Scott Sumner  

The Democrats move left

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In recent decades, the Republican Party has moved to the right on some issues, notably immigration. More recently, the Democrats have moved left on issues like trade, fiscal stimulus and the minimum wage. And taxes, as the following story illustrates:

Rand Paul's tax reform plan is utterly bizarre. I don't even mean that as a criticism. It's not that the plan is bad, though it is; it's just downright weird. It calls for a 14.5 percent flat tax, which is substantially lower than just about every other Republican flat tax plan. That's normal enough, if a bit extreme, but then Paul takes a strange turn, altering his proposal in a way that suggests he's borrowing it from a completely baffling source: current California Gov. Jerry Brown's eccentric, ideologically unclassifiable 1992 Democratic presidential primary campaign. . . .

In 1992, Jerry Brown -- who was Bill Clinton's main rival in the late stages of the primaries, mostly running to his left -- proposed abolishing the payroll tax for Social Security as well as personal and corporate income taxes, and replacing them with a 13 percent flat tax on personal income (with deductions only for rent, mortgage interest, and charitable donations), and a 13 percent VAT.

That's right: Rand Paul has taken Jerry Brown's tax plan and then raised the tax rates in it. Brown's plan was more regressive than Paul's as well. Brown would've eliminated personal exemptions and the standard deduction, which makes the flat tax far more regressive. He would've eliminated the Earned Income Tax Credit, which Paul keeps; Paul also retains the Child Tax Credit, which helps many low-income families, and didn't exist yet in 1992. While in the past Paul has proposed slashing those credits by making them nonrefundable, they're still fully refundable under this plan. Paul does eliminate the estate tax, unlike Brown, but on the whole, his plan can be fairly characterized as to the left of Brown's.

For one thing, while Paul's plan cuts taxes for all income groups on average (albeit more for rich people), the working class would actually be worse off under Brown's plan.


Now it should be noted that Bill Clinton won the nomination in 1992, not Brown, and Clinton called for higher taxes on the rich. On the other hand, in 1986 Ted Kennedy voted for a 28% top income tax rate and 20 years later George Bush favored a 35% top rate. Today many Democrats favor still higher taxes on the rich, even though President Obama raised the top rate from 35% to 43.4%, and of course states like California have also raised taxes on the rich.

I find it sad to contemplate the fact that there is no longer any possibility of finding bipartisan support for tax reform---the parties are far too far apart. For better or worse we are stuck with our current system.

PS. It also seems like the Vatican is moving sharply to the left on economic issues. Yesterday I read Pope Francis's recent statement on global warming, and was struck by the strongly anti-capitalist tone of the document. As an aside, I agree with the Pope on many issues, such as the need to do more about the environment, to be more aware of the risks posed by technology, skepticism about the "over-population" theory, as well as the need to treat migrants better. But the anti-market tone of the document was really striking, appearing in dozens of places. The term "privatization" was consistently used in a negative manner. The opposition to carbon credits (although perhaps a minor issue) best exemplifies my point. It just seemed weird. Apparently the Church even opposes using markets to solve global warming. You can't get much more anti-market than that.

PPS. Rand Paul's plan is obviously an improvement over the current system, but I think it's a tactical mistake to add a VAT to the current income tax regime. Rates would creep up again. True tax reform would involve abolishing the income tax, and replacing it with a progressive consumption tax. Which reminds me, the Pope seemed particularly upset with the high consumption levels of the global elite.


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COMMENTS (14 to date)
Hazel Meade writes:

Why is it that nobody ever proposes raising the standard deduction?

I hear this idea a LOT in libertarian circles, but somehow it never ever shows up in policy proposals of actual politicians, even the ostensibly libertarian ones.

If you raise the standard deduction, you can preserve progressivity while simultaneously flattening tax rates and simplifying the tax code. It's a simple, obvious compromise. It also has the beauty of being broadly fair - everyone gets it, regardless of whether they have kids or a mortgage.

So what's the problem?

Scott Sumner writes:

Hazel, It's a reasonable idea, but the left will claim it's not enough. They seem to favor a very complex tax code in order to tax the rich at much higher rates than the middle class.

It is included in Rand Paul's proposal.

Glen Smith writes:

Hazel,

The problem is that no one in government or certain businesses want to simplify the tax code.

ThomasH writes:

Hazel,

If you meant a minimum tax credit, I'd agree. The problem with deductions of any kind except expenditures are not consumption like state and local taxes, is that is that they would make a progressive consumption tax less transparent.

Scott,

I agree about the anti-market tone of the Pope's encyclical, but factually, it makes it harder for people to deny that CO2 accumulation causes harm. Morally the important message is that the we the rich should not ignore the harm from CO2 accumulation just because our wealth can (if it can) insulate us from the worst effects. In policy terms, it means that when the rich countries set a price for carbon it should not be based only on harm to our own citizens but globally and we should be willing to use some of the proceeds of a revenue neutral tax to compensate people in poorer countries for adopting a carbon tax.

Glen,

Even if we want to simplify, a consumption tax will still be pretty complicated, sorting out what is really "consumption" and if all kinds of consumption really should be taxed the same way.

Scott,

I see the leftward move of Democrats as somewhat a result of the rightward shift of Republicans, (although I realize I may just be making excuses for the other end of my "tribe.") Small scale example, if Republicans proposed an increase in the EITC, there would be no reason for the minimum wage. Bigger example, with Republican support, we could have gotten rid of linking health insurance to employment with everyone in exchanges. I even think (again, maybe just projection) that if Republicans were willing to accept progression, Democrats would support taxation of consumption.

E. Harding writes:

"When the political right has badly mismanaged an economy over many decades (think Argentina or Venezuela), Piketty's ideas will have some appeal to the voters."
-I'm not sure if the Pope votes, but Piketty's ideas definitely appeal to him.

khodge writes:

You cannot take the Pope's economic theories away from that Pope's background and training. He comes from Argentina; he views the world as Argentinian. Catholic Church theology says nothing different.

Scott Sumner writes:

Thomas, Those are reasonable comments, but I think you are being a bit overly generous to the Dems.

E.Harding, I would hope that even Piketty would be horrified by the Pope's views on economics.

Khodge, Pope John Paul came from Poland, and that's one reason he was so anti-communist. Argentina is like a poster child for the failures of statist economic policies. It used to be one of the richest countries in the world. Odd that he can't see that.

Robert Simmons writes:

Could you explain how a progressive consumption tax would work? It sounds promising in the abstract, but to me that's all it is at this point, very abstract.

nl7 writes:

The main drawback to a more muscular standard deduction is that it narrows the number of people paying income tax. It also undermines GOP talking points on the issue. But I think it's a good idea generally.

Scott Freelander writes:

Scott,

I think what's actually happening is the Democrats are becoming more populist, as are conservatives. IF you listen to right wing radio shows, increasingly you hear anti-free trade(zero-sum) rhetoric, with the Michael Savage/Pat Buchanan portion of the conservative movement growing.

I thought it would happen much sooner than it has, but it seems the consensus supporting these "free trade" deals is collapsing, which could eventually also actually affect free trade.


Similarly, we're seeing the movement to increase minimum wages gain momentum, and it's not just on the left.

The economic fallacies that support such movements never die, but always wait in the wings to emerge during times of economic mismanagement. This is similarly true for anti-immigration and redistribution policies.

When people feel poorer, their anti-free trade, pro-minimum wage, anti-immigration, and pro-redistributionist ideas gain favor.

Many people in this country, for a long time, feel they've been getting screwed by the rich, immigrants, foreign countries, etc., and it's understandable that people with no background in economics would think that way.

Hence, I don't know why you would be so surprised a religious leader, like the Pope, with no expertise in economics at all, would get some things wrong. You point out how even Nobel winners in the field of economics regular make the most idiotic statements that not even undergraduates in the field should make.

Scott Sumner writes:

Robert, There are different methods. In the long run a payroll tax on wage income is identical to a consumption tax, and hence a progressive payroll tax is like a progressive consumption tax.

Another option is to have unlimited 401k privileges under an income tax. You only pay taxes when your saving are taken out and spent.

A third option is to directly tax consumption. That would involve a VAT that rebates a fixed amount to everyone (so the poor effectively pay no tax.) And probably progressive rates on real estate, yachts, private jets, etc.

All have drawbacks. The payroll tax encourages evasion (switching wage income to profits). The income tax/401 is complex, and the third option is harder to make highly progressive.

Scott, Good points, and indeed I've argued that one of the costs of bad monetary policy is that it leads to bad policies in other areas.

Regarding the Pope, I'm surprised he has any sort of view on tradable carbon permits. I wouldn't expect him to know much about the subject, but I guess I would sort of expect him to not make any remarks at all if he didn't know much about the subject. There are all sort of practical technical problems faced by our society that I would expect religious leaders to avoid. Starting with economic policymaking.

Talk radio probably reflects the views of many voters, but the GOP is still pretty pro-trade, as far as I can tell.

Prakash writes:

Are Land Value taxes still the great orphan? Good idea with no natural home in any political coalition.

Thomas B writes:

I find it bizarre that the Pope thinks he, as leader of the Catholic church, has any moral authority to speak to capitalists.

The Pope is a man with personal attributes many of us admire. But on this subject, it's time for him to read Matthew 7:3.

Consider that capitalists have done more to address poverty in 200 years than... well, than anyone, ever, including the Church in its 2,000 year history. And, what does the Pope have to say about the Church's history of actively obstructing AIDS prevention?

Floccina writes:

I think that I cam up with another simpler way to turn the income tax into a progressive consumption tax:

Could the income tax be turned into a a progressive consumption for all but some of the top 1%,by allowing Americans to contribute up to $5 million over their lifetime to an IRA before taxes and allow withdrawals and tax them as income.

Does anyone see a major flaw in my thinking?

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