We Can’t Always Get What We Want: Why Governing Americans is So Hard
The conventional wisdom is that Americans are fed up with their government. But our demands on policymakers are so inconsistent and irrational that we make governing nearly impossible. We hate big deficits, but oppose the actual tax increases or spending cuts that we need to dam the flood of the red ink. We are furious that government passed an $800 billion stimulus last year, but feel lawmakers are not doing enough to get the economy going. We want government to “do something” about the gulf oil spill but reject government interference in private business.
And that’s just the beginning. Conservatives cry “states rights” when it comes to the new federal law requiring individuals to have health insurance, but are silent about the parallel federal requirement that insurance companies must sell to all comers. Liberals want to make Social Security benefits more generous, but only as long as they are paid for with higher taxes on the wealthy. Seniors oppose the “government take-over” of health care for those under 65, but will fight to the death to preserve their (government-run) Medicare.
We oppose new spending, but happily support targeted tax subsidies that are economically no different. And governors of both parties demand more federal money to pay their teachers and fund their Medicaid programs, but would rather complain about the accompanying red tape rather than repair their budgets by rationalizing their own hopelessly outdated tax systems.
We are, collectively, four. We want what we want, and we want it now. And we want somebody else to pay for it.
A new Washington Post-ABC News poll provides new evidence of our schizophrenia. Fifty-seven percent of respondents oppose the federal government spending more money to boost the economy. But 62 percent want Congress to extend jobless benefits for the long-term unemployed. Go figure.
Americans are not stupid, and in fact their collective wisdom on public policy is usually pretty sound. But the nation faces immensely complex policy issues at a time of severe economic turmoil. Americans are nervous and uncertain. They want change, a mood that both presidential candidate Barack Obama and the tea party have successfully tapped. But change also makes people very uncomfortable, especially when they already feel insecure. So we want to move in a new direction and are simultaneously terrified about what it would mean.
Politicians sometimes talk about having an “adult conversation” with the public about difficult issues. But they rarely do. Eighteen years ago, Ross Perot tried to have one on fiscal policy. He came in third in that year’s presidential election. Twenty-six years ago, Walter Mondale said he’d raise taxes if elected president. He won one state. Ronald Reagan, who painted a gauzy picture of morning in America, won 49.
Obama has not forgotten those lessons. That’s why he said so little about the need to control medical costs during the health reform debate, why he vows to raise taxes only for the rich, and why he describes climate change legislation as a jobs bill rather than what it ought to be, an effort to reduce consumption of oil, gas, and coal. Like Reagan, he hopes to build his reelection campaign around flowers and bunnies.
Maybe Obama should try some honest talk about fiscal issues. Jack Lew, his choice for Budget Director can help. No doubt our constant and inconsistent demands for a free lunch won’t make it easy. On the other hand, the way things are going for the president and his party, a candid chat or two couldn’t make matters much worse.
Some of our fiscal wounds are self-inflicted. Take, for example, the insistence by some that higher tax rates for the upper-middle class and the wealthy damage hiring. This is obviously not the case, since for now at least, wages paid to employees is deductible on the owner's taxes.
Last night, as I was flipping through the channels, I came across Senator Grassley's comments on how allowing tax rates to increase would damage incentives. I posted the following on my blog in response (I also sent these comments to Senators Webb and Warner):
…Then it hit me, what motivates Senators?
Campaign contributions – and in Grassley's case, seemingly contributions from people who want lower taxes. This makes it easy to devise an example that Grassley can understand.
Let's suppose that in our example, Virginia did not have fixed conformity (meaning that what's taxable here is what's taxable federally). Instead, imagine that Maryland, the District of Columbia and Virginia all passed legislation making contributions to members of the Senate taxable at a rate of 30%. I say all three jurisdictions so that no one can simply cross the border to evade the tax with their grip and grin. Assume also that they considered contributions raised in the home state taxable income for Senators living part year in the national capital area – closing all loopholes.
What would most Senators do? Would they decide that they don't need the extra money for their campaigns because it is being taxed? Buying Grassley's logic, you would think that would be the case. (Obviously he has not asked either his wife or my wife about the acceptability of working less when your income goes down.) The reverse is actually true. If the tax man taketh, the Senator will lean harder on more donors to make up the loss. So do small businessmen and households. The amount of money anyone wants is not a function of the tax rate they pay to get it, but rather on what ones wants to spend. If you raise the tax rate, people will work harder to make up the difference.
This is why when Clinton raised taxes on the rich, the economy improved, revenue increased over and above the tax effect and the budget was balanced…
Some tax breaks result in market failure, however and others simply provide unearned benefits to activities that would have occurred anyway. There is a word for that – corruption.
I am all for certain breaks, especially breaks to families which could be used interchangeably with government subsidies – except with less of a leaky bucket effect. In such a scenario, the current financial flow is money goes from customer to the firm who pays taxes on behalf of a higher income employee (who files taxes which are really tax reconciliations of taxes already paid), which funds employees at federal and local level to give benefits to poorer workers and non-workers, as well as having the employer distribute some of this money to workers as part of their pay under the EITC and child tax credit when withholding has been changed – although some of this money goes all the way to IRS for payout at the end of the year after a tax preparer takes their cut – or gets a cut on the back side in a tax anticipation loan.
In what I propose, the employer simply files and pays a portion of the tax as the subject of taxation – rather than the employee – although the richest employees would still file as above – only the top 10% or less. Poorer employees would get their credits up front from the employer without filing at all and up and down the funding chain both tax preparers and bureaucrats find that their services are no longer required. Economically, however, as far as the customer and low income employees are concerned the flows are the relatively the same.
Sorry, that last post from from me, not Anonymous. My login must have expired.
One could blame Americans for wanting an impossible combination, or blame politicians of all stripes for promising exactly that. Where exactly were Americans supposed to learn the truth? Not at public schools, that's for sure. Nor from the news media. Almost no unbiased source of information exists. Most articles on the subject are heavily slanted, designed to mislead rather than inform accurately. Tuesday's WSJ editorial page has an example of the former. Or pick almost any column by Paul Krugman.
>We oppose new spending, but happily support targeted tax subsidies that are economically no different.
There is a very real economic difference in most real-world cases. A tax break leaves money in the private sector, where it will be used subject to the constraints of market forces. It will tend to flow to economically preferred uses.
Money that is spent by the government is not analogous to tax breaks. Its use is not subject to the constraints of market forces. Its use increases the number of government employees who produce less than their cost in market value, not counting the regulatory and other damage they may cause.
You can construct hypothetical examples in which a tax break for X can be replaced by a direct and unconstrained government payout for X. That's irrelevant, because such a direct swap is not at all what advocates of limiting tax expenditures intend. They want to use the additional tax money for new spending unrelated to the original tax break. Money that currently flows through the private sector will be directed to the public sector, decreasing the relative size of the private sector and increasing the size of the public sector. That is not equivalent to the current state of affairs. It's a net loss to the economy.
Phenomenal article. Most cohenert thing I have read in months, perhaps years.
I have come up with a plan to meet our conflicting demands. I suspect that if you raise net pay to fund a VAT, while cutting gross pay and ending the requirement on most people to file taxes, you could get support – especially if health care taxes became solely an employers responsibility. Would it cost jobs overall? It depends – it may create jobs in health care. You can read what I submitted to the Fiscal Commission (which needs a folder) at http://iowafiscalequity.blogspot.com/2010/07/revised-submission-to-fiscal-commission.html