The Return of the Tax Fairy

"The apportionment of taxes," wrote James Madison in Federalist No. 10, "is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets."

Things have gotten quite a bit more complicated since Madison's day, and today one can look at his warning in different ways, depending on where one sits. It could mean simply that we ought to watch out for legislators twisting the tax code to benefit those who don't deserve it. Or it could mean that we ought to forever guard against the rabble putting too great a burden on that most oppressed of all minorities, the wealthy.

The idea of legislators shaping policy to directly benefit their own personal bank accounts is largely a relic of a bygone era. It may happen from time to time, but today's professional political class is usually more interested in helping the patrons who put them where they are. Not that it doesn't feel personal for some people. You might remember that when Paul O'Neill, George W. Bush's first Treasury secretary, objected in late 2002 to cutting taxes for the wealthy because it would increase the deficit, he was shot down by Dick Cheney. "We won the midterms," Cheney said. "This is our due." It certainly helped the VP -- one analysis showed the Bush cuts were worth $110,932 to the Cheneys in 2006 alone.

Yet for the last few years, we haven't spent much time debating taxes. And to use a word conservatives like so much when it comes to this subject, it was a relief. However, since the Bush tax cuts will be expiring at the end of the year, we're in for another round of ridiculous arguments, disingenuous talking points, and maddening stupidity. We have already seen the return of the Tax Fairy, the absurd belief, depressingly widespread in Republican circles, that cutting taxes increases revenue. Even Greg Mankiw, chair of George W. Bush's Council of Economic Advisers, called those who believe this fiction "charlatans and cranks." But it has become almost doctrine within the GOP.

The Bush cuts, which came in 2001 and 2003, are expiring because they were passed through budget reconciliation (remember that?), and one of the rules of reconciliation is that any changes it makes can only last 10 years. So the 2001 cuts -- most important in income-tax rates, but on a few other matters as well -- will be expiring at the end of the year.

Back when the cuts were enacted, the administration and its allies in Congress spent a lot of time talking about how there were cuts for everyone (or at least everyone who pays income taxes, a crucial distinction they weren't at pains to make). They were less comfortable talking about the fact that people of modest means got a few hundred dollars, while millionaires were showered with tens or even hundreds of thousands. It wasn't just the cuts in the top rates -- the administration pushed for a series of cuts, on stock dividends and inheritances, among other things, targeted squarely at the wealthy.

When the tax cuts were passed, the prevailing assumption was that when the 10 years expired, Congress would make them permanent, no matter which party was in charge or who was president. After all, who wants to vote for a tax increase? But now, the Obama administration has put Republicans in a difficult spot. President Barack Obama's proposal is to make the cuts permanent -- but only for Americans making less than $250,000 a year, in keeping with a promise he made during the 2008 campaign. This forces Republicans to explicitly argue against a tax cut for the wealthy -- and only for the wealthy.

And whatever else Americans think about taxes, they emphatically believe the wealthy get off easy; polls consistently show around 60 percent saying the rich don't pay their fair share. If you're a conservative, how do you deal with that? The justifications shift to whatever focus groups are saying is most effective at a given moment, but the goal is always the same: Make sure that the wealthy pay as little as possible.

A few will claim that if we raise taxes on the wealthy -- in this case by moving the top rate from 35 percent back to its Clinton-era rate of 39.6 percent -- dispirited millionaires will curl up into a fetal position and refuse to do their job-creating work (Bill O'Reilly is probably the most notable proponent of this view). Others will claim that tax cuts for the wealthy are really about protecting small businesses. This argument doesn't hold water: First, only a tiny portion of people (around 5 percent) who rely on small-business income are in the top two tax brackets, the ones that increase under the Obama plan. And second, if you're a small-business owner who brought home a half million dollars last year, you're not Mom and Pop struggling to keep the hardware store open. You're a rich person, and you ought to pay the taxes that rich people ought to pay.

The final argument we're hearing in favor of keeping the Bush tax cuts for the wealthy is that we need them to improve the economy. But that argument doesn't have support either. The Congressional Budget Office recently assessed 11 different potential ways of stimulating the economy. The most effective, they found, would be increasing unemployment benefits (the unemployed, who almost by definition have immediate expenses they need to satisfy, quickly spend whatever money they get, putting the money directly into the economy). The least effective? Extending the Bush tax cuts.

This isn't new -- conservatives always argue that increasing taxes on the wealthy will destroy the economy, and cutting taxes on the wealthy will bring economic paradise. Back in 1993, when Bill Clinton's first budget cut taxes for the middle class and raised them slightly on the wealthy, every Republican in both houses of Congress voted no, and the GOP talking point of the day was that the budget would sink America into a "job-killing recession." What ensued, of course, was a period of extraordinary growth, with 22 million jobs created during Clinton's term. Then Bush cut taxes twice, and we got a period of anemic job creation culminating in the worst economic crisis since the Depression.

History doesn't matter much to these debates, because few seem particularly eager to learn from the past unless it validates the things they already believe. Which wouldn't be so bad, if the things so many people believe weren't so wrong.

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