All yours Ezra:
The GOP doesn’t just hate taxes. They hate taxes so much that their stated position is they’d prefer no deficit reduction, and even a default on the debt ceiling, to even a dollar in new taxes. They hate taxes, in other words, more than they like balanced budgets, or fear a federal default. Hating taxes is the absolute, number-one core belief of the modern GOP. The question is, why?
Disliking taxes, of course, is understandable. No one likes taxes, just like no one likes visiting the dentist or going to the DMV. But most of us accept them because the alternatives are worse. The GOP’s argument, however, is that a federal default and a second financial crisis are preferable to even modest tax hikes. Now, you can argue that this is just a bargaining position, or a political posture, or an effort to keep faith with certain interest groups and donors. But I think such double-games are rarer than people think in Washington. And so I’m inclined to take John Boehner at his word.
Which is why I spent much of yesterday asking right-leaning economists to walk me through two quotes that seemed to summarize the Republican Party’s argument against taxes. The first came from Boehner on the ‘Today Show.’ ‘The fact is you can’t tax the people we expect to invest in the economy and create jobs,’ he said. The second came from Louis Woodhill, a member of the anti-tax Club for Growth’s leadership council. ‘To stimulate GDP growth, a tax cut has to cut the marginal tax rates upon which the decision-makers in the economy base their decisions to work and, above all, to invest.’
As I saw it, the argument embedded in these quotes is almost Randian. It’s that the economy depends on the actions of — and thus the taxes on — ‘the people we expect to invest in the economy and create jobs,’ ‘the decision makers.’ But I didn’t find many takers for that point among Republican elites.
Glenn Hubbard is dean of Columbia’s School of Business and former chief economist to George W. Bush. He was sitting on the stage when Boehner delivered Monday’s broadside against taxes. ‘There are two arguments,’ Hubbard told me. ‘The first is arithmetic and the second is economics. First is tax increases on the wealthy can’t be a big part of the solution. I could double taxes on the top 1 percent and it’d be a quarter of this year’s deficit. The only way you could get the deficit down through taxation is to go after middle-income taxpayers. The economics argument is that marginal tax rates effect work, entrepreneurship, savings, investment.’
But Hubbard emphasized that what mattered for decision-making was marginal tax rates — the taxes that effect whether you do one more thing. Think about it like this: Imagine you make $1,000,000 annually and we impose a 50 percent tax on every dollar of income above $1,000,000. That makes doing more worth less to you. But let’s say we cut the deduction for your health-care insurance, or your mortgage interest. That raises your taxes, and you may not like it. But it doesn’t give you a reason to work less. Quite the opposite, in fact. But Hubbard didn’t feel Boehner was giving sufficient weight to this distinction. ‘When I heard the speaker,’ he said, ‘I didn’t just hear him rule out marginal increases. I heard him rule out cutting tax expenditures, too.’ To Hubbard, that didn’t make much sense. Cutting tax expenditures wasn’t like raising tax rates. It wouldn’t be apocalyptic for the economy. It wouldn’t keep the decision-makers from investing. It might even keep them from over-investing in things we want less of, like expensive health-care insurance policies and homes.
Josh Barro, the Walter B. Wriston fellow at the Manhattan Institute, chided me for being so naive. ‘A lot of this is political,’ he said. ‘I wouldn’t assume Boehner’s doing whatever he’s doing as a first-best policy preference.’ The fear animating Republicans, according to Barro, is that we end up with three rounds of tax increases: first, the tax increases in the Affordable Care Act, the bulk of which fell on the wealthy. Second, an expiration of the Bush tax cuts for income over $250,000. And third, further tax increases on the rich as part of a coming budget deal. Add all that together and you’re looking at very, very high taxes on the rich — much higher than what we saw under Clinton.
At that point, the standard fears apply with particular force. ‘Marginal tax rates effect behavior,’ Barro continues. ‘That’s uncontroversial. ‘What’s controversial is how much they affect behavior, and what Republicans believe is that high-income people are especially sensitive because they have more flexibility to decide how much they’ll work.’ And as Barro pointed out, it’s not only Republicans who believe this. The Congressional Budget Office agrees, too. So as Barro sees it, even if Boehner thinks that in 2013 or 2014, he’s going to have to cut a deal that raises taxes, it’s a smart play to hold the line until then in order to keep total tax rates, particularly on the rich, from being raised repeatedly, to levels where they really will hurt the economy.
But Andrew Samwick, who served as chief economist on the staff of George W. Bush’s Council of Economic Advisers, found the whole discussion exasperating. ‘I just find this to be a ridiculous distraction,’ he told me. ‘These are small tax changes we’re talking about. It defies any sort of logical reasoning that there’d be such large effects.’ To Samwick, the specific set-up of the tax code is, for the moment, a distant, second-order concern. The deficit looms much larger. Once we get that under control, we can worry about the precise way to set up the tax code to maximize the incentives to work and invest. But getting the deficit under control is almost certainly going to require some revenue increases. ‘I don’t think any Republican should be taken seriously on matters related to budget until they lay out a set of circumstances under which they’d be willing to raise tax rates,’ he said. ‘And I haven’t heard any Republican in leadership give even a hint of that.’
Leonard Burman isn’t a Republican economist, but he is a tax expert. He was actually deputy undersecretary for tax analysis in Bill Clinton’s Treasury Department. And when I reached him for comment, he found the whole conversation baffling. ‘You can build these models where people are very sensitive to changes in taxes,’ he said, ‘ but in practice, there’s scant evidence of it actually working out that way. And lucky for us. If we really needed to get the tax code just right in order for the economy to grow, we’d have been in a depression for the last 40 years.’
The bottom line, he says, is that these theories were tested, and recently. ‘In the 1990s, we raised taxes, particularly on the rich. And a lot of these people were saying our tax increases were going to kill the economy. But remember what actually happened? We got rid of our deficits and the economy grew really robustly for 10 years. And what if it happened again? We might get rid of our deficits and the economy would grow really robustly for another 10 years. Maybe it’s good for the economy to actually get the deficit under control.’
(Via Ezra Klein.)