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Agreeing on fairest tax rate proves elusive

One of the great enduring mysteries of American politics is why Republicans attach so much importance to cutting taxes for the rich.

I know there are many Democrats and independents who believe Republicans get up in the morning determined to do whatever is necessary to help their rich friends and campaign contributors. While that may explain some Republicans' behavior some of the time, I strongly doubt it's the primary motivation.

For starters, there is no American Association of Rich Persons out there with a huge political action committee and a formidable grass roots lobbying effort. Yes, there are cabals of very rich people who fund conservative think tanks and political advertising. But American democracy is not so corrupt or dysfunctional that a tiny portion of the population, driven purely by selfish greed, can capture so many elected officials and bamboozle so many voters.

It's also worth noting that there are plenty of very rich people who are liberal Democrats who don't seem to have a problem with paying higher taxes.

That said, a lot of the explanations given by Republicans themselves don't quite explain their fetish about taxes on the wealthy.

While Republicans have argued recently that it would be an economic catastrophe to raise taxes on anyone now, in the midst of a jobs recession, the truth is that they don't believe there is ever a good time to raise taxes on anyone.

Equally unconvincing is the argument that they are primarily concerned about small-business job creation. Surely there are other ways to encourage small businesses to expand payrolls without tax breaks to movie stars, pro athletes, law firm partners and hedge fund billionaires.

There may be some truth to the Republican belief that lowering taxes overall is a good way to boost economic growth or contain the size of government. However, that would apply just as well to cuts in corporate and payroll taxes or additional income tax cuts for the middle class. Yet you don't see Republicans drawing lines in the sand over those. What's so magical about the estate tax or the top marginal income tax rate?

For their part, liberal Democrats have now worked themselves into a lather about the impact of an upper-income tax cut on the burgeoning federal deficit. If memory serves, many of those same Democrats had worked themselves into a lather when Bill Clinton betrayed them and struck his budget-balancing deal in the 1990s. It's hard to believe their real outrage over tax cuts is rooted in some profound sense of fiscal rectitude.

So what's really going on here?

Kevin Hassett, an economist at the conservative American Enterprise Institute, suspects the issue of taxing the rich looms so large because it is a proxy for what you think about George W. Bush. If it were just some wonkish disagreement over whether the marginal tax rate should be 39 percent or 35 percent, it would be easy enough to split the difference at 37 and move on to something more meaningful. Instead, the question is invariably posed as whether to extend the Bush tax cuts, implicitly making it a referendum on the Bush presidency and the latest round in a partisan feud that goes back to Bush vs. Gore.

Another reason this issue arouses such an emotional response is that it's really not about economics, or even economic self-interest — it's about fairness, an inherently subjective concept.

Democrats focus on the increasingly unequal outcomes generated by the private economy, the widening gap between the very rich and everyone else. To them, raising taxes on the rich seems the least we can do to even things out in an increasingly arbitrary and unfair free market. Do the rich deserve a tax cut when 15 million other Americans are jobless and even those with jobs are struggling? Do their children deserve to inherit a life of leisure and luxury? They consider the answers to be morally self-evident.

For Republicans, it's also a moral issue, looked at through a different lens. For them, the focus isn't on the fairness of income distribution but the fairness of the system that produces it. And part of that calculation involves how much of a person's hard-earned income government takes away.

Karlyn Bowman of the American Enterprise Institute has gathered extensive polling data on this subject that goes back decades. What she found is that most Americans agree with Democrats that national income is unfairly distributed and that upper-income households pay too little in taxes. But when you ask them what is the highest percentage that even high-income households should pay in taxes, the average tends to be around 25 percent, with very few in favor of it going much above 30 percent.

As it happens, the rich pay more than that — a good deal more. The Congressional Budget Office reports the average effective federal tax burden on the top 1 percent of households is now about 28 percent. (That's different from the marginal rate, or the rate on the last dollar earned.) Adding in state and local taxes, the total tax burden on the richest households probably exceeds 40 percent in most places, considerably higher than what most Americans consider fair. If you listen to the more thoughtful Republican politicians express their views on taxes, they invariably reflect that sensibility.

For years now, liberals have taken comfort in the work of behavioral economists that shows human beings aren't the rational, income-maximizing stick figures they're assumed to be in classical economic models. This research shows one thing we care about is fairness, even when the fair thing may not be in our economic self-interest. Democrats have used these findings to bolster their argument that a healthy economy over the long term must be both efficient and fair. What they are only now coming to recognize is that people's views on fairness can be complex and don't always point in the same policy direction.

Agreeing on fairest tax rate proves elusive 12/25/10 [Last modified: Saturday, December 25, 2010 3:31am]
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