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May 15, 2005

The Never Ending Story: Tax Cut Politics

Neil Buchanan: May 15, 2005

Taxes have always been a political cookie jar.  Few politicians, it seems, can resist the temptation to curry favor with the folks back home by voting for some kind of change in the tax code.  The spectacle has always been fascinating, if not truly strange.  Now, for reasons that are little understood—and perhaps mostly accidental—there is every reason to believe that things will only become stranger.

One of the issues roiling Congress these days is the proposal to make permanent the repeal of the estate tax.  Under current law, the estate tax is being decreased (by a combination of larger exemptions and lower rates) from 2001-2009, then eliminated entirely in 2010, then returned to its 2001 level in 2011 and thereafter.  Like many other provisions in Bush’s 2001 tax bill, therefore, estate tax repeal is set to be undone unless the law is changed.

I strongly support the estate tax.  Like many economists and tax specialists, I see the estate tax as a misunderstood and underused part of our menu of taxes.  The point of this post, though, is not to defend the estate tax but to

explore the implications of the curious procedural rule that brought us the odd prospect of a tax being reduced, then disappearing entirely for one year, then reappearing in its original form.  The rule, which was adopted for understandable (though debatable) reasons, now threatens to make tax policy and politics even less sensible than ever.

In a previous entry on Left2Right, I mentioned that Congress has at its disposal several ways to make its promises seem more reliable.  In particular, I mentioned the possibility of requiring a super-majority vote for a future Congress to change a law.  One way to create such a requirement, of course, is through a constitutional amendment.  But that is not the only way.  The U.S. Senate has imposed upon itself a super-majority rule, requiring 60 votes for any tax cuts that lose revenue more than ten years into the future.  When Bush’s 2001 tax bill was up for a vote, fewer than 60 Senators were willing to make the tax cuts permanent.  Hence, the Bush team was forced to sunset everything in the bill after 10 years.  Some provisions of that law have since been made permanent by super-majority votes, but many others—including repeal of the estate tax—have not.

The original purpose of the Senate’s super-majority requirement, of course, was to prevent a mere majority of the Senate from approving tax cuts that would raise deficits into the indefinite future.  It might seem far-fetched now, but there was a time in the eighties and nineties when Republicans were eager to prevent deficits from getting out of control.  Now, with deficit spending a key part of the Bush economic plan, one might think that these requirements for broad consensus on tax cuts would be an ironic roadblock, with Republicans’ previous procedural maneuvers now preventing them from cutting taxes—representing precisely the kind of budget discipline that the earlier Senators intended to impose on their successors, though none of them could have predicted the role reversal.  Instead, the super-majority rule has created a political goldmine, allowing Republicans in Congress to revisit tax cuts endlessly, granting single-year extensions to some laws and constantly providing grist for the anti-tax rhetorical mill.

The opposite approach is represented by President Reagan’s first major tax bill, passed by a Democratic Congress in 1981.  In that bill, Congress and the President responded to a decade of high inflation by recognizing that higher prices were pushing people into higher tax brackets, paying higher marginal tax rates on incomes that were lower in terms of buying power.  Up until 1981, Congress had simply passed a tax cut bill every few years, readjusting the tax code to undo the effects of inflation.  This approach was ad hoc and unpredictable, though, so the 1981 bill included a provision to index various parts of the tax code, in particular the cutoff points for the various rate brackets (to prevent “bracket creep”).  Such indexing allows everyone to know that, even without legislative action, the tax code will be changed each year to prevent taxes from going up inexorably with inflation.  This is good economics, in particular because it allows people to know that the tax code will be changed neutrally according to objective economic data.

The problem, of course, is that automatic indexing prevents any current member of Congress from bragging to their constituents that they voted to cut taxes.  Taxes have been “cut” in this way every year since 1981, but no one gets any credit for doing so.  While I am not aware of any serious proposals to eliminate indexing, there is every reason to believe that the Republicans in Congress and the President have awoken to the fact that long-term tax changes are not good politics.  People talk about “fixing” the Alternative Minimum Tax (AMT), for example, but in the meantime Congress has voted for partial AMT relief on a rolling one- or two-year basis.  Might we not suspect that, even if Republicans merely stumbled onto this, they are now only too keenly aware that tax uncertainty benefits them politically—that annual, piecemeal, partial, time-limited, ad hoc tax changes are exactly what they need to keep their political base engaged and hungry for more?

In the 2004 election campaign, the Bush team claimed that John Kerry had voted for “higher taxes” several hundred times in his Senate career.  Their count included every procedural vote on a tax bill, as well as votes against tax cuts (not just votes for tax increases).  We can expect the future of tax politics to take that logic and push it to its extreme.  Having taxes constantly on the front burner means that every member of Congress will be faced with a seemingly endless series of votes to cut taxes.  Every vote against a tax cut—no matter how small the cut or how ill-advised the policy—will be a political liability.  Keeping various taxes just alive enough to force regular votes on them could be Karl Rove’s fondest dream.

The estate tax itself might well be the exception to this new rule.  It has become a big-game trophy, and the anti-tax Republicans have long been hungry to taste victory.  On the other hand, a compromise might keep the estate tax barely alive—and on the political agenda.

Either way, though, my expectations for fundamental simplification of the tax code have never been lower.  We no longer have politicians who merely want to add special provisions to the tax code to benefit certain constituents.  Now we have a majority party that is simply addicted to tax cut politics.  They do not want to cut taxes once and for all.  They want to be permanently in favor of cutting taxes.  The result will be an even bigger tax mess than we already have.


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Posted by: bakho

This may be good politics, but it is no way to govern.

Posted by: bakho | May 15, 2005 1:29:03 AM

Posted by: D.A. Ridgely

I question whether the tax code is really any more convoluted than it has typically been in the past and would be interested in knowing what evidence Mr. Buchanan has to support that claim. I question, also, whether it makes all that much difference whether its complications arise from targeted favoritism to various pocket constituencies or to recurring, more broadly based tweaks to the code. I might indulge in just a touch of whataboutery here, too, and note that it is hardly only the Republican Party that finds itself in diametrical opposition to positions it took several decades ago. (Filibusters spring to mind here.)

Mostly, however, I have to question Mr. Buchanan’s dark suspicions about the possibility that the current Republican Party is comprised of sufficiently intelligent leadership to come up with the clever scheme he imagines. Oh sure, there’s the obligatory mention of Karl Rove, the conservative evil genius but for whom the Stupid Party’s mean IQ would apparently plummet a standard deviation. (Isn’t it a shame the Democrats haven’t found a suitable evil genius of their own who... oh wait, they did! His wife has carved out a nice little political career for herself now, too – and all on her own merit, just like W did! – and according to Mr. Velleman he’s definitely not sui generis, either.) Frankly, however, I find little reason to believe there’s very much high voltage brain power on either side of the aisle these days. On the other hand, while I’d much prefer overall permanent tax cuts, I suspect the average taxpayer and voter doesn’t much mind how Congress goes about lowering taxes as long as they continue to be lowered in real terms.

As for the estate tax, it will come as little surprise around here that I favor its repeal. Then again, I’d prefer a far more limited “tax menu” than I suspect Mr. Buchanan thinks appropriate and an altogether leaner cuisine for the federal government to nibble on.

Posted by: D.A. Ridgely | May 15, 2005 2:14:36 AM

Posted by: Glen Raphael

Uncertainly benefits both parties, which is why the tax code changes every year regardless of who is in power and why many "tax simplification" efforts make taxes more complicated. The Democrats just use different talking points and aim them at different constituencies.

Applying the same principle to the left during periods when it held the balance of power, we'd have to conclude that Democrats don't want to reduce poverty, they want to be permanently in favor of reducing poverty. Hmmm...

Posted by: Glen Raphael | May 15, 2005 5:39:17 AM

Posted by: Tad Brennan

Mr. Raphael--

Your suspicion about Democratic demagoguery on anti-poverty programs strikes me as plausible--I am sure that "during periods when it held power" there were parts of the Democratic leadership who were more interested in being visibly in favor of anti-poverty programs than they were in actually addressing poverty. Might even still be some.

On the other hand, there is also a vast difference between the cases. There was never a time (and will never be a time) when by a simple act of Congress poverty and its ills could be eliminated from our country. Governmental power is very limited in this regard; I think it is capable of doing significant good rather than being doomed to make things worse (which makes me a liberal), but even I think that the main determinants of the equation lie with the economy as a whole, with culture, and with personal choices.

That means that even a Democrat who set out to retire the anti-poverty program as a political issue, and take that winning issue off the table forever, would not be able to do it by passing a bill.

Mr. Buchanan's hypothesis is that the Republicans could take the political issue of taxes off the table by passing a bill, and don't.

Posted by: Tad Brennan | May 15, 2005 8:29:20 AM

Posted by: john t

Glen Raphael's point is quite appropriate. When Hillary Clinton took office in 1993,unoffically, one of the things she was interested in was federal job training programs,people being unable to train themselves. At the time their were 161 such programs,unsuccesful because they hadn't beeen funded properly,they are always unsuccesful because they are always underfunded. Or so I'm told. Well,Hillary moved on to bigger and worse things but the point about revisiting,recreating,and renaming federal programs is made,Kiddie Care,an extension of Medicaid,being another example. I wonder about the comment oftaxes being "cut",quotemarks in the original,by indexing. If serious it would be accurate to say an artificially induced tax increase is avoided rather than taxes being cut. On the Senate's super majority as a preventive to tax cuts causing deficits,it's Groundhog Day all over again. You have to spend it before you have a deficit. Please, think about the fact that both parties love to spend,one party more than another,the party whose name I dare not mention.

Posted by: john t | May 15, 2005 8:46:04 AM

Posted by: Brian Weatherson

think about the fact that both parties love to spend,one party more than another,the party whose name I dare not mention.

On recent evidence, I assume you mean the Republican party. Or do you have have any cases of the Democrats putting forward as many big-spending initiatives as the Iraq war, the $500 billion Medicare expansion, the Social Security privatisation which could cost as much as $2 trillion, etc? Republicans have had both houses of Congress and the White House for a bit now, if they aren't the ones who want spending, then Federal spending should have fallen by enormous amounts by now right? The evidence of this is, er, minimal.

Posted by: Brian Weatherson | May 15, 2005 9:31:26 AM

Posted by: D.A. Ridgely

Mr. Brennan:

I think you offered a good response to Mr. Raphael’s claim. On the other hand, might it not be both more fair and more accurate to acknowledge that the extent to which any party in power can make sweeping changes to the status quo is limited by a variety of other political realities? After all, it isn’t as though LBJ’s War On Poverty wasn’t sold as a program that actually would eliminate poverty in America, and it seems to me that the mainstream left has been rather late in arriving at the conclusion that the government might not, after all, be able to create the sorts of utopias the world was promised in the 20th century.

I mentioned the threat of the filibuster in my earlier post, for one. Then, too, the current slim Republican majority in Congress counts at least three or four RINOs in its ranks, just as Democratic majorities have typically included at least a handful of (and in the days of the Dixicrats, quite a few) conservative members. Gaining and keeping a majority in Congress and winning and keeping the White House requires making compromises and accommodations to the demands of weak districts and aggressive interest groups and this is a reality for both parties.

Moreover, if we non-leftists are routinely lectured about how the left is by no means monolithic, marching in lockstep to the whims of its titular political leadership, might we not acknowledge the same of the right? The overwhelming majority of my personal acquaintances on the right have been unalterably opposed to the domestic and spending policies of the Bush Administration, most have been just as worried about the demands of the social and religious conservatives’ influence as several of the authors of this blog, and roughly half have been opposed to the Iraqi war. Thanks to 9/11, Bush emerged with considerably greater power than we might reasonably have expected him to enjoy after his initial election, but no president, including the likes of FDR and LBJ, has been able to force his entire agenda on the nation. (To which even the most diehard atheist should shout “Thank God!”)

In the case of tax reform, the “tax menu” of which Mr. Buchanan spoke is intentionally designed, in my opinion, to conceal the extent to which individuals are burdened by taxes. Corporate taxes, for example, are simply passed through to consumers in the form of higher prices and to stockholders in the form of lower dividends or retained equity (and let’s remember that those stocks form the basis for countless working class pensions in this country). Estate taxes, which Mr. Buchanan claims are both misunderstood and underused, together with capital gains taxes and other investment income taxes have typically been set at a far higher level than the average federal income tax rate under the dubious assumption that one is somehow more entitled to earned income than to other sources of income. The Earned Income Tax Credit is simply working class welfare, just as FICA is simply middle class welfare posing (successfully, given some of the threads on this blog) as insurance or an investment. And on and on.

People, including some very well educated folks, buy into these taxes and their dubious rationales over time. More importantly, they also buy into and come to expect the various forms of tax relief to which they have become accustomed; for example, mortgage interest deductions. The political reality is that people fear drastic change and that, while they are all for tax reforms that don’t threaten what they perceive to be the deductions they receive, they invariably balk at the sort of sweeping reforms that would be required to rationalize the process and that therefore necessarily do eliminate those tax breaks. Furthermore, vested interests (from both right and left) vastly prefer playing hide the ball with taxes and continue to exert untoward influence in politics.

All politics may or may not be local or personal, but all politics certainly is short-term. Moreover, even a cursory perusal of the public choice literature provides a fairly compelling basis to conclude that professional politicians can be relied upon to act, first and foremost, in their own best interests. Insofar as that is so, whether the public is well served as a result is largely coincidental.

Posted by: D.A. Ridgely | May 15, 2005 9:33:52 AM

Posted by: john t

Brian Weatherson, search my post as you will you won't find anything in it that precludes Republican spending. Amazingly,and it is amazing,the very quote you use says"both parties love to spend". I do assert that the party whose name I still dare not mention,for fear of being responsible for inflammation of certain brains,is the even bigger spenthrift. The historical evidence for this is,er,maximal.

Posted by: john t | May 15, 2005 11:19:04 AM

Posted by: Sans Serfs

I for one see nothing wrong with always being in favor of reducing taxes to the extent practical. IE consitent with necessary expenditures and priorities. That's a winning political message. The problem is that there is no political control over "to the extent practical" clause in the first sentence.

It seems that there is some kind of differential bewteen the executive and legislative branches in terms of the leverage of the tax cut message. It seems to work well for presidential candidates. Senators and Representatives, even conservative ones, seem to be a little more leery of this message, possibly because tax cuts reduct the amount of pork there is to dispense, and makes budgeting in general difficult.

The question is: where is the feedback mechanism to prevent growing deficits? IE if the executive branch can claim it cut taxes and the legislative branch can increase spending to fund their popular programs and dispense more pork, they both win. Only bean counters will complain about the deficits, at least at first.

It probably will take a market based event [dollar collapse, extremely high interest rates, etc] to force a painful resolution of this problem as there is no inherent governing control in place.

This is the fundamental argument for putting in place some type of automatic budget balancing mechanism..although that in itself is a pretty messy topic.

Posted by: Sans Serfs | May 15, 2005 2:38:46 PM

Posted by: john t

Sans Serf, there are a number of mechanisms in place already;treasury instruments,the market for and the marketabilty of same,the rates and more importantly the yield of same,the dollar,internationaly traded,the impact on other fixed income securities,and inevitably the income tax [we're doing this for the children ] and public reaction and awareness. There are probably others but don't wait for any kind of federal action. That's like waiting for the criminal to put the handcuffs on. Remember what happened to the proposed Balanced Budget Amendment in 1995?

Posted by: john t | May 15, 2005 4:26:27 PM

Posted by: Sans Serfs

Yup I agree - an event in the Treasury or FX markets will in all likelyhood prompt the change here. But that will be pretty painful: since spending never really gets reduced, you'll end up increasing taxes to balance the budget at a time where interest rates are rising and the dollar dramatically weakens. Not a rosy scenario...

Posted by: Sans Serfs | May 15, 2005 4:42:02 PM

Posted by: neal

I agree with estate taxes. Today it is difficult to imagine the extent benefits of taxpayer dollars on wealth creation and hording.

The tax burden has been shifting to the middle class, with regressive social security increases, lower capital gains, and lower corporate earnings taxes.

A stiff inheritance tax, say 75% above 2 million or so is a great way to ensure that successive generations continue to innovate and add value with the property and wealth accumulated by their ancestry.

Posted by: neal | May 15, 2005 10:58:00 PM

Posted by: Sebastian Holsclaw

The problem with American fiscal policy is that huge swaths of the electorate really truly do want more government spending AND lower taxes. Traditionally there has been the big spending party that is willing to raise taxes somewhat (but not enough to cover the enormous spending) and the tax cutting party that wasn't quite willing to cut enough programs to make up for the tax cuts. Both were dangerous, but the modern truer reflection of the US public which is going for bigger spending and lower taxes--both at full throttle, has the makings of a real disaster.

Posted by: Sebastian Holsclaw | May 16, 2005 2:51:47 AM

Posted by: murky

This is a lot worse than just frivolous use of legislature. It's an insidious method of distracting citizens from the things that matter, including how well legislators are doing their job.

Posted by: murky | May 16, 2005 8:11:05 AM

Posted by: Bret

D.A. Ridgely wrote: "As for the estate tax, it will come as little surprise around here that I favor its repeal."

Well, it may come as a little surprise. Given that even the ultra-minimal night watchman State requires some funding, and surely one's right to self and property ends at the grave even for an ardent Nozickian style Libertarian, aren't estate taxes one of the best and fairest methods of funding government?

Posted by: Bret | May 16, 2005 12:29:09 PM

Posted by: Stuart

Bret, you neglect that one of the stronger drives for wealth creation is the ability to pass stuff on to one's kids. That's not an argument for abolition of estate taxes, but it is an argument for a better system than the one we have.

The most compelling argument against estate taxes is that the wealth has largely been taxed already. The stuff that hasn't been (capital gains) steps up in basis, which is at odds with the idea of taxing what hasn't been taxed yet. Strange.

Posted by: Stuart | May 17, 2005 11:08:41 AM

Posted by: SamChevre

I think inheritance taxes are much fairer than estate taxes, but I'll leave that point for another thread.

I've wondered about tax politics for a while; why don't we use the solution that is used in other areas to avoid targeted legislation when that conflicts with government needs. For example, "fast track" trade authority, or the Pentagon basing commission; some expert group decides what the package is, and then Congress votes up or down without any possibility of amendments. It seems like this would be a desirable wayt o handle tax policy as well; let some expert commission propose a tax code (with, say, 3 sets of rate scales to raise different amounts of revenue) and then let Congress vote on the package, without amending it.

Posted by: SamChevre | May 22, 2005 9:43:56 PM

Posted by: Benito Ribbentrop

Establishment Bank Robbers

What do David Rockefeller, Stanley Fischer, Paul Wolfowitz, and Alan Greenspan have in common? They are the world’s most notorious bank robbers. Unlike the average bank robbers, they rob banks from the inside, not the outside.

David Rockefeller is the “Boss” of the Establishment. That old geezer is the “Big Daddy” of the New World Order. That old geezer is the founder of the Trilateral Commission and an honorary chairman of the Council on Foreign Relations. “Big Daddy” Rockefeller controls trillions of dollars in money. Since “Big Daddy” is too old (and lazy) to rob banks, he gets his partners Fischer, Wolfowitz, and Greenspan to do the dirty work for him.

Stanley Fischer is the new governor of the Bank of Israel. Stanley Fischer is a member of the Council on Foreign Relations (CFR); his name appeared on the 2004 membership roster. Stanley Fischer is also a member of the Trilateral Commission. Stanley Fischer even attended a Bilderberg conference in 1998. But why Stanley Fischer? Stanley Fischer was the former vice chairman of Citigroup and a director on the International Monetary Fund. In another words, Stanley Fischer is a bank robber, I mean, banker.

Now what is the “Bank of Israel?” The Bank of Israel is Israel’s central bank. The Bank of Israel in Israel is the equivalent to America’s Federal Reserve System. The Governor of the Bank of Israel is the equivalent to the Chairman of the Federal Reserve. Coincidentally, both Stanley Fischer and Alan Greenspan are members of the Council on Foreign Relations. Greenspan was a former Trilateralist. Greenspan, like his partner in crime Stanley Fischer, attended a Bilderberg conference.

Earlier this year, Israeli Prime Minister Ariel Sharon appointed Stanley Fischer to become the new Governor of the Bank of Israel. This leads to one conclusion so far; Stanley Fischer is a dual citizen of America and Israel. If Stanley Fischer is not an Israeli citizen, then Ariel Sharon is simply a puppet who receives his orders from the Establishment in New York and London.

The current “master” of the World Bank is Paul Wolfowitz. Paul Wolfowitz was the deputy secretary of defense during President George W. Bush’s first term. Wolfowitz is a member of the Council on Foreign Relations and a former participant in the Trilateral Commission. Wolfowitz attended the Bilderberg conference earlier this year.

Alan Greenspan is the current chairman and “master” of the Federal Reserve. Greenspan’s partner in crime Timothy Geithner is the President of the Federal Reserve Bank of New York. Geithner, like Greenspan, is a member of the Council on Foreign Relations.

Think about the money trail. There is a money trail that begins in Washington D.C. and ends in Jerusalem (or Tel Aviv). In most cases, the money trail takes a round trip back to Washington D.C. This money trail comes in the form of “foreign aid.” Every time those swindling politicians in Washington give money to the swindling politicians in Israel, the money ends up in the bank vault of the Bank of Israel. How do the Zionist bank robbers at the Bank of Israel receive so much extortion money every year? Easy. They simply debauch the Israeli currency and inflate the value on the currency, thereby making the currency worthless. As the Rothschild family learned, those who control a nation’s currency controls a nation’s destiny.

In most cases, the “foreign aid” money that the Israeli-Zionist bankers receive from Washington ends up in the coffers of the World Bank, which is located in Washington DC. In this case, David Rockefeller and his gang of thieves maintain control of the “foreign aid” money and use the “foreign aid” money that was supposed to go to Israel as an economic weapon. Rockefeller and his bank robbers Fischer, Wolfowitz, and Greenspan are hoarding the “foreign aid” money until there is a major crisis. When a major crisis erupts, Rockefeller and his fellow bank robbers will inflate and debauch the currency, pick the average people’s pockets, establish their “New World Order” and run with their loot as fast as they can before they get caught.

What better ways to create a New World Order and enslave the people than to get stupid government officials (i.e. Bush and Sharon) to appoint three CFR members to control three of the most valuable banks in the world?

There is no doubt David Rockefeller, a CFR member and Trilateralist himself, is laughing his ass off right now. That’s right. That old geezer Rockefeller has been dreaming about establishing a New World Order. David Rockefeller once said: “We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the New World Order.”

Right now, there is violence between the Israelis and the Arabs. As U.S. Marine Corps General Smedley Butler once said, “war is a racket.” So, who exactly is benefiting from this racket? Who is getting rich quick from this splendid little racket and who is getting rear-ended? In the end, David Rockefeller and his gang of thieves at the Harold Pratt House who will benefit from this “sweetheart” deal, and it will be the average Americans and Israelis alike who will get screwed real hard.

Speaking of Israel, who does a better job of screwing and betraying the Jews: Ali Baba and his forty thieves or the International-Zionist bank robbers?

Posted by: Benito Ribbentrop | May 24, 2005 6:21:37 PM

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