When congress returns from its august recess, it will take up the battle over a modest expansion of the program that provides health insurance for children. The Senate Finance Committee will begin its fight over changing the tax treatment of hedge-fund and private-equity firm profits. In both cases, Democrats are on the side of right: expanding health insurance for kids and closing tax loopholes for tycoons.
But more striking is that the Democrats are trying to keep the fights small and manageable, while Republicans are trying to make them bigger.
In the case of the children's health program, SCHIP, Democrats argue that the expansion is a modest one, largely intended to keep pace with population growth and health-care inflation. Republicans call it "socialized medicine." But then, they call anything "socialized medicine." John Kerry's minimalist health program from 2004 was denounced in Bush campaign advertisements as putting "Washington bureaucrats ... not your doctor" in charge of health care. So, one might ask, if you're going to have to fight over "socialized medicine" anyway, why not join the fight for an ambitious universal health-care program with a large role for public programs?
Similarly, the tax loophole that hedge funds and private equity firms are taking advantage of is a consequence of a much larger inequity: the special tax rates for capital-gains income. Fund managers' fees are taxed at the capital-gains rate of 15 percent -- but why do we allow a lower rate on capital gains anyway? The old argument was that it provided an incentive for investment, but there's no shortage of capital in our economy today. Besides, the benefit goes to people who take income out of investments rather than add to it. In consequence, people who work for a living pay a much higher tax rate than those who simply collect income from their investments. Oregon Sen. Ron Wyden has argued that all income should be treated the same way. But most liberals think that comprehensive tax reform is too big a fight to take on. Closing the hedge-fund loophole is a small step; the big fight can come later.
As the political scientist E.E. Schattschneider wrote in the 1950s, the central question of politics is the scope of conflict. When a fight breaks out, do you try to expand the scope of the conflict or narrow it? There's no one answer: Sometimes the best approach is to keep a fight small and contained; sometimes it's better to expand it to bring in new allies, even at the risk of creating new enemies. Democrats, chastened by years out of power, often hope that by causing the least sacrifice to the smallest number, they will minimize opposition. Hence the narrowing of the tax fight to target just a few hedge-fund managers, or the gradual limiting of the definition of the word "rich" when Democrats say they'll end the Bush tax cuts for the rich: First, "rich" began at $200,000 in annual income, then $400,000, and recently Nancy Pelosi upped it to those earning more than $500,000.
But the result of such narrowed fights is that a small number of people, usually armed with lobbyists, are deeply aggrieved, while a larger number see little reward. Closing the hedge-fund loophole alone will not raise enough money to pay for any tangible benefit. There's no constituency that will materially gain, while a significant group, concentrated in a few states with influential Democratic senators, will be hurt. Whereas broadening the fight to take on the entire exemption for capital-gains income would potentially hurt a much broader and more widely distributed class of people (the top 10 percent of all households get 90 percent of the capital-gains break) but could raise $100 billion a year in revenue over the next decade to fund, say, universal health care. A wider fight, in this case, could be easier to win than a narrower one.
Political strategists will always make the argument for incrementalism: This step today will make it easier to achieve the bigger change tomorrow. But public policy is littered with incremental changes that never went beyond the first step and actually foreclosed the pressure for further changes.
That's because every fight tells a story: Focusing on hedge-fund managers suggests that only a few very wealthy people are ripping off the rest of us, and neglects the more basic problem of the radical inequity of our tax code. And having told one story, it can be harder to turn around and tell another one and reopen the conflict on different terms. Democrats need to remember this lesson, which the Republicans long mastered: Sometimes, it can be just as easy to win a big fight as it can be to win a little one.
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