Political Economy: Not So E-Z

Published Apr 14, 2012. By John Cranford.

It’s tax week, a time for celebration and reflection on the benefits of living in the United States, right? Well, no. It’s really a time for procrastinators to get their paperwork finished for Uncle Sam. But, as an important moment in time, the filing deadline does accentuate the public debate about all things taxes.

And the evidence is clear: Hardly anybody who knows about the U.S. income tax system is happy with it. To some, it’s basically unfair (although there is disagreement over just who is punished by the way taxes are levied). To others, it’s overly complex in ways that distort economic behavior. To still others, it’s structured to raise insufficient revenue to finance the needs of government.

The range of things that make people unhappy about the tax code is quite broad. And proposals to make changes in it are often contradictory. So, for now, that doesn’t really get us anywhere.

That won’t prevent lawmakers of both parties from trying to use taxes to gain political leverage, even if their efforts don’t go far toward addressing the real issues.

So, this week will mark the opening salvo in what promises to be a yearlong tax fight when the Senate debates the Buffett Rule, which is designed to appeal to those who think the tax code unfairly favors the rich. It would raise relatively little additional revenue and, undeniably, make the code more complex, not less. It also upsets those who contend that Americans who pull in higher incomes already pay the bulk of federal taxes.

The Buffett Rule started out as the broad notion that people of means (such as Berkshire Hathaway Chairman Warren E. Buffett) should pay a higher effective tax rate than those much further down the income scale (such as Buffett’s secretary). It has morphed, however, into a specific proposal to levy a 30 percent tax that would be phased in for those with $1 million or more in annual income.

Senate Majority Leader Harry Reid will — almost certainly — fall short of the 60 votes he needs to move forward on a bill to enact the Buffett Rule into law. But that doesn’t mean the issue will disappear. Not in this election year, when President Obama wants to capitalize on broad public sentiment, borne out through polling, that the rich need to contribute more to the cost of government.

Not to be outdone, House Republicans are likely to bring a bill to the floor soon to grant any company with fewer than 500 employees a deduction equal to 20 percent of its profit. This bill is sure to pass the House. But a lack of support from Democrats — who complain that it doesn’t target its benefits to companies that actually add workers — means it will probably die there.

Moreover, the measure would lose revenue for the Treasury and add to the tax code’s complexity. But Republicans see this one as a winning political gambit, so they will press ahead anyway.

Economists in Agreement

All of this is a reminder that Congress doesn’t so much debate tax policy these days as obfuscate it. Donald Marron, the director of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, made just that point at a timely conference last week titled “Should the Rich Pay Higher Taxes?”

As if anticipating the way lawmakers would talk about the Buffett Rule and other tax issues this year, Marron was blunt: “Tax policy debates often feature more rhetoric than substance and a lot of fiction mixed in with occasional bits of fact.”