Taxes

That said...

Larry Bartels is one of the very last people I'd ever want to question, but I'm left with a lot of skepticism about the politics of this.

Some has to do with budgets and trade-offs. When it comes to the budget, there are limited moving pieces: taxes, spending, deficits. Presumably the best short-term move is always going to be to cut taxes and raise spending, on the assumption that people don't actually care about deficits, but mainstream Democrats may have good policy reasons for making responsible choices with the federal budget. Certainly, Democratic presidents since at least Carter have acted as if that's the case.

If the deficit is regarded as a fixed target, then the question is which moving piece will be less costly. Presumably, no matter how intense minority preferences may be, raising taxes on the wealthy isn't going to be worse politically than middle-class tax increases. No? And then there are spending cuts. How do the intense preferences for low taxes on the wealthy compare to preferences about slashing Social Security? Medicare? My guess, without looking at any numbers (and the YouGov poll doesn't appear to have asked about trade-offs) is that Democrats are better off antagonizing those who really hate tax increases on the rich. What about defense? That's a harder call, but there are both political (certainly) and policy (perhaps) risks in significant Pentagon cuts. So while it's nice for Dems to know the landscape, to know that intensity is with the tax cutters, it's not clear at all that Democrats should therefore believe that tax cuts are the politically safe choice, on that level.

That's where some of my skepticism comes from. The rest...well, I need to think about how this plays out.

First, I'll note that Republicans have decided that they're going to accuse incumbent Democrats of raising taxes no matter what they do, and voters who listen to GOP pols and yakkers are going to believe it. Thus the National Taxpayer's Union counted the stimulus (which, you'll recall, cut taxes), as a tax increase; thus most voters believe that Barack Obama and the Demcorats have raised taxes. So Democrats actually have a complex question. If they support and pass extension of the tax cuts, what's the size of the segment of the electorate that are even open to the possibility of Democrats being for lower taxes? How many of Bartel's intense opponents of high taxes for the rich will be affected at all by any actual policies that Democrats adopt?

To some extent, good survey evidence can help with that sort of question. But then it gets more complicated. Democratic politicians are balancing a lot of things when they make budget choices. In this case, it may include: raw majority preference (pushes one way); intensity (pushes another way); and commitments to constituency groups. That last one matters! Bartels concludes:

Of course, the president and his allies in Congress could still push to implement the proposal in a lame duck session. If they do, it will be a principled choice rather than a politically expedient one. For expedient politicians, an energized minority trumps a tepid majority every time.

Perhaps. But Obama would clearly be breaking a promise if he flipped on this one. How would his strongest supporters react? How would party elites react? Would it harm his reputation? Shake his connection with them? Even if tax cuts on the rich don't poll as something that Democrats at the mass level care a lot about (now), it's certainly possible that flipping on it would provoke strong reactions from Democratic opinion leaders, which then would spark the intensity of opinion missing now.

More layers: presumably, on at least some issues, politicians take the positions they do because they're convinced that the policies they choose to support will actually work. If that's the case, then they may have a reasonable belief that immediate public opinion, even if measured and understood correctly, may prove ephemeral. After all, if a group of citizens wants tax cuts for the wealthy because they believe it will produce economic growth (and not just because they like low taxes for rich folks), and elected Democrats believe that in fact such tax cuts will not produce economic growth, then they might think the correct political play is to take the public opinion hit now, on the assumption it will pay off in the medium or long run.

That's just taxes, but it's going on with every issue, all the time. It informs the debate that continues to go on about the effects of passing health care reform on the 2010 election cycle. We will, eventually, get good estimates after the fact of the effects of support for ACA on House vote, to update the early estimates from Seth Masket. But those are always going to be static effects that assume one context, and we can imagine many other contexts (such as Jonathan Cohn's parallel universe).

What I mean to emphasize in all of this is just how complex are the choices faced by politicians, especially presidents, even if all they care about is re-election, and even if they get good polling. They are the ones who must choose: how important are my commitments on this issue? What is the likely effect of breaking those commitments? How will policy implementation change the political universe? How will retreat change the political universe? How confident am I in the policy forecasts? What kinds of uncertainty are in all of these equations, and how should one deal with that uncertainty (what kinds of downsides are absolutely crucial to avoid risking)?

Think about health care reform again. As I've argued in the past, it's very possible that ACA when fully implemented will rapidly become an untouchable sacred cow -- and still not help Democrats at all (among other things, the more successful it is the more it removes health care as a high-salience issue that plays well for Democrats). At least, I think that's the logic of it... the problem for pols is that they need to get a sense from one sense of specialists how the legislation will work, and also have a sense of how it will be attacked and what future votes might have to be taken, and also have a sense of how all of this will play with swing voters, with strong supporters, with relevant interest groups.

And then there's the point that Matt Yglesias makes, that "the point of winning elections is to pass laws." Good point, but that leaves (as he implicitly points out) the question of which laws are worth losing. I'd agree with those who argue that (sort of) universal health care, a primary goal for the Democratic Party for half a century, is worth losing an election over... but even there, one has to be careful, since losing an election could wind up getting things repealed or undermined, and then you're back at square one, or even worse. And that's an easy call! What about the upper-income tax cuts? Is that worth losing an election over? What about financial regulation? Does the answer to that change if you think the bill that was available was only 20% of what was needed? 40%? 10%?

The people with the skills needed to answer these questions are professional politicians. If they're good -- the Bill Clintons, the Ronald Reagans, the Nancy Pelosis, the Bob Doles -- they'll learn when to trust their policy experts, and when not to. They know which coalition bonds are strong, which are weak; which commitments must be honored, and which can be ignored, and how to keep relationships strong when a commitment can't (or won't) be respected. They know when to listen to their pollsters, but they also remember the time that the Iowa Caucus was a few months away and the pollsters could find no hope, but they strung together the coalition that was just barely enough to go on to the next round, and they'll know that even the best polling only shows what people think right now. Without, of course, falling into the trap of assuming that they always know more than the pollsters, the policy people, and their political advisors.

They'll know how to balance "win to pass laws" with knowing when to live to fight another day. They'll see the opposition arguments coming, and have a sense of when to move to counter those arguments, and when it's best to just bull ahead because those arguments are coming whatever happens. They'll have a sense of timing. They'll know, or at least be aware of, the differences between what plays in Washington and what plays back home, and they'll realize that both are important.

And this is where Jim Manzi really gets it wrong when he writes about expertise, politicians, and the Progressives. He's right that the Progressives wanted experts to run things. But that didn't mean politicians, to them; it meant neutral expertise, the kind that one can test for in civil service examinations. That's what Manzi is against, too, I think, but he conflates those sort of experts with politicians. Pols are not Buckley's much-maligned Harvard faculty, but they're not the first 2000 names in the Boston phone directory, either.

They are experts, but not in public policy -- or, if the latter, only incidentally. Their expertise, if they have it, is in representation. That requires a politician to deal with the sorts of questions and have the sorts of skills I described above: not what a particular piece of legislation will do, but how to reconcile what the experts say it will do with what her constituents and constituencies want, or say they want, or will want in the future, or how they want her to behave in office. Who she's promised to be.

And for that, neither the policy experts Manzi doesn't like nor the markets he does like -- and certainly no poll, no matter how sophisticated -- can give safely correct answers. For that, we need those who are skilled in the art of politics and the tending of representational relationships. We need politicians.

What does interest me however, is a theory brought up by readers in both the comments and in personal e-mails that declares that what's really happening here is that since Americans know that their taxes ultimately must rise in the future, given the vast, unhappy disparity between government revenues and outlays, they feel as if their taxes have already risen, even if they haven't.

I don't disagree with the presumption that taxes will rise in the future. The percentage of income that Americans currently pay as federal income tax is lower than at any point since the 1950s -- it has declined steadily, through Republican and Democratic administrations, since the early 1980s. The inability of either Republicans or Democrats to significantly cut government spending implies that taxes must rise, or, eventually, the United States will have a hard time borrowing enough money to pay the rent.

But if this prudent foresight explains why Americans currently think their taxes are rising, then, why, I wonder, didn't they have the same epiphany during the Bush administration? When you cut taxes, start wars, and increase health care spending (the Medicare Part D prescription plan) without accompanying those actions with corresponding spending cuts, you guarantee future tax hikes. We've been headed down this road for years, but only now, when the federal tax burden has hit a historically low point, are Americans convinced that their taxes are rising.

The quick answer to that is that the budget deficit numbers are much scarier now than they were a few years ago. But as Justin Fox recently pointed out, almost half of the current budget deficit can be blamed on the huge shortfall of government revenue due to the recession. If Obama's first action as president had been confined to simply tax cuts -- the deficit would still have rocketed up. And if he had attempted to significantly cut the size of government to match those cuts, unemployment would likely be much worse now than it already is, as hundreds of thousands of government workers would have joined the layoff rolls, and, not uncoincidentally, further put pressure on government finances by seeking unemployment benefits.

It is not dumb to worry about the future, that's for sure. But it would have been smarter to start down that road a decade ago.

Except, that's just not true.

The Obama administration has cut taxes -- largely for the middle class -- by $240 billion since taking office on Jan. 20, 2009. A program aimed at families earning less than $150,000 that was contained in the stimulus package lowered the burden for 95 percent of working Americans by $116 billion, or about $400 per year for individuals and $800 for married couples. Other measures include breaks for college education, moderate- income families and the unemployed and incentives to promote renewable energy.

Even a plurality of Democrats believe Obama has raised taxes. Poll respondents also think the U.S. economy is continuing to shrink, when in fact it has grown for the last five quarters.

The incumbent majority political party usually is fighting an uphill battle in a midterm election, but when you throw in headwinds of ignorance on this scale, it's easy to despair. It's one thing to argue that Obama probably shouldn't have included a big tax break as part of the stimulus, instead of pouring more money directly at infrastructure spending and aid to states. But when he cuts taxes and everyone assumes that their tax burden rose, the strategy is doubly undercut.

There are two takeaways:

1) Unemployment trumps GDP.

No one cares about statistics indicating that gross domestic product rose at 2 or 3 or 4 percent in a quarter. The unemployment rate is by far the most important economic indicator. If you've lost your job, can't find a job, or are in fear of losing your job, you are unlikely to believe that the economy is growing. The Obama administration made a bet that a $787 billion stimulus bill would bring the unemployment rate down to a politically reasonable point by the midterm election. It did not, and Democrats will be punished for it.

2) Republicans have won the messaging game for the last two years.

It seems remarkable that a party that governed so badly while it was in power, preaching smaller government while engaging in total fiscal irresponsibility, would be trusted by anyone on anything. But GOP talking points, fueled by Tea Party mobilization, appear to have taken hold almost immediately after Obama's election. Even as Obama was lowering taxes, he was labeled with the hoariest of Republican attack-mantras: tax-and-spend. He was immediately blamed for a budget deficit that was largely constructed by Republicans and the result of recession-induced shortfalls in tax revenue. He is now saddled with responsibility for an unemployment rate that is the consequence of a crisis that occurred before he took power, and that would undoubtedly be higher if not for the stimulus.

But that's all for naught. Whether the Obama administration could have dented the misinformation by more aggressively making the case for its own actions is something we'll never know. High unemployment is a very difficult jam to talk your way out of. We knew that. What we didn't know is that high unemployment can actually twist perceptions of objective reality into an alternative universe. Obama lowered your taxes. It might not have been the smartest thing to do, but it's what actually happened!

The tax break has been in place since a Supreme Court decision in the 1990s, which essentially said that a company sending you products across state lines doesn't have to collect sales taxes unless it has a physical presence in your state. Local merchants, however, are obliged to collect the tax.

This free ride isn't just unfair to Main Street merchants. It further starves state governments that are already in their worst fiscal situations in decades. And its end is way overdue. (I should note that I own a small amount of Amazon stock, so ending the free ride would almost certainly be bad for my pocketbook in more than one way. But fair is fair.)

I snicker at some of the absurd reasoning behind why we shouldn't muck with this system, such as the notion that since customers of Internet and mail-order companies usually pay shipping fees, they're actually not getting a break buying online. First, online prices are generally better than in physical stores -- one of the main reasons customers shop online. And that item you found on the shelf at Nordstrom's didn't just materialize there. It was shipped, and that became part of the retail price.

Yes, local retailers use services provided by local and state governments. But they pay property and income taxes. Sales taxes, on the other hand, are not paid by stores. They're paid by us, and that money helps provide services from our local and state governments.

Many states have "use taxes" -- an equivalent percentage levy that consumers are supposed to pay directly to the state for purchases of goods and services where merchants don't add on a sales tax. This specifically includes online sales. But hardly anyone pays, because these laws are difficult to enforce.

Congress, naturally, keeps ducking this issue. Why shouldn't it? After all, the activists who oppose taxes of any kind would go berserk, never mind that what we're talking about it ensuring that everyone pays what they actually owe.

Two dozen states have been working on a "Streamlined Sales Tax Project" for more than a decade, aiming to simplify tax codes and make it easier for states and retailers alike to work on this issue. There hasn't been all that much progress, in part because such state compacts require congressional approval.

Amazon and other online retailers should at least be obliged to tell customers how much "use tax" they owe their states. It's not difficult to get computers to add up what you've spent in a year, based on where you received it, and do a calculation on what's owed. But I'd rather see the retailers collect the taxes and send them to the states directly. The alternative, as state governments grow more desperate for cash, is increasingly intrusive auditing of taxpayers and their purchases.

No, I don't want to pay any more taxes than I already do. But I also don't want to see more huge cuts in the services that we all need.

Fred Schulte and Ben Protess report:

Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay.

Here's how it works. A homeowner fails to pay property taxes on time, and gets a tax lien slapped on them by the county tax collector. But the local government doesn't have the resources or manpower to effectively enforce the proliferation of tax liens in the current distressed economic environment, so it bunches them up together and sells them off to the highest bidder at online auctions. The winner of the auction then proceeds to do its best imitation of a loan shark, slapping on additional fines, charging high interest rates on the debt, and eventually initiating foreclosure proceedings.

The Huffpo provides a chilling example:

Barbara Carpenter, a 58-year-old disabled Ohio retiree, found herself in such a situation. The former worker for the American Red Cross struggled to save her Toledo home from a JPMorgan entity called Plymouth Park Tax Services, which in recent years has been among the nation's top buyers of tax liens.

"It's a great neighborhood and the house is in good condition,"said Carpenter, who paid $67,000 for the one-story home in 2004. But she fell behind in paying her taxes and a certificate for $1,500 in unpaid taxes was sold off to Plymouth Park, which is based in New Jersey.

Carpenter's lawyer, Joseph Westmeyer, said Plymouth Park routinely charges an upfront fee of around $1,500 as soon as it buys the lien and 18 percent interest on the debt. If they don't get paid, they foreclose.

"It's not a good deal for poor customers," said Westmeyer. Carpenter wound up selling the house in August for less than half what she had paid. Plymouth Park received about $12,000 in legal fees and other charges, including some additional taxes, Westmeyer said, quoting from court records.

My favorite paragraph:

Years ago, the big banks left the buying of tax liens largely to local real estate specialists and small-time investors. These days, banks and hedge funds, stung by the failure of many speculative investments, see tax liens as a relatively safe option that can yield returns of around 7 percent.

Let's unpack that just a bit. The banks that aided and abetted a frenzy of dubious mortgage loans then proceeded to get badly burned by their investments in mortgage-backed securities when it became clear that underlying mortgages were crap. The ensuing economic crash pushed millions of Americans over the financial edge. And now the banks have discovered that there's a safe, steady business model in cashing in on their hardship.

Genius, yes. Evil genius.

The Kentucky Republican Senate candidate made headlines yesterday when he proposed a national sales tax to replace the income tax, but Paul is scarcely alone in preferring a tax that falls most heavily on the middle class, workers and the poor. Rep. Ryan’s budget "roadmap," released earlier this year to much fanfare in the conservative and mainstream media, relies on an 8.5 percent "business consumption" tax -- yet another name for what Europeans call a VAT. From Arizona to  Maine, Republican candidates seem increasingly eager to impose a national sales tax -- and although they usually say this new tax would “replace” the income tax and abolish the IRS, such fantasies aren't contemplated by Ryan, the ranking Republican on the House Budget Committee.

Regressive taxation is a perennial enthusiasm among conservatives. But whatever happened to "no new taxes" and the Taxpayer Protection Pledge popularized by Grover Norquist? Ryan and Paul are both among the signatories of the Norquist pledge, a document that forbids any “changes in tax deductions or credits that increase the tax burden on Americans,” as a national sales tax or VAT would inevitably do -- especially if it doesn’t replace income and wage taxes. Evidently the Wisconsin Republican believed he could get away with sneaking a VAT into his budget plan (which is one of several reasons that the Ryan roadmap would  increase the tax burden on most American families while lavishing new tax breaks on the wealthiest few).

This right-wing sales-tax vogue represents not only a departure from conservative orthodoxy but an embarrassing plunge into political hypocrisy. Soon after health care reform passed last spring, dire predictions of an "Obama sales tax" to pay for the program blared from the likes of the Republican National Committee, RedState and Norquist himself, who warned that any promises to replace the income tax should be considered worthless. The anti-tax crusader remarked disdainfully last summer that "VAT is French for big government," while RNC Chairman Michael Steele denounced the idea as an example of the despised "European-style" policies favored by the president. (Of course, many conservatives  simply adore European ideology as long as the authors are Austrian and ultra-right, but that’s another flavor of hypocrisy.)

Yet now at least some Republicans are promoting the same tax proposal they warned us against six months ago. So perhaps the section of the midterm Pledge to America that vows to "permanently stop all job-killing tax hikes" should carry an asterisk, at least for Paul, Ryan and all the other advocates of a sales levy (which would surely reduce employment in the retail sector). And perhaps that foreign stigma could be removed by renaming the VAT. From now on, let’s just call it "the Ryan tax."

Update: Norquist says that while he opposes VAT in principle because they are tax hikes and make it too easy for government to raise revenue, he likes other aspects of Ryan's roadmap. His group, Americans for Tax Reform, hasn't focused on the Ryan bill because "it is not up for a vote right now" -- although that didn't stop him from campaigning against the Obama administration's nonexistent VAT proposal. Norquist doesn't believe that a VAT necessarily violates his group's Taxpayer Protection Pledge, so long as the enabling legislation would repeal the federal income tax (unlike the Ryan bill, which merely makes the income tax more regressive).