Sunday, July 10, 2011

Not All "Tax Hikes" Are Bad

“What Boehner’s trying to accomplish will literally change the fiscal trajectory of the country.”

-- Rep. Tom Cole (R-Okla.)

Until he changed his mind yesterday, Speaker John Boehner was headed for trouble with the talk radio set: "He's a socialist! He wants to raise taxes by $1 trillion!!! He’s betraying us!" Unfortunately, that reaction is both wrong and highly destructive to conservatism. Let’s discuss.

Here’s what happened. With the government bumping up against the debt ceiling, Obama and the Republicans are busy negotiating a debt reduction deal. On the table were two possible deals. One deal involves $2 trillion in cuts over the next ten years. The other deal involves $4 trillion in cuts, including structural changes to Medicare and Social Security. But the $4 trillion deal would have include $1 trillion in tax hikes. Specifically, this would have involved an across-the-board reduction in tax rates, including corporate tax rates, offset by the elimination of tax “loopholes,” i.e. deductions.

Until last night, Boehner was working on the $4 trillion deal and most conservatives in Congress were waiting patiently to see what was on the table before commenting. But in the idiotsphere, talk radio went on the attack without having a clue what they were talking about. They heard that this would involve “tax hikes” because the elimination of deductions will result in an increase in taxes. Increased taxes are bad. Hence: “Boehner is a socialist! Get your pitchforks!” But this is stupid. . . there is no kinder way to put this.

For decades, most people on the right have advocated reform of the tax code -- usually a flattening of rates and a simplification of the code. Remember all the talk about doing your taxes “on a post card”? Even the current Presidential candidates (except Santorum) are advocating some form of “tax reform” to “simplify the tax code.” But you can’t simplify the tax code without eliminating parts of it. And if you eliminate parts of it, then you are by definition raising taxes on the people who can no longer use the deductions you eliminate. Thus, if we accept the argument of these self-proclaimed conservative purists on the radio, then basically all tax reform will result in tax increases and should be opposed. Who knew so many talk radio guys thought the IRS code was inviolate?

We should reject this stupidity and instead look at what is cut to decide whether a particular reform is a good one. Indeed, some deductions should be cut. For example, we should eliminate any deduction that is not a generalized deduction that any taxpayer can claim. In other words, if a deduction is industry specific (or company specific), then we shouldn’t be too troubled by this “tax hike.” These are deductions that were put into the code by well-connected lobbyists to benefit individual industries or companies and they are a distortion of the free market and an abuse of power. Eliminating them is a good thing and should not be attacked as a tax hike. Examples of this include ethanol-related deductions (though Norquist disagrees), or deductions which make it cheaper to shift jobs overseas, which let companies use pre-tax money to lobby, or which allow credit card companies to deduct faked bad debts from their profits.

A classic example of such deductions are the deductions put into the code by Charlie Rangel, who gave $2.8 billion in tax breaks to British alcohol giant Diageo and who created a deduction that only four companies in the USA can qualify for. . . all contributors naturally. (see Rangel, No. 9).

We also shouldn’t be troubled by the elimination of deductions that exist for social engineering purposes, such as the deduction for the purchase of electric cars or going solar. Indeed, the government should not be using the tax code to tell us how to live and should not be subsidizing products which the free market has rejected. Again, we should not be attacking the elimination of these deductions as “tax hikes.”

The problem here, as increasingly is becoming the case, is that people who don’t know what they are talking about react to the characterization of these reforms as “tax hikes” and throw a hissyfit. If we are to remake the government along conservative lines, we’re going to have to shut these idiots up or get people to stop listening. When conservatives like Rush Limbaugh can with a straight face claim that wiping out Charlie Rangel’s friends’ dirty tax break is an intolerable “tax hike,” conservatism has lost its way and all Rush is doing is doing the bidding of the Democrats and K-Street by leaving in place a corrupt and complex tax code that is packed with handouts for the well-connected.

This is very frustrating.


Tennessee Jed said...

How true, how true, Andrew. One cannot discuss, let alone condemn any tax reform without seeing the total impact of all reforms. If, for example, the end result after all rate changes and deduction changes is that the over $250,000 group ends up paying more, then one can indeed argue they received a net tax hike as a group. But for people to go bonkers is just idiotic and one can only wonder if the Obamites put this out just mess with the conservative base (:-(

AndrewPrice said...

Good question Jed. And if that's the case, then the base fell for it hook line and sinker.

If we're going to do any reforming of the government, people are going to need to start using their brains instead of their jerking-knees. We will need to look at the big picture of each reform and ask whether it makes the government more conservative or less conservative in nature. Does it increase government power or decrease it? Does it spur growth and free enterprise or stifle it?

What we can't do is start freaking out the moment anyone finds a buzzword they can use to upset people. This is the classic example. If we follow this logic, then tax reform becomes impossible because it can always be attacked as raising someone's taxes -- and tax reform has always been a deeply held conservative desire.

We need to be smarter than this. Hold out fire until we have the fact. Provide useful guidance, not shrill attacks.

DUQ said...

Andrew, You better watch yourself or Rush and Hannity will put out a hit on you! LOL! Nice analysis though. I wish our talking heads could be this mentally clear.

AndrewPrice said...

Don't worry DUQ, bring 'em on. Seriously though, these guys need to start using their brains or people need to stop listening. It's one thing to fire up the base, it's quite another to send the base at the wrong target or make it impossible to carry out conservative reforms.

AndrewPrice said...

And DUQ, let me add: I don't know exactly what was in the deal, no one did yet. But that's the point. They should not have been attacking this deal in principle without any idea if it was good or bad. If it was bad, then by all means get the pitchforks. But to attack in principle just makes it impossible for conservatives to implement any reforms.

T-Rav said...

Sounds like this could have gone over well with a lot of conservatives and independents, especially if some of the items got the right spin. Ah well. Boehner was probably right in walking away from the deal, seeing as how Obama tried to renege on everything. Never would have expected that...

AndrewPrice said...

T_Rav, Not being involved in the negotiations, we don't know if Boehner walked away because Obama tried to reneg or if he panicked at being attacked from his right flank, but in either event, this spells the end of tax reform or Medicare/Social Security reform until at least 2013.

All in all, as I say above, I don't know what they were talking about specifically -- no one does. But if Boehner got a deal that involved across the board cuts and a wiping out of a lot of bad (i.e. distorting) deductions, then we should have been pretty happy. My point with this article is that conservatives need to gather evidence and think things through before we start attacking or we can forget ever getting conservative reforms because you can make similar complaints about virtually any type of reform of any government program.

There are always winners and losers with every change. And if we are going to say "there can be only winners" then we've basically become Democrats who are looking for ever expanding goodies.

(P.S. One of the dangers of blogging is that events overtake you sometimes. I had to completely rewrite this article last night after Boehner announced he was dropping the $4 trillion deal.)

Unknown said...

Andrew: Too many knee-jerk conservative "pundits" don't understand that reform takes time and simplifying the codes isn't simple. The only deduction I have consistently supported over my lifetime is the residential mortgage interest deduction. It encourages home ownership (a very important thing in a responsible Republic) and does no harm to renters. When I was living in an apartment in San Francisco, I refused to take the "renter's deduction" on my state taxes because it mimicked the core concept of residential ownership. BUT, that said, the Democrats (and some Republicans) have participated in screwing up the residential mortgage and banking businesses so badly that I'm having second-thought even about that deduction.

I want to see some sort of combo flat tax/federal sales tax ultimately, but it has taken 100 years to get the tax codes so complicated and the tax infrastructure so shaky that we're not going to solve it overnight. Those taking potshots at any possible compromise need to keep that in mind.

Excellent post, and a great shot at knee-jerk single-issue conservatives who won't let Boehner and Ryan have two seconds of breathing time to start dismantling the tax-and-spend mess. It isn't even simple Monday morning quarterbacking. It's Monday morning quarterbacking during the game.

AndrewPrice said...

Thanks Lawhawk, Great analogy -- Monday morning quarterbacking during the game. That's exactly what this is.

Fixing the tax code is going to be a very hard process and a lot of people aren't going to be happy when their deductions get targeted. But in the end, it's necessary. If we can shrink the tax code, i.e. make is small and simple with low rates, then we can spur economic growth and eliminate these weird distortions that are hurting some businesses, helping others, and create strange investment bubbles that keep blowing up.

But we can't do that if people get upset at the first sign that there might be anything they don't like in the reform.

At this point, I think Boehner and Ryan have earned our trust to at least get us to the proposal phase. To attack before we even know the details is just a horribly self-destructive thing for conservatives to do.

On the home mortgage thing, I don't have any heartburn over that one either because (1) it deals with something I think should be pre-tax anyway, shelter, (2) it's broad-based so anyone can get it, and (3) it does promote something that is inarguably good for everyone in society -- ownership of property. So I can excuse the distorting effects of that one. But when you start talking about money to install solar panels or a new furnace or trade in an old car or buy an electric car.... that's just government tinker at taxpayer expense.

Unfortunately, I think this has shown that reform will be very hard, even if we end up with control off the House, Senate and White House.

T-Rav said...

Well Andrew, I said that because of what I was reading earlier. WaPo mentioned that according to House sources, Obama over the past day or two started demanding more tax hikes than were being originally mentioned; plus, he started backpedaling on the entitlement cuts he had been agreeing to, specifically not wanting to touch Medicare and Medicaid any more. If true, then he either had no intention of cutting entitlements at all or the left got to him just as much as the right got to Boehner.

As for the tax "hikes" themselves, I have two problems. The first is that, as you said, we don't know what all's involved in the proposed deal. Is it just eliminating loopholes? Or is there something else? Second, I don't know that eliminating these loopholes is all that wise, at least at this point. There's no reason to think getting rid of them won't result in the added costs being passed on to customers. This would happen at any time in the economic cycle, of course, but a recession would be an especially bad time for that to happen. (Sorry, NYT, I forgot we're "not actually in a recession anymore," blah blah blah.) I agree that these loopholes do need to be cut out eventually and the tax code simplified; but just because this deal purports to do that, doesn't necessarily mean it's a good one.

AndrewPrice said...

T_Rav, I'm not endorsing the deal Boehner was proposing because I don't know what was in it. My point is that screaming about tax hikes and trying to stop Boehner from even discussing this before we even know what is going on is bad for conservatism. How will we ever reform the tax code or Social Security or anything else if we demand a total stop the first time anyone can put a bad spin on what might happen?

Conservatives should have held their fire until they knew what exactly was being proposed and then examined the proposal. But they didn't.

And by fire, I don't mean don't explain what you want to see or what you would consider a good/bad deal... but that wasn't what was going on. Instead, they jumped into the "he wants to raise taxes, he's betraying us, he's a socialist!" That's entirely unhelpful.

On whether it was Obama or the right, it was probably a bit of both, though again -- I don't know because I wasn't there. I think both sides are reaching for political cover right now with the Democrats suddenly claiming they were holding out for $2 trillion in taxes and the Republicans claiming they said "no taxes." I think both positions are designed to calm their bases and neither is probably true. That said, I don't doubt for a moment that Obama is not a good faith negotiating partner. But that doesn't mean you can't reach a deal with him, it just makes it harder. And with Boehner's base screaming in his ear, I doubt he thought it was worth the political pain of continuing to try.

Finally, on the timing, that depends on what we're talking about again. Eliminating things like Rangel's favors should be done immediately. Eliminating deductions for banks, which are showing record profits, probably won't hurt the economy either right now. So again, it depends on what we're talking about -- not all deductions are made equal.

CrispyRice said...

My knee-jerk reaction is that the Republican leadership never explains what they're doing, and the result is that Talk Radio and blogosphere, et. al. goes all knee-jerky. I haven't been following this all that closely, but I think the source of the knee-jerk was something that Bill Kristol said about Boehner caving, and then everyone went ballistic. I agree that Talk Radio has really been getting things wrong lately, but I also attribute a lot of problems lately to really poor communications on the part of the Republican leadership. Either that or the press is not covering anything they're saying.

AndrewPrice said...

Crispy, The Republicans definitely have issues when it comes to communicating -- though it's rather hard to communicate the subject of a negotiation as it's ongoing.

But the problem really is that talk radio's default setting is to believe any rumor about the Republicans selling out conservatives and then running wild with it without ever verifying anything and without ever thinking it through. . . because that gets them ratings.

What they should have done is point out the Kristol peice and then discussed what would or would not have been a good deal instead of pretending that they knew what was really going on and attacking the Republicans in these very wrong "there shall be no tax hikes" absolutes.

How are we going to make tax reforms if people get it in their heads that eliminating any deduction is a "tax hike" and a sell out?

Pittsburgh Enigma said...

I have to agree with CrispyRice that there are communication problems with the Republican leadership. If they can't get their message out (assuming they have one) through traditional media, then they're going to have to hit the talk shows hard. Why isn't Boehner going on Rush's show and explaining exactly what tax "hikes" he would find acceptable? I think most conservatives could get behind the elimination of unfair/bad tax loopholes, but if all we hear is that the leadership is going to support certain tax "hikes", we're going to assume they're plain old income tax increases. I agree that people should inform themselves, but most won't. That's the sad truth. But the Republican leadership could go a long way in addressing that problem by going on talk shows more often to get out their message.

AndrewPrice said...

Pitts, Let me respond this way.

1. I agree in principle that the Republican leadership has been bad at communicating and must get better at it. That means putting out more information and also going through people like talk radio hosts to get the message out and explain their positions. They definitely need to get better at communicating.

2. That said, here's the problem with blaming the Republicans.

First, this was an almost instant response to a proposal that didn't even exist yet -- the very defintion of a "knee jerk reaction." For Boehner to have explained this to Rush or Hannity would have required him to call them the moment he left whatever strategy meeting they had where this was first raised and giving Rush/Hannity a full explanation of something (1) that probably wasn't even fleshed out yet, i.e. for which they didn't have any details yet, (2) which they might not even have been considering seriously, and (3) which they probably wanted to play close to the vest as a negotiating tactic with Obama.

There is no way an effective leadership can run to talk radio every single time they get any sort of plan and explain it in detail just to keep the idiots from running wild as soon as someone leaks any part of it. It's just not possible. And do we really want our leadership needing to go to Rush and Hannity et al. every single time they get an idea or that someone thinks they have an idea? Who did we elect? The Republicans or Rush as leader?

Also, even if you blame the Republicans for not communicating, that still does not justify the talk radio guys running off half cocked. They had no idea what they were criticizing and yet they never once stopped to acknowledge that -- they just blasted away. That's rumor mongering and disloyalty, it is not news break, analysis or even conservative advocacy.

And let me ask this, if talk radio is going to fall for every claim that the Republicans are doing something wrong and just start blasting away, why should the Republicans work with talk radio? Wouldn't it make more sense to treat them as the enemy at that point and try to defuse them? When someone is acting irrationally and causing problems, you don't cater to them, you shut them out.

That's not good for talk radio or the Republicans, but that's where we're headed if this keeps up.

Ed said...

Andrew, Excellent point as always. It's too bad our talk radio guys don't read your stuff before they open their mouths. I would have loved to see reform, but I guess we'll have to wait for a Republican president. Do you forsee any problems then?

AndrewPrice said...

Ed, I think this kills any reform until at least 2013. The big question then will be if we can pull it off. The one advantage right now, which won't exist then, is that the Democrats are desperate to get the debt ceiling raised. That need goes away as soon as they lose the Senate and the White House. So unless we get a 2/3 majority in the Senate, you can forget most reform except through reconcilliation.

That could be a problem. But we won't know until we get there.

By comparison, the obvious problem right now is what T_Rav mentions, that Obama is not trustworthy and he could be playing bait and switch.

Nothing good in life is ever easy.

AndrewPrice said...

By the way, if you think we have problems, just be glad we're not Europe. Greece will definitely default at some point soon -- only a question of when. Italy is teetering. Spain, Portugal and Ireland are all in serious trouble and have had to do austerity plans that will kill their economies. What a mess!

T-Rav said...

Yes, that's worth keeping in mind. We are definitely much better off than Europe.*

(*For the next four or five years, anyway.)

AndrewPrice said...

T_Rav, In many ways. :-)

Indeed, I'm frankly thrilled to be an American and I mean that seriously! I love the fact I'm an American and I resent any efforts by anyone to make us more like any other people on this planet.

Ed said...

Andrew, I hadn't thought about that. I guess the pressure will be off on the Democrats to agree to anything once they lose the election.

AndrewPrice said...

Ed, You always need to look ahead to decide if you will be in a stronger or weaker position in the future. We just don't know. At this point, let's hope for a 2/3 majority in the Senate -- that would solve everything.

Ed said...

Andrew, What do you think the chances are of that?

AndrewPrice said...

Ed, No idea. There are a LOT of Democrats up for re-election and many are in moderate or conservative states. So that will help. But getting gains that large will be very difficult. The last I heard, I think people were projecting a slight Republican majority.

T-Rav said...

Andrew, I hear there's a high chance of getting a simple majority in the Senate come 2012. It's just arithmetic--way too many Dem seats in red states up for grabs, very few Rep seats that are even a little insecure. Getting to 60 will be difficult, although doable.

By the way, why does it have to be two-thirds? Why not just the filibuster-proof 60?

AndrewPrice said...

T-Rav, It has to be 2/3 because I've arbitrarily changed the law. LOL! Sorry about that. It's it 60. I've been busy cleaning up old film articles today and my mind is kind of numb at the moment. Thanks for clearing that up!

On the pending election, my first thought was that there is a real chance of getting to 60 because of the number of Democrats up for election. But none of the polling guys are that optimistic. They are all saying +3/+4, which barely gets us a majority.

Depending on the strength of our candidates and how the Presidential election goes, that could change, but right now I wouldn't put money on us getting to 60. So we may have problems after the election. Hopefully, the Republicans are thinking ahead so they can plan to use things like reconcilliation. That's not the nicest procedure, but I don't think the public really cares how something passes once it's passed -- they just care what it is.

AndrewPrice said...

Here's an interesting update:

It turns out that word of this plan, i.e. what was reported by Bill Kristol, was leaked before Boehner even had a chance to advise the other Republican members of the House.

The most likely source of that leak is Eric Cantor who is claiming credit for stopping this deal and who knew about the deal at the same time Boehner did. He and Boehner also have a testy relationship, with Cantor waiting to take over the leadership.

Here's a link to the story. It's pretty interesting stuff. LINK

Ed said...

Andrew, I read that Boehner is now denying there were any taxes. At the same time, Obama is treating us like children, telling us to eat our peas.

AndrewPrice said...

Ed, I saw that as well. At this point, we have no idea what either side was proposing, but it doesn't really matter as the deal is dead.

As for the Peas, yeah, Obama is a true orator isn't he?

CrispyRice said...

I still think the Republicans need to communicate better. And Rush made that point very well today, too! :D

AndrewPrice said...

Crispy, I agree with that, but Rush needs to look at his own conduct too. A person who spews out anger out of ignorance cannot blame his target for failing to communicate with him before he chose to rant.

AndrewPrice said...

By the way, for anybody interesting Cantor is now being credited as the guy who took down the deal with Boehner.

Personally, I find this troubling. You can't negotiate effectively if your second in command is sabotaging your efforts. And interestingly, according to Politico, Obama is apparently using this against the Republicans during the negotiations -- as any negotiator would.

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