also neutralize a key Democratic issue and regain many of the independents that abandoned you for Obama last time around.
Conservatives don’t like penalizing those who create wealth and economic growth. I don’t either. In the long run we need to have pro-growth policies and cut back government spending. But we also need to keep politics in mind. And the lesson every revolutionary has to remember is there are more of us than there are of them.
The adage that a rising tide lifts all boats is generally true, economically speaking. But I’m OK if we sink a few yachts along the way.
PILEUS 
Ah, yes, get the party of the rich to tax the rich. As your post suggests, we can’t even get the Democrats to tax the rich. I think the rich are pretty much in control of this… Democracy.
They have unimaginable wealth, and more importantly, a civil society to support it.
Unfortunately, they cannot restrain themselves. Once in control of government, they must pretty much tear that society, our society, apart, rather than do what is necessary to maintain it. Only one thing is part with the necessary tax dollars. Another is for them to restrain their seeking of favors from government.
Neither is likely. Either they do not see the need, or they do not see how, to sustain that society.
And we already see the shape of the future. The grip of the wealthy on government is tightened with the recent Supreme Court decision on campaign finances. The free market comes to government.
Great post, Sven,
I fully agree with what you have written here. A few comments:
I always like to remind my students that, broadly speaking, there are two kinds of taxes: those we pay today and those we pay tomorrow. The GOP, under this reading, was more correctly the party of “spend and tax your grandchildren.”
As for increases in the marginal tax for the wealthiest tax payers, these rates are largely illusory (as the wealthy understand). Given the number of tax exemptions and expenditures, very few people of means actually pay full freight. I would thus favor an increase of top rates only if combined with a simplification of the tax code (one that would make the Tax Reform Act of 1986 look trifling).
On Social Security, progressive indexing is likely the best option. Tie increases for top earners to the CPI, retain the current indexing for low earners, and blend the rates for people of moderate means. Obviously, we could also raise the income cap for FICA. Progressive indexing would have a far greater role in improving the long-term position of Social Security than the alternatives. It is far more defensible on normative grounds than increasing the retirement age (which locks many African American males with lower life expectancies out of the pool of beneficiaries). Nonetheless, you have a keen awareness of the politics.
Despite the Left’s support for means testing, there is a clear understanding that a movement in this direction could transform Social Security into a poor persons’ program, thereby subjecting it to the same kinds of opposition encountered by other means-tested programs (e.g., AFDC).
I don’t think the upper classes need a government run retirement program, so I would very much like to re-conceive social security as a means-tested welfare program.
People like Ted Kennedy fought against means-testing for just this reason, that it would weaken broad support for the program. Krugman makes the same argument. We are never going to get rid of Social Security, but we can change its nature to be a program that provides retirement support for those not successful at providing for their own retirement. For a long time this is going to be a majority of the population, but we can still trim program benefits (possibly, as you suggest, by progressive indexing).
But as far as monsters in the future, SS is cute and cuddly compared to Medicare. As a group, the elderly are the wealthiest of Americans and the sickest. We need to 1. make premiums more progressive and 2. make care more cost-effective (yes, that means paying for what works not paying for what people may want).
Do you guys reject the “starve the beast” strategy for decreasing the size of government?
Problem is, when you don’t feed the beast, it just borrows food.
Until the pantry collapses on the beast. Which is beginning to happen anyhow.
I think libertarians should look at it in one of two ways — we try to rationalize the system even if doing so impinges on some cherished ends (and is more responsible) or we aim for a crisis (which starve and borrow will give us) because that is the only chance for real radical change (see New Zealand).