Friday, August 05, 2011

Krauthammer Attacks the Rich?

I just read Charles Krauthammer's latest op-ed on the possibilities of a "grand bargain" on fiscal reform.

I frankly couldn't believe some of the stuff I was reading. I mean, really, did Krauthammer really write the following about "true tax reform" that eliminates loopholes?

Fairness — because a corrupted tax code with myriad breaks grants deeply unfair advantage to the rich who buy the lobbyists who create the loopholes and buy the lawyers who exploit them.
Did he just say that tax breaks that disproportionately benefit the rich are unfair?

My ears are burning!

And then, is it really conventional wisdom among conservatives to push this next line?
Start with the obvious boondoggles, from the $6 billion a year wasted on ethanol subsidies to your Democratic perennials — corporate jets, oil-company breaks, etc. That’s the fun part. Unfortunately, whacking that piƱata yields but pennies on the dollar. The real money is in the popular tax breaks: employer-provided health insurance, mortgage interest and charitable contributions. Altering some of these heretofore politically untouchable tax breaks would alone be a singular achievement.
Did Krauthammer just admit that he agrees with liberal talking points about the "boondoggles" of tax breaks for corporate jets and oil-companies, not to mention the exemptions from taxation of income spent on employer-provided health insurance and mortgage interest? I have to say that this kind of language is mostly anathema among conservatives. You just don't hear conservatives even acknowledge that there is anything untoward or unfair in any policy, no matter how it comes about or who it affects, that has the end result of exempting personal income from taxation.

I usually find Krauthammer columns to be rather distasteful; but I have to admit that I didn't find myself disagreeing too much with Krauthammer's overall point in this particular column.

He essentially embraces Simpson-Bowles as an acceptable blueprint for fiscal reform. I'm definitely not opposed to that. However, I do have one point of disagreement with Krauthammer, but it's one that's more a matter of degree as opposed to one of principle. And it has to do with his baseline starting-point on revenue neutrality. I could easily find my way to supporting the idea of revenue-neutral fiscal reform as a precursor to a grand bargain in which both raising revenue and cutting spending are both on the table. But where we disagree is what the starting-point of revenue neutrality should be.

Krauthammer's whole argument for revenue neutral reform of the tax code starts under the revenue baseline established with the Bush tax cuts in place. I would argue that revenue-neutral reform to the tax code should begin after the expiration of the Bush tax cuts. Why? Because, as even conservative economist Bruce Bartlett notes, revenue as a percentage of GDP is at its lowest levels since the cuts in 50 years. Revenues currently account for less than 15% of GDP, which is below the 18% historical average that has held from the post-WWII era until 2001, which is when the Bush tax cuts kicked in and then revenue as a percentage of GDP declined significantly. So, I say let's reform the tax code at a revenue-neutral baseline of 18% of GDP, and then have our "grand bargain" debate from that baseline.


Eric said...

I think the spending-to-GDP ratio is somewhat of a red herring. You forget that in the years following Bush's tax cuts, excepting the year 9/11 happened, government revenues increased right up until the 2008 meltdown.
In fact, the $780 Billion increase in tax revenue collected by the US Government between 2004 to 2007 reflects the largest 4-year-increase in governmetn income in American history.

Unless you can somehow argue that the recession was caused by the Bush tax cuts, and the economy would be made better by doing away with them, I don't see the justification in sacraficing economic growth to try to hit some arbitrary ratio of spending to GDP. The focus shold be on bottom line dollars. If we could squeeze $3 Trillion out of 5% of the GDP, that's better than squeezing $2.8 Trillion out of 15.

With that said, I do think some aspects of the tax-simplifying effects suggested by Simpson-Bowles would hurt the economy if they were implemented (particularly, it would put a lot of high dollar accountants out of work... and I look forward to driving by the blood sucking bastards picketing on the street corner and giving them my spare change). But as you mentioned, Simpson Bowles is essentially revenue-neutral, eliminating deductions while also cutting marginal rates.

I might support an increase in tax rates as a political negotiating token (not becasue I think they are likely to do much for revenue), but before I'd be willing to look at that, you'd have to a) be in the range of $7-$8 Trillion in cuts over 10 years and b) make a flat rate increase so so that everyone who has an income gets some skin in the game.

Huck said...

Yes, during the Bush years overall revenue increased marginally in most years, but so did the number of people in the labor market and in the total number of people overall. We have a growing population. This means that tax revenues are likely to increase some, even with a marginal decrease in tax rates. But this also means that with more people, there is greater demand for essential services the state provides (widening roads, stronger bridges, better sewerage systems, more extensive infrastructure needs overall, more trash pickup, more customs agents, more school teachers and school buildings, etc.) Let's not forget that those absolute marginal revenue increases also came with a balooning deficit. As families grow and age, the costs of survival increase -- and sometimes they increase more than the family's revenue increases by cutting out weekly pizza parlor visits.