Tax rates, exemptions
Nation must break no new tax pledge
President Obama ran on a platform which prominently featured restoring tax rates on those earning above $250,000 to levels set before these rates were temporarily reduced some 12 years ago.
Raising tax rates would increase gross tax revenues and begin reducing the federal budget deficit and, presumably, the nation’s long-term debt. President Obama won. Apparently American voters are OK with restoring tax rates to reduce the deficit.
Several prominent Republicans have recently agreed that additional revenues are required to help reduce the deficit. However, rather than restoring tax rates to increase gross revenues, they want to keep the temporary tax rates on the wealthy and reduce tax exemptions to increase net tax revenues. Gov. Romney ran on a platform of reducing tax exemptions (on the wealthy). Romney lost. Apparently American voters were not persuaded by the governor’s arguments.
Both raising tax rates and reducing tax exemptions work to the same outcome — more money for the feds. The first generates more gross tax revenues, the latter increases net tax revenues.
It is even possible that either can achieve the same revenue increase, although no one of consequence has ever publicly identified specific exemptions to be eliminated, making it impossible to determine how much money exemption reduction could generate. The common knowledge is, not a lot. But whether eliminating exemptions will generate more than, less than, or the same amount of money for the feds as restoring tax rates on the wealthy is not the issue. The real issue is that simply eliminating (or capping) some set of exemptions now to generate more money into a 10-year future is a dumb idea. It won’t work.
One person’s eminently reasonable exemption is another person’s boondoggle. Tax relief for bioresearch is the only way to keep us competitive with the rest of the world (and will pay for itself many times over) to someone in Massachusetts, while it is a boondoggle for already rich universities and big companies to someone in Georgia. On the other hand, assistance for peanut farmers ... So, clever politicians that they are, these erstwhile Republicans who put forth a “revenue-enhancing” scheme by reducing exemptions are really only playing a shell game whereby today we get some revenue enhancement, but within a decade, that enhancement will be frittered away, one little exemption at a time. Witness the Reagan tax reform. That reform purported to reduce exemptions as one of its main features. And while it did just that, what are we doing now? Talking about getting rid of exemptions!
Furthermore, reducing exemptions won’t work for the middle class in any meaningful way. A large number of exemptions accrue precisely to the middle class — home mortgage, college loans, child credits, etc. All these exemptions will be on the table.
But there is an even more important reason to eschew exemption reductions in favor of increasing tax rates. It is necessary for the good of the nation to break the Republican mantra of “no new taxes”; an artifice which replaces meaningful compromise with belligerent orthodoxy. Such blind orthodoxy from the party in power leads to bad choices and from the party not in power, to gridlock. In this specific case, it is counter intuitive coming from the Republican Party. No tax increases sounds an awful lot like price restraint — a bogyman abhorrent to any right thinking Republican. How about, no price increases. How about, no price increases on bread, on cars, yachts, gold jewelry.
It is malarkey.
Just as President Reagan started breaking the strength of labor unions by going after the least desirable such union — the air traffic controllers making north of a hundred thousand back in 1981! — it is imperative that the nation break the no new taxes pledge that has captured the Republican Party in the recent few decades by going after the most egregious example — billionaires paying a lower tax rate than their secretaries. Since at least 1986 — almost 30 years now — Republicans have been promising no new taxes — period. During this time, tax rates have been reduced several times and each time, like a ratchet on a winch, revenues just keep getting tighter. The old reasoning that reduced taxes paid for themselves in increased economic activity was disproven long ago — if not with the Reagan tax cuts, clearly with the Bush tax cuts — the temporary Bush tax cuts. Now, we are just keeping taxes low for the fun of it.
It is extremely important that some number of Republicans vote in favor of an honest to god tax increase. Even a minor tax restoration (from 35 percent to 39.6 percent) will set the example, break the log jam, force recalcitrant Republicans to look at the nation’s needs and set the precedent for addressing them in an honest, straightforward and equitable fashion.
Richard Tillberg lives in Whately.