Monday, August 2, 2010
The Art of Tax War
The highly charged partisan debate over the future of the Bush tax cuts (scheduled to expire at the end of December) is a kind of war. Whether you term it a class war depends on what you mean by class, but it is certainly a war between the very rich (the top 2 percent of income earners) and a host of other individuals allied with them, against everybody else who gives a darn.
Battlefield success will be largely determined by the outcomes in the coming Congressional elections. A key issue in these races will be public perceptions of President Obama’s proposal to let expire the federal income-tax cuts put in place by the Bush administration for the very rich, while maintaining those tax cuts – and others implemented by his administration – for everybody else.
Voters’ perceptions are not primarily driven by facts. A February CBS poll showed that only 12 percent of voters recognize that the Obama administration has cut taxes. About 24 percent of voters (and about 64 percent of Tea Party supporters) said they believed it had raised taxes.
Many explanations come to mind. The tax issue is often a lightning rod for other frustrations. Most people find discussions of tax policy complicated and boring, and highly charged partisan debates excite some, but upset others, discouraging them from learning more.
The dynamics of collective conflict also come into play. Precisely because they are such a small group, the very rich stand to lose much more per person than others will gain per person from increased tax revenues. They also have more resources to invest in the fight, enabling them to make bigger contributions to Congressional campaigns.
One important strategic goal of this camp is to persuade voters that tax increases at the top will hurt the economy as a whole. Here’s where supply-side economics comes in, with its claims that tax cuts increase revenues and promote economic growth.
Historical trends, including a comparison of trends during the Clinton and Bush administrations, do not support these claims. But in a world in which most people believe their livelihoods depend on rich investors, many people are fearful. As Brit Hume of Fox News put it on July 25, “When’s the last time one of these poor people offered you a job?”
As a corollary, it is strategically important to argue that increased taxes at the top will hurt small-business owners, who are generally more liked and better respected than individuals in the economic stratosphere. But as William Gale of the Brookings Institution explains, very few small-business owners are in the top 2 percent, and most individuals in that category don’t heavily rely on business income.
In a counterattack, a group called Business and Investors Against Tax Haven Abuse has released a report arguing that corporate tax havens provide an unfair advantage to large chain retailers and financial companies over locally owned retailers and community banks.
This report doesn’t speak directly to the issue of federal income taxes, but nonetheless lands some relevant blows. Apparently Goldman Sachs, taking brilliant advantage of offshore tax havens in 2008, paid federal taxes at an effective tax rate of 1 percent, proffering a sum less than one-third what it paid its chief executive, Lloyd Blankfein.
It seems unlikely that taxing Mr. Blankfein himself at a higher rate would cause any harm.
Another strategic goal of opponents of the tax increase is to split and weaken the coalition favoring it. In this context, it is advantageous to label those receiving public assistance (including unemployment insurance) as slackers and cheats. About 47 percent of Americans owed no federal income tax in 2009, which you might think people opposed to federal income taxes would consider good news. Instead, the conservative radio commentator Rush Limbaugh characterized this as a form of fraud, “worse than anything Bernie Madoff ever thought about doing.”
On the battlefield, in the fog of war, it is often difficult to know exactly what is happening, and why. But those resisting change have the most to gain from fog – or even from blowing smoke – because uncertainty often works in favor of the status quo.
In my view, Citizens for Tax Justice, which describes itself as an advocacy group that strives “to give ordinary people a greater voice” against the “armies of special interest lobbyists for corporations and the wealthy,” offers the most specific and well-documented analysis of the two competing approaches to the Bush tax cuts, those of President Obama and the Congressional Republicans. Unfortunately, it doesn’t seem to have gotten much attention from the news media.
I’m not sure whose fault that is, and if Sun Tzu were alive today, I’m not sure whom he would be working for. But it’s pretty clear that the Republicans would offer him a higher salary.