In 1938, the economist Paul Samuelson published his theory of "revealed preference." The concept falls into that elite class of insights so revolutionary that they now appear obvious. Consumer preferences, Samuelson argued, are best determined by consumer behavior. What people say or think they want is less important than what they actually buy.
A similar theory holds true for politicians. What politicians say or think they want is less important than how they actually vote. For instance, Sen. Evan Bayh cast a difficult vote against Obama's first budget, and he also released an appropriately tortured statement along with it. "This budget," he said, "represents an improvement from years past … [because] money we will borrow will fund important priorities like affordable health care, energy independence, job creation, and education improvements, rather than tax cuts for the most affluent." Sadly, Bayh continued, he could not support it: "Under this budget, our national debt skyrockets from $11.1 trillion today to an estimated $17 trillion in 2014."
Bayh's expressed preferences were clear. National debt reduction was of paramount importance. Below that were such priorities as "affordable health care, energy independence, job creation, and education improvements." And below that were "tax cuts for the most affluent."
His revealed preferences -- as shown by the fate of two tax changes that came before budget vote -- told another story.
The first tax change was built into the health reform reserve fund included in Obama's initial budget. Currently, Americans making more than $250,000 a year can claim a 35 percent subsidy on deductible expenses. Obama proposed to limit that to 28 percent. Lower, yes, but still much higher than the 10 percent to 15 percent available to most Americans. The tax change would have affected only 1.4 percent of households and raised more than $300 billion for health-care reform. It would not have raised the national debt by even $1.
Critics held that this plan would harm charitable giving. Some wealthy Americans, it's thought, give money to charity in order to save money on their taxes, underscoring Thoreau's dictum that "goodness is the investment that never fails." But the Center for Budget and Policy Priorities estimated that the tax change would prove only a mild disincentive. Charitable giving, they calculated, would drop by 1.9 percent. Still, some legislators remained worried. "I'd like to think that people give out of the goodness of their heart but that tax deduction helps to loosen up the heartstrings," said Rep. Shelley Berkley, a Democrat, during a Ways and Means Committee hearing.
Last week, Sens. Jon Kyl and Blanche Lincoln proposed another tax change that was also likely to harm charitable giving. The estate tax encourages charitable donations because a dollar given to charity is taxed less than a dollar left in your estate. You get more for your dollar by giving it to charity.
Kyl and Lincoln sought to reform the tax to exempt estates valued below $10 million and lower the rate on holdings above $10 million from 45 percent to 35 percent. This change would cost $440 billion over 10 years and accrue entirely to the wealthiest 0.28 percent. The tax cut would reduce charitable giving by making donations somewhat less advantaged than they had previously been, and it did not come with a source of funding. Proponents promised deficit neutrality, but only by finding the money later, they said. Even if they do find that money, that's $440 billion that could go toward paying down the deficit or funding health care or improving schools.
The contrast was almost comical. One tax change would raise $300 billion for health reform without adding a dollar to the national debt. The other would save hundreds of billions for the wealthiest sliver of Americans and carries no source of funding whatsoever. And both would slightly disincentivize charitable giving.
The outcome, however, was depressing. Charities howled over the change to the itemized deduction rules. Moderates bristled at the tax increase. "Before we raise revenue," Bayh warned, "we first should look to see if there are ways we can cut back on spending." The proposal was stripped from the budget, and with it, $300 billion in funding for health reform was lost.
The Kyl-Lincoln amendment, however, was quickly passed. Ten Democrats crossed the aisle to vote in its favor. Among them was Bayh.
That would be the same Bayh who'd complimented the budget because it "will fund important priorities like affordable health care, energy independence, job creation, and education improvements, rather than tax cuts for the most affluent" but voted against it because "this budget will increase our borrowing."
Bayh's expressed preferences ranked reducing the debt first and investing in areas like health care second. They also suggested an aversion to tax cuts for the affluent. But the revealed preferences showed something else entirely. Bayh cut $300 billion of revenue-neutral money for health reform from the budget. He then promised to find $440 billion in the budget and, rather than directing it toward debt repayment, cut taxes on the top two-hundredths of the income distribution.
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