(Dan Mitchell) – Republicans are fighting about taxes. But they’re fighting with each other, not Democrats. I’ve already written about this topic once, but the issue has become more heated, and the stakes have become much larger. And this time I’m going to focus on the political implications.
First, some background. One side of this battle is led by Grover Norquist of Americans for Tax Reform, who is the organizer of the no-tax-increase pledge. Grover argues that America’s fiscal problem is too much spending and that higher taxes are economically and politically foolish.
The other side of the conflict is led by Senator Tom Coburn of Oklahoma, who argues that America’s fiscal problem is too much red ink and that higher taxes are a necessary price to strike a deal with Democrats that supposedly will reduce budget deficits.
The first skirmish in this fight involved ethanol tax credits. Senator Coburn wanted to get rid of the credit, which everyone agrees is economically destructive and fundamentally corrupt.
But there’s a catch. When you get rid a tax preference, even an odious one, that means the government gets more money. In other words a tax increase. Senator Coburn has no problem with that outcome.
Grover Norquist says that all of the arguments against ethanol are correct, but he says that any proposal to get rid of the credit should be accompanied by a tax cut of equal magnitude.
If the ethanol credit is worth about $6 billion per year, as Senator Coburn’s office states, then find a tax cut of similar size, pair it with the ethanol credit, and kill two birds with one stone. Seems like the best of all possible outcomes, which is why Grover is correct from a policy perspective.
The fight over the ethanol credit may seem like a tempest in a teapot, but it was symbolically important – particularly since it is a precursor for the much bigger fight about whether GOPers should agree to a budget deal with Democrats.
Indeed, this may already be happening as part of the “Gang of Six” negotiations, with Senator Coburn and two other Republican Senators joining three Democrats in putting together some sort of grand compromise (presumably something similar to what was proposed by Obama’s Fiscal Commission).
In this case, the tax increase could be enormous, well over $1 trillion. No wonder this battle is getting heated. Here are some excerpts from a recent story in the Washington Post.
Republicans are feuding over whether to abandon the party’s long-held opposition to higher taxes in pursuit of a deficit-cutting deal with Democrats. …both sides say this cuts to the core of a quandary for the GOP: Will the cause of trimming deficits run aground on the conservative principle that the government must not increase the amount of money it takes in through taxes? …“If we don’t do something, what we’ve done is put the country at risk,” Coburn said in an interview. “I agree we ought to cut spending, but will we ever get the spending cut to the level that we need to without some type of compromise?” Norquist…argues that bipartisan deals struck by Presidents Ronald Reagan in 1982 and George H.W. Bush in 1990, both of which entailed increased taxes, resulted in bigger government rather than spending cuts that both men thought they had secured. “This is a fantasy on the part of the liberal Democrats that the Republicans would be stupid enough to repeat 1990 and throw away a winning hand politically,” Norquist said.
As the excerpt correctly acknowledges, this issue deals with both economics and politics. From an economic perspective, there are all sorts of important issues:
1. What is better for the economy, lower spending or higher taxes?
2. Is it possible to balance the budget without higher taxes?
3. Would tax increases be used for deficit reduction or more spending?
But I covered these issues in my earlier post, so lets’ look at the political implications. Grover asked, in the Washington Post article, “Why would you elect a Republican Senate if they just sat down with Obama and raised everyone’s taxes?” And I was quoted about how abandoning the no-tax-hike position would heavily damage the GOP.
How the debate among Republicans is resolved in the coming weeks will play a large role in determining whether a grand bipartisan bargain on deficit reduction is possible. “There’s a significant split over whether to put taxes on the table,” said Dan Mitchell, an economist at the libertarian Cato Institute and a Norquist ally. Mitchell said the disagreement largely pits House and Senate Republicans against each other and gives Democrats a potential political edge. “Obama has it within his power to drive a big wedge between House and Senate GOP-ers and turn the tax issue from something that works on behalf of Republicans into something that works against them,” he said.
To elaborate on the last point, the no-tax-increase pledge helps the GOP because it sends a signal to all voters that they will not be raped and pillaged (at least in excess of what is happening now).
This puts Democrats in a tough position. They can play the politics of class warfare (as Obama likes to do) and say only the “rich” will pay higher taxes, but voters don’t dislike their upper-income neighbors. Moreover, they probably suspect that Democrats have a very broad definition of what counts as rich, so they instinctively gravitate to the GOP position. After all, the only sure way of avoiding a tax hike on yourself is to oppose tax hikes for everyone.
If Republicans put tax increases on the table, however, the politics get turned upside down. Instead of being united against all tax increases, voters realize somebody is going to get mugged and they have an incentive to make sure they’re not the ones who get victimized.
That’s when soak-the-rich taxes become very appealing. Democrats, for all intents and purposes, can appeal to average voters by targeting the so-called rich. And even though voters will be skeptical about what Democrats really want, they don’t want to be the primary target of the political predators in Washington.
Think of it this way. You’re a wildebeest running away from a pack of hyenas, but you know one member of your herd will get caught and killed. You despise hyenas, but at that critical moment, you’re main goal is wanting another member of the herd to bite the dust.
This is why surrendering to tax increases put Republicans in a no-win situation. They oppose class-warfare taxes because they understand the disproportionately damaging impact of higher top income tax rates and increased double taxation of dividends and capital gains. So when GOPers get bullied into agreeing to raise taxes, they want to target less destructive sources of revenue. But that usually means that taxes that are more likely to hit the middle class.
Needless to say, Democrats almost always win if there is a fight on whether to tax the middle class or to tax the rich.
Senator Coburn’s heart is in the right place, but he is creating a win-win situation for Democrats. By putting taxes on the table, he is giving Democrats a policy victory and a political victory.