Sunday, December 05, 2010

The Democrats' Tax Cut Dilemma

Nate Silverman (not my favorite pollster) has an interesting article on the dilemma facing Democrats over raising taxes (by letting the Bush tax cuts expire on someone or anyone). What popped out at me first was this statement:

It’s a little bit more difficult to identify the preferences of Democrats, because there are more divisions within the party: between the president and Congress, between moderate Democrats and liberal ones, between Democrats who are electorally vulnerable and those who aren’t. It is safe to say, however, that on balance, the Democrats would prefer to extend the tax cuts only below the $250,000 threshold, and not above it.

This goes with something Aphrael said last week, which was that to many Democrats, raising taxes only on a segment of the populace is a compromise, because some Dems would like all the tax cuts to expire. At the time, I didn't really give this much thought, because it seemed crazy to me that in a bad economy, there were people who wanted to raise taxes on everyone, including the poorest people. But in the last day or so, I've heard arguments from some liberals that amount to the same thing; these are people complaining that we need to go back to "Eisenhower era" tax rates or "Reagan era" tax rates.

The people making this argument, of course, are only concerned about the top marginal rate and how much "the rich" will pay. But the truth is that going back to the tax rates of the Eisenhower administration wouldn't have quite the effect liberals want. For one thing, that 92% tax rate was for people making millions of dollars. And, as with raising tax rates back to the levels of Ronald Reagan, there were significantly more loopholes in the tax system so that virtually no one paid that higher rate.

Ronald Reagan's tax plan was drastic because it cut out most tax shelters (for example, no more credit card interest deductions) while flattening the rate structure. But there would be at least one unintended consequence to going back to either of these levels: it would hurt the working poor.

If Congress passed a new tax law pushing the rates back to Eisenhower (or Reagan) levels and Barack Obama signed it, items like the Earned Income Tax Credit and higher deductions for children would go away, not to mention that tax rates would go up for just about everyone. Even Silverman notes that letting all the Bush tax cuts expire would detrimentally affect everyone in a bad economy, which is why there is almost no talk about doing it.

So why are some liberals still talking about this idea like it is the cure-all we've been needing? My only guess is that the fringe left is so wedded to the idea of sticking it to "the rich" that they aren't concerned about the consequences their policies would have for everyone else. That policy isn't even sane and is far more cruel than anything the Evil Republicans can dream up.