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Conservatives and Taxes Revisited

Opinion is sharply divided over whether the “Gang of Six” framework can produce a workable debt ceiling compromise, with the Wall Street Journal editorial page and other observers expressing cautious optimism, while other sound and sober voices like James Capretta are saying “we’ve seen this movie before, and the ending sucked; why would we think the sequel will be any better?”  My own view is that even if the favorable construction of the deal (pro-growth tax reform that raises revenues along with real spending cuts that are nailed down) was agreed to it would be difficult to work out the details in two weeks.  The tax reform act of 1986 took almost two years to work through; the 1990 Bush budget bill—simple and small by comparison to the Gang of Six plan—took several months to take shape.  Not even round-the-clock work between now and August 2 can possibly get this right, and if they do put it into a two-thousand page law, it will be riddled with mistakes and perverse results.  My best guess is that we’re going to see a short-term debt ceiling increase with minor budget cuts passed as a stopgap.  In other words, we’re going to kick the cliché down the road again.

Meanwhile, I took some fire with my recent post here on the conservative case for raising taxes.  I expected some conservative pals to criticize it, and would have been worried had they not.  And in a private exchange, a prominent liberal found my outline “appallingly bad,” which greatly pleases me.  But as a sequel don’t miss Richard Epstein’s thoughts on the matter, which are not identical to, but are congruent with, my case made here before.  Above all he throws down this gantlet: “The Republicans should break ranks with Grover Norquist’s tax advocacy group, Americans for Tax Reform, and its ‘no new taxes’ pledge.”  Here’s the heart of Epstein’s analysis:

The Republicans are on solid ground by insisting that shrinkage in the size of government is the key to any sustainable policy. But what is the best way to achieve the goal of smaller government? Start with the simple proposition that government can pay for its expenditures in three and only three ways. It can raise taxes; it can borrow money, which can be paid back only with taxes raised at some future time; or it can print more currency, at which point the rapid inflation cheapens the currency and thus works as an implicit tax on anyone who holds American dollars or any creditor (including creditors of the United States) whose debt is denominated in dollars.

All three forms of government funding necessarily rely on either explicit or implicit taxes. The differences between these funding methods are all second order effects. If the size of government is not cut from its current unsustainable levels, it will not matter much whether the government defaults on its obligations today or two years down the road. Either way, government bankruptcy will create massive dislocations in both the economic and the political sphere.

On this view, Republican strategy to rail against all new taxes is a misguided negotiation position. The Republicans should break ranks with Grover Norquist’s tax advocacy group, Americans for Tax Reform, whose “no new taxes” pledge has been taken by many members of Congress.

The object of this pledge is to use the control on taxes to limit the size of government. So far, so good. But the means that Norquist champions are deficient for two reasons. First, the “no new taxes” pledge is too weak. Second, looking at only overall tax levels ignores the striking differences between various forms of taxation.

It is consistent with the pledge, for example, to raise the debt limit by letting the treasury borrow new money. Ultimately, those new obligations have to be paid off with either tax revenues or cheaper dollars, so that a “no new taxes” pledge that only addresses current taxes contains obvious loopholes.

The implications of this proposition are clear. First, Republicans should treat all three forms of government financing as functional equivalents, and thus push for that deal which, subject to the caveats raised above, works the greatest cut in total expenditures. Following this reasoning, it is better to cut expenditures by $5 trillion over the next decade and raise taxes by $1 trillion over that same period, than it is to cut expenditures by only $3 trillion, without any current tax increase.

RTWT, as the saying goes.

UPDATE:  Hey–does Michele Bachmann read Power Line?  I see she’s embraced one of the points of my original post, namely that poor people should pay taxes, too.

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