Pearlstein: On tax fight, Obama can't afford to lose

Jul 28, 2010

Business columnist Steven Pearlstein will be online Wed., July 28th at 11:00 a.m. ET to discuss why it's game over for Obama's economic agenda if he fails to alter the political dynamic and finally slay the anti-tax dragon.

Editor's note: We're sorry to say this will be the last weekly chat with Steve Pearlstein. We appreciate this show's loyal fanbase, but we have to periodically trim our schedule of regular programs and discontinue shows with flat or limited readership. It's not a decision we make lightly, but we feel it's the best way to use our limited resources to best inform and entertain The Post's audience.

Steve will do occasional chats off of the news, and you can always read his columns and the On Leadership blog.

Steve, I totally agree with your main point in today's column, but, ironically, even you seem to have been taken in a bit by the right wing anti-tax orthodoxy. By citing Holtz-Eakin, are you saying that raising rates on the wealthy would cause some jobs to be lost, just not too many jobs? As you well know, tax rates on the rich went up in 1993/4, followed by a jobs boom. And tax rates on wealth were slashed in 2001 and 2003, followed by job stagnation and an almost depression. Why do you give any credit at all to the shibboleth that slightly higher taxes on wealth hurts job creation even slightly?

Easy. The point was that even Republican economists, using the most favorable assumption to their policy prescription, can't make the case that raising taxes on the rich will have much of a macroeconomic effect. My purpose was not to endorse his findings.

"The public is all in favor of raising taxes on the wealthy." Do people know that income does not equal wealth? Since I have no blue blood, how am I to generate wealth (or, even more imporantly, generational wealth) through income when pundits or policymakers equate income and wealth? A small drag on income can translate to significant lost wealth over time (not much different than low fee versus high fee mutual funds). It's hard to engage in an honest debate when facts and terms are not correct.

Fair point.I usually try to be careful about not confusing high income with high net worth. But when you are trying to make a concise argument, sometimes shorthand is necessary.  Saying, "The public is all in favor of raising taxes on high income earners," just doesn't have the same sizzle. Things begin to sound wonkish.

Enjoyed today's column,but just have to comment on the last line. I'm just an outside observer here in "fly-over country", but I would say that one thing Washington and Wall Street have is common is a lack of patience and an absence of humility.

Your are probably right. I was referring to the next 2 1/2 years.

Sir, What is the the upper limit for the middle class, both single and family, to which you would increase federal income taxes? Do you go with Obama's numbers or have your own?  As a Fed making just over $100k and living in D.C., I consider myself middle class. In Lexington, Ky., I would be very well off. My problem is I don't trust Congress to spend any tax increase wisely. How many C17s and ships were authorized to be built in DOD's budget that DOD says they don't need? Just look at the House subcommittee authorization of the second engine for the F35. Congress should not micro manage the DOD budget. Since I can't trust Congress and as a Fed I don't trust any executive branch agency, I say no tax increases.

Even if the proceeds were put in a "lockbox" for deficit reduction?

Some people are very upset that Congress yesterday authorized spending $1,000,000,000 for every Al-Qaeda member in Afghanistan, while simultaneously cutting education spending in the U.S. and laying off thousands of teachers. They need to realize that this was a good thing. In a generation, there won't be enough Americans with enough education and training to build and operate our war toys and the U.S. will have to make peace.

Funny.

I hope that helps get my question answered! I am on the verge of a serious loss of hope for our country and world solving the problem of our cultures' impacts on the Earth's natural ecosystems. The big problems need some degree of cooperation among the players, but it sure seems like we are fast forgetting how to cooperate. Am I being too pessimistic? Can you offer an optimistic vein of thought?

No, frankly, I cannot at this point offer much optimism. This collapse of the Senate effort to deal with climate change and energy is a very bad sign, particularly since there are a lot of business interests that actually want something reasonable and want it decided sooner rather than later.  This is a real failure of leadership on the part of a lot of people, including, I might add, the White House.

Steve: I'm not in the top tax bracket, but I'll pay more if the tax increases go into effect. I'm okay with that if we have some sort of sustainable plan to help fix Social Security, Medicare and Medicaid, and the tax increases will go to assist those endeavors. But if the tax increases are just a bottom hole to the Treasury, forget it. I can use my money much better than Washington can waste it. I think this problem is much more acute at the state and city level. Here in NYC, taxes keep going up (I think the top collective state and city rate is about 13%) and the money is basically a transfer of wealth from taxpayers to pay union pensions and healthcare. Our taxes aren't really going for social benefits or welfare, rather they are going to help the most politically connected unions squeeze more money from Albany. It's such a severe scam.

This is precisely the point Peter Hart was making to me. But if the President is going to govern and accomplish anything close to his agenda, the first thing he has to do is to restore voters trust that their money is being spent for things they care about.  And this is also a big part of the pernicious anti-tax argument, which is that its all wasted anyway. It is not all wasted, in fact. But he needs to engage in a few high-visibility battles against waste and fraud (lilke vetoing the defense appropriation bill with money for a second F-35 engine) to show that he means it and that the people in charge are beging careful with voters money. The free-floating cynicism and skepticism about government has, unfortunately, taken hold and prevents government from doing what needs to be done.

Steve, I don't think most people understand the concept of marginal tax rates; they think an increase applies to someone's entire taxable income. I would love to see the WP start clarifying that issue every single time a reporter writes about tax increases. Real numbers also help readers visualize the actual costs involved. A family of four with a taxable income of $300,000 would pay $X if the tax cuts expired as opposed to the $Y they pay now which would be an increase of $Z. Actually, I have a BS in accounting and I have no idea what those figures would be! Here's hoping the Post will educate your faithful readers.

Would be useful, I agree.  Problem is that if you include three paragraphs explaining that in every tax story, which is only 15 paragraphs long, you wind up not having much new to say. The journalist's dilemma.

The estate (death) tax was eliminated this year and there is a demand that it be reinstated at some level. To "pay" for the elimination of the tax, the stepped up basis for capital gains was modified. Has anyone determined if that tradeoff reduced or added to federal revenues? Isn't it possible to structure the basis for inherited assets in a way that raises more revenue than the inheritance (death) tax and leave that argument behind?

As I've written in this space before, I'll take the deal that ends the inheritance tax but also ends the stepped-up basis on capital gains at death. The people lobbying for elimination of the inheritance tax won't take this deal, which tells me it raises as much money. I believe the Joint Tax Committee has found it raises nearly as much -- at least in the ball park. And that way you completely avoid the double taxation argument -- this means taxing it once before it is passed on to the heirs.

Hard as it is for me to believe I'm saying this, Ruth Marcus had a great piece about letting the Bush tax cuts lapse. Is there really any other option? Thanks.

As both Ruth and I wrote, no there isn't any other option. The key here isn't the amount of money involve -- we're talking $1.2 trillion over ten years in an economy producing $15 trillion each year. Raising it or not raising it won't solve the deficit problem and, by the same logic, won't fundamentally alter the course of the economy. But it is the symbolism of it -- if we can't raise this tax, then we can't raise any tax on anyone for any reason and any time. And that means game over on a lot of policy intiatives. Take one example: a couple of Senators proposed some version of cap and trade that would amount to an indirect carbon tax, with a promise to rebate every penny to taxpayers through tax cuts. And the anti-tax crowd wouldn't tolerate it even being discussed. Whyt? Because it involves raising one tax to lower another one. They are just nutty on this subject. Its nothing less than a jihad.

The coming tax fight is going to involve a lot of screaming from supply-side ideologues. Maybe I'm blind to my own ideological prejudice, but it seems to me that if we just look at evidence of what works, there's no case for the supply siders: In 8 years under Clinton, we raised taxes, created millions of jobs, and balanced the budget. In 8 years under Bush, we cut taxes, lost jobs, and blew a hole in the budget. I'd hate to draw too much from two data points, but why exactly are we considering an extension of Bush-era policies? They failed. Badly.

Broad strokes, that's pretty much on target with the facts.

Have federal income taxes for American families gone down under President Obama? Yes, according to a report by the nonpartisan Center for Budget and Policy Priorities which says under Obama's tax cuts, a family of 4 is paying the second-lowest percentage of federal income taxes in the past 50 years, and all federal taxes, including Social Security taxes, are at or near the lowest level in decades. Given these facts which may be inconvenient for some, why the anger in the Tea Baggers' protests? Is President Obama's race a key factor? Otherwise, where were the angry protesters when on George Bush's and Republicans' watch, lax regulations of financial markets resulted in the 2008 financial crisis, the housing subprime mortgage grew and market collapse, unconstrained borrowing from the likes of China to fight two wars, and unfunded spending like Medicare Part D increased the Federal deficit by 89% and the erosion of significant personal freedoms occurred under the Patriot Act?

This is where the anti-tax bias has brought us, and yet, as Ruth Marcus points out, there is no level of taxation that they don't consider too high. For the Mitch McConnell's of the world, the optimal tax rate, apparently, is zero.

Steven, in today's column you cite Peter Hart. He is a Democratic pollster. Look at is web page, where he lists his clients.  While I don't think that makes his work suspect, I do think you should identify him as such. You identify Douglas Holtz-Eakin as a top economic adviser to McCain. Why one and not the other?

Peter Hart has worked for mostly Democratic candidates in the past. He doesn't do political work now, but polls for the Wall Street Journal, I believe. He is also a straight shooter -- if the polls and focus groups showed that people wouldn't favor higher taxes on the rich, he would say so. Otherwise, he wouldn't be credible and his business would be caput. When I last checked, it was doing pretty well.  Public opinion data is just that -- data.

Couldn't a group of 41 Senators (say all Democrats) just filibuster any attempt to extend the tax cuts and let them expire on schedule? I generally agree with your column today, but I do take issue with the idea that we can enact something like health care reform to extend coverage to the uninsured, fight two wars, fund a stimulus bill, but the sacrosanct "middle class" isn't expected to pay anything at all, just the "rich". My approach is that if something is truly a national priority, then everyone should have to pay something more. Extending the middle class tax cuts and just letting the "rich" pay more fosters the mentality of something for nothing that causes the political problems you identify. Further, letting all the cuts expire may start to promote more honest budgeting, as they were set up this way specifically to game the deficit neutrality rules back in 2001. Speaking for myself (and I fall into sub $125,000 block (being single, that's where my increase would kick in I believe)), I'd be willing to pay more in over all net taxes in exchange for two things: 1. Tax simplification so the actual "cost" to me in time, money and frustration from doing taxes is less. 2. No one else is gaming the system through special exclusions (see carried interest and Sub S Corps).

I'm with you, actually. That's why I'd only extend the middle class tax cuts for two years. The President was wrong to have promised the middle class that their taxes would not be raised. It is not only a promise that will be impossible to keep if you want to get the budget back to a reasonable deficit, but it helps to perpetuate, as you say, the anti-tax myth and the belief that people can get things for nothing

Writing and discussing minute changes to the tax system is fiddling while Rome burns. Marginal tax rates and "Bush's tax cuts" are like worrying about your fridge door being open while there is a fire in the living room. The problem is government spending, which goes up and up in good economies and bad. It goes up faster than inflation no matter what. New agencies and programs are created and expanded, but old ones are hardly ever dismantled. The federal government is involved in aspects of the economy and society to a degree that far outstrips its constitutional parameters. So, go ahead and wring your hands over tax rates and tax cuts, and yet ignore the fact that our entire tax code should be destroyed and a new, simple flat tax structure should be implemented. And most importantly, spending needs to be slashed, not increased.

With you on all of it except two things: one, taxes will have to be raised as well because most of what the government spends money on is stuff we value, whether it is social security payments or a robust military or national parks; and two, there is no reason the simplified tax code has to be a "flat" tax.  There is nothing wrong with a modestly progressive rate structure with three or four rates. That can still be plenty simple and still allow most people to file their taxes on the back of a postcard.

Here is my question on estate taxes. Someone inherits something, such as a farm or a business, that is barely profitable, but has a net worth of over one million dollars. Doesn't taking the value of this farm or business require it being sold in order to pay the inheritance taxes? Is the goal to not allow family enterprises to continue?

Short answer:  if the farm is losing money, yes, you'd need to sell it to pay the taxes. You'd also need to sell it to cover the losses, by the way. And if it is making money, then the tax code allows the inheritor a long time to pay the taxes from the proceeds of the business. And this is why those who complain about this "problem" with the inheritance tax have yet to come up with one example of someone who had to sell the farm to pay the inheritance tax.

Of course people favor taxes on 'the rich.' It's the same when the amendment to the Constitution was passed. Citizens were told: no big deal, only the very high earners will have to pay it - you won't have to pay it cause you don't earn enough. And look where all that wealth envy got us. Seriously - I am hardly in the top tax bracket but I hope to be there one day. I have no problem with people earning a lot of money - but our politicians seem too. They demonize those who work hard and earn a lot. Okay, maybe some of them don't work so hard, but who cares? Unless you're stealing the money, I don't care - and I want you to keep it because goodness knows that DC can't spend it wisely.

This is unadulterated hooey. Nobody is demonizing people because they earn high incomes. Taxing people is not demonizing.

Given the lack of ability of this Congress to accomplish anything if 60 senators can't agree, what do you think is the likelihood of tax legislation by the end of the year? As a tax professional, I've been counseling my clients to expect a major tax hit next year because the easiest thing for Congress to do is nothing.

It is possible stalemate will result in all the Bush tax cuts expiring. It is possible that Obama and the moderates will cave and the cuts will be extended for a year or two for all taxpayers. Those are the two likely outcomes. Unfortunately, that doesn't help you or your clients plan. And you are unlikely to have an answer much before Dec. 15 during the lame duck session.

Would you comment on the fact that somewhere between 30%-40% of income tax filers in this country don't pay any federal income tax? Even though I believe in a progressive tax system, I still find this trend disturbing. I understand that a lot of these people do pay payroll taxes, so they aren't "tax free," but I can't escape the feeling that they have no skin-in-the-game when it comes to voting and other political decisions.

I think it is indication of how badly skewed the distribution of income has become, that we can raise much of the necessary revenue we need without have to tax the income of those at the bottom and still have globally competitive tax rates at the top. That should tell you a lot.

    By the way, there are lots of poor people who not only don't pay income taxes, but actually have negative income taxes -- that is, they get a check rather than send one. That is the result of the earned income tax credit.

Steven, this may be too wonkish, but I'm wondering. Does the multiplier effect of money in the economy vary by income level? For example, a middle-class person buying a car vs. someone in the ultimate bracket buying a Van Gogh. A fair amount of the Van Gogh's "value input" is prestige, while that of the car is steel and electronics. Can this be an explanation for why we seem to be more prosperous as a society with more progressive tax rates? We "ordinary folks" buy things that have human input. Thanks.

The multipliers are different depending on the goods and services purchased, and different classes probably do have different things they tend to purchase with the last dollar they spend.  Much of that has to do with the foreign content of what people buy, since there is not much of a multiplier if, at the margin, people buy imported sneakers and electronics  or if they use the money to take a vacation on the Dalmation coast. My guess is, however, that at the margin, rich people probably spend their marginal dollar on personal services, which tends to create low paying jobs, while poorer people tend to spend it on domestic entertainment and foreign made goods. But that is just a guess.

YES the politicians DO demonize the 'rich.' Every day. It's called wealth envy (they imply the money isn't earned, that somehow those other people who earn more are just 'lucky' or 'fortunate.'). YES it *did* happen when the income tax amendment was passed. Most of the people who voted for it thought: great, free money! cause *I* won't have to pay this tax. Read the history.

I don't hear that today from politicians, particularly those that are in leadership positions.

The point of the estate tax and the stepped up basis is that most people don't keep such great records. Especially for heirs after death to find the basis information is difficult - but 40% of an estate is absurd. I hardly can find basis information for some of the stocks/etc. I currently own, my heirs will certainly not be able to find it. So I don't disagree with a small estate tax for very large estates, but not stepping up the basis - that's just craziness (seriously - I was just told yesterday by a mutual fund company to guess).

Well, you could have a default tax rate for someone who can't figure out the basis. But it would have to be high -- like, say, 45 percent. Come to think of it, that is the inheritance tax rate!

Your otherwise excellent column included one bit of poison: your claim that the bipartisan deficit commission was "rendered impotent". It's work is not done and it is too soon to condemn it. Its budget is too small, and we should find out why, but there is still time for it to do good work.

Even the White House doesn't expect it will be able to come up with consensus recommendation because of the requirement of a supermajority and the Republican appointments designed to thwart such a majority.

Steve, Every time there's a tax hike we singles get hit the hardest - no deductions per every kid etc. AND we pay property tax to educate kids that aren't ours. What can stop it on the federal level?

Most people who are single and have no children eventually get married and have children. On a life cycle basis, things are actually pretty fair in that regard. Same with help for the elderly. You'll be old some day too!

That''s it for today folks. Just for your information, it has been decided not to do these chats every week, but just once and a while. So for those of you who have been regulars, please accept my thanks for your loyal attentions and participation. And have a great rest of the summer.

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Steven Pearlstein
Steven Pearlstein is a business columnist for The Washington Post. He won a Pulitzer Prize in 2008 and is co-moderator of the On Leadership discussion site.
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