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Bush didn't run his most recent campaign on the idea of pushing major "tax-reform", but we all knew it was coming, and since November 3rd he has been letting us all know that he is going to spend his political "capital" on getting is through. While many in the right-wing and corporate press have been comparing this to Reagan, and the congressional Democrats, 1986 real tax-reform effort, Jonathan Chait of the New Republic exposes Bush's fake "tax reform" plan:
Bush's goal is different from--and, in many ways, the opposite of--tax reform. The fact that Reagan's tax reform entailed a death struggle against tax lobbyists, and that Bush's "tax reform" strategy was literally devised by a tax lobbyist, is merely one clue.

The 1986 tax reform eliminated tons of loopholes for special (ie:moneyed) interests, there was no increase in revenue however, because tax rates were then cut across the board, but the general structure remained progressive, with the wealthy being bearing a greater burden than the middle class and poor.

So what is Bush up to?

Two years ago tax lobbyists came up with a strategy called Five Easy Pieces which would do five things:

1. cut marginal tax rates
2. elimine taxes on capital gains and dividends
3. allow more generous treatment of business investment
4. do away with the estate tax
5. establish tax-free personal savings accounts.

The three major Bush tax cuts to date have achieved the first four pieces, partially or completely.

These steps, taken together, would indeed radically transform the tax code by rendering virtually all investment income tax-free. With capital virtually exempt from taxation, the burden of supporting the federal government would fall almost entirely on labor. It would amount to a reversal of the principles of progressive taxation that have held sway for the last century. And it has very little to do with what most people mean by "tax reform."

But what's up with these changes, where are they leading?

Bush's supporters claim that his present and future tax cuts, taken together, would bring about a consumption tax. "With each incremental change to the tax code that Bush has put in place, or has proposed, we take another leap toward a flat- rate consumption tax system. I call this Bush's stealth flat-tax plan," gloated Republican activist Stephen Moore

Most of us probably remember the Senate race in South Carolina last year between Inez Tennenbaum, and Jim DeMint, where for a few hopeful weeks she was crushing him on the national sales tax issue. Well, this goal is not going away. So, how is a consumption tax generally supposed to work?

Under an income tax, [assets] get taxed on the front end. Under a consumption tax, they would get taxed on the back end. The savings that exist at the time of the switch would get taxed at both ends, while future savings would avoid this penalty.

That may sound unfair. And, to some extent, it is. But the unfairness, in a way, is exactly the reason economists like it. Taxes impose the least drag on the economy when they do as little as possible to change people's behavior. One way to design an efficient tax is to concentrate on taxing things that people can't, or are reluctant, to change. This can be unjust.

It penalizes people who have saved money in the past ...behavior that can't be changed (in this case, because it has already happened). As Brookings Institution economists William Gale and Peter Orszag wrote in a recent Tax Notes paper, "A key finding in academic analysis is that almost all of the economic benefit from moving to a consumption tax derives from the one-time tax it places on existing assets."

The one-time tax on existing assets is not only the most economically efficient part of a consumption tax, it is also the one part that most hurts the wealthy. (The underlying principle here being the well-known fact that wealthy people have more money than poor people.)

So since Bush's "reform" plan would shift taxes from investment/capital savings to consumption, rather than from wages to consumption this not really consumption tax, it's simply a double tax on wages on the front and, and on the back end, for working people. And rather than broadening the base of income subject to taxation, it narrows it, and does so regressively. The only possible outcomes are still higher taxes on wages, more and more deficit spending or... or what? Dramatic cuts in spending?

We are all familiar with Grover Norquists famous quote about shrinking the government to the size where it can be "drowned in a bathtub". But why the shifting of the burden to working people? As Stirling Newberry described earlier today, we also know that Bush will be "making it harder for self-employed people to avoid payroll taxes", "expanding the federal tax on telephone service", "changing the laws that exempt from payroll taxes for Social Security and Medicare a variety of fringe benefits, including employer-paid health insurance and child care assistance", and from the comments: "eliminating the property tax deduction". What do these policies all have in common?

They are all designed to increase tax friction on everyday people

It's rather sick, really. Under normal conditions where the tax-policy is set up to, at least in some respect, share the burden, increase growth, create jobs, etc. etc., only the fringe is motivated to get activist against taxes. I can only assume that by making the burden of taxes worse on your average person, or small-business they hope to incite a more general tax-revolt; the kind that Norquist and his kind salivate over. They can only do this by really making people feel it, and by doing so they are promoting policies that are bad for growth, bad for distribution of wealth--just bad period! Anyway, as bad is all this sounds, I really don't see how it can work. It seems like a classic example of hubris getting in the way of reality.

So what about real tax-reform?

What would a forward looking, progressive, Democratic tax-reform plan look like? I am still putting my thoughts together on this one, and hope to write a diary about it soon. But in the meantime...

Originally posted to colorless green ideas on Fri Jan 28, 2005 at 02:49 PM PST.

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Comment Preferences

  •  One of my best friends (none)
    has been having a debate with people on a pontiac vibe message board of all places, and one of the big things they debate are taxes.  She just cant figure out why conservatives are so deadfast for people paying supposedly an equal % of taxes.

    I mean, I see the logic of is "fair" to them, but then again, there are really three different viewpoints of what is "fair" when you tax things.

    First idea of "fair" taxes:  Make everyone pay the same amount, regardless of income.

    Second idea of "fair" taxes: Make everyone pay the same percent, regardless of income.

    Third idea of "fair" taxes: Make taxes based on an "ability to pay" model, making it progressive.

    Of course, the tax system we like, and that the income tax is based on is the third idea of fair taxation.

    Most conservatives are usually somewhere between the 1st and 2nd idea, both of which harm the middle and lower classes the most.

    Anyway, i'm done ranting.

    Phil Bredesen for ME...oh wait I'll only be old enough to run for Congress.

    by FleetAdmiralJ on Fri Jan 28, 2005 at 02:55:46 PM PST

  •  good diary! (none)
    One question, though, since I'm not really up on these things: Why do the Reps want to incite a tax revolt?
    •  that might have been the wrong term (none)
      the anti-tax activists want to generate voter pressure to demand lower taxes, one way to do that is to make them really feel the taxes. taxes such as those on capital and investment, the employer side of payroll taxes, corporate income tax, etc. are "invisible"; your average voter does not feel their impact, or if they do, they don't know it. voters want their government services, but if they had to pay for them all by themselves, they might change their minds. so shifting the tax-burden to your average working stiff through consumption, property, and wage taxes increases their "tax friction" without increasing their benifits from the government which may put them on the path towards anti-tax activism.
  •  The focus on equal tax rates (none)
    would make sense in a world where everyone has the same amount of money, but that's not reality.

    It really is no big deal for a person with $50 million in income to pay a fifty percent rate, because they still have a ton of money anyway.

    Requiring a person making $20,000 a year to do that, especially someone raising kids, is an atrocity.

    Also, it is important to point out LOUDLY that their "flat tax" is not flat, because all of the proposals make a concession to reality by excluding people below a certain income level from having to pay. That's progressive. If you map out the rates on a graph, it looks like a plateau (whereas a truly progressive rate graph would resemble a slope).

    Democrats should be pushing for a negative income tax rate calculated to lift everyone above the poverty line (ie, if the poverty level is 20k and you make 15k, you get 33 percent back, if you make 10k you get 100 percent back, etc). And that "poverty line" needs to be updated in its figuring because it uses outdated standards.

    And while they're at it, try adjusting the minimum wage to match inflation levels. As it stands, the poor get a pay cut every year, thus driving down the wages of most everyone else.

    But of course the political realities are very ugly right now.

    •  a negative income tax rate (none)
      i really like that idea. kind of like a simpler, broader EITC (earned income tax credit), allowing everyone who works to live above the poverty line.
      •  Yes, it's been backed (none)
        by a number of people of differing ideologies. It should be expanded because currently it is limited to those over 25 and mostly benefits those with children. For one thing, many young people already ARE raising families and should not be made to pay higher taxes just because they weren't born in the right year. Many young people are not in school and receive no parental support. As well, giving much less of a benefit to those without children is unfair, in my view. (There seems to be a current backlash against the single and childless these days. Being in such a situation makes me notice this even more clearly, but this could well be an overreaction on my part.)

        The EITC is also applied first against existing liability and only afterwards works as a refund, whereas a good negative income tax automatically abolishes all liability except for Social Security and state/local stuff. The latter could hopefully be brought down due to increased federal revenues.

        An increase in consumption is what would most benefit our economy and Bush wants to tax people for doing it. Labor force participation rates are at historically low levels and Bush wants income derived from labor to eventually be the ONLY way the federal government gets money. Getting this message out to people could quickly harm the conservatives.

  •  Dems vs Reps on taxation (none)
    Republicans are the party of existing wealth. Dems want to create new wealth.

    The easiest path for existing wealth to compound into an invincible megapile of power and influence is to reduce the taxes on it. This is all the Republicans care about. Their growth policies start and stop with the wealthy's balance sheet.

    At their best, Dems use the additional money raised via a progressive tax code to make investments in public infrastucture, public education, targeted business tax credits, and to lower taxes on the bottom wage earners. This is a tax  policy that will allow the economy to continue to grow and thrive.

    If you view all tax code through this filter, the difference between Dems and Rep all makes sense.

    To prove my point, the returns in the stock market are much better under a Democrat president than a Republican. The returns on small cap stocks under Dems vs Reps is truly astounding. The original paper is here.

    Freedom does not march.

    by ex republican on Sat Jan 29, 2005 at 01:18:30 AM PST

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