How to Sell a Tax Increase

I am nowhere near informed enough to offer any intelligent commentary on economic policy, but I am pretty good at political analysis.  And so instead of focusing on the economic part of Bruce Bartlett’s argument against cutting payroll taxes, I want to focus on the political implications of what Bartlett says in defense of the payroll tax:

But the biggest problem with cutting the payroll tax is that it isn’t really a tax at all. A tax, by definition, is a compulsory payment for which no specific benefit is received in return. This is not true of Social Security. The vast bulk of workers get back all the money they put into Social Security in the form of a cash benefit in retirement and most get a substantial return. (See this Congressional Budget Office study.) That’s why Franklin D. Roosevelt always insisted that the money withheld from workers’ paychecks for Social Security was not a tax but a “contribution.”

And I think this – along with the fact that people like to get money – is directly related to why Social Security is an enduring, incredibly popular program.  Among many other things, part of the problem liberals face with expanding the welfare state is that it is incredibly easy to inveigh against tax increases.  And part of the reason why it’s incredibly easy to inveigh against tax increases is that there doesn’t seem to be much of a logical connection between what you pay into the system and what you get out of it.  Especially when – by and large – what you do get out of it is a little abstract; as we’re seeing in the Virginia gubernatorial race, it’s very difficult to defend proposed tax increases with cries of “what about the infrastructure!”  Very few people  make the connection between paying their income taxes and having decent roads, and even fewer people make the connection between paying their income taxes, and having clean water or clean air or a reasonably competent regulatory state.

Of course, barring some collective awakening of political consciousness among the voting public (think Childhood’s End except less telekinesis and more subscriptions to the New York Times), we’re going to be stuck with a political culture in which it is incredibly easy to drum up anti-taxation sentiment.  That said, if the Obama administration is actually cognizant of our long-term fiscal challenges (and I think that it very much is), then it will eventually have to sell a tax increase to the American public.  I think the best way to do that is to propose a tax which – like the payroll tax – has a direct relationship to benefits received.  Ideally, we would have seen something like this with health care reform: you pay a flat rate to the federal government, and in return, you are guaranteed health insurance and some level of subsidies to pay for it.

A payroll tax-style arrangement is not only simpler and less intrusive than the alternatives, but it would also help lessen the vulnerability of these reforms to demagoguery, as each voter can see the tangible impact the legislation – and the tax – has on their lives.

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12 thoughts on “How to Sell a Tax Increase

  1. To a large extent, I’d like to see this applied to far more than just tax increases for specific programs. For instance, I’d like to see an itemization of how much each government department (you could divvy it up along the lines of how Congress breaks spending bills down) is allocated, plus the amount allocated for interest on the debt. I think it would be a great way of getting people to understand just where their money is going, and how much of it.

    Somewhat relatedly, and now delving into fantasy land, I’ve occasionally played around with the idea that the best, most moral, and most democratic form of taxation would be if taxpayers could choose how their taxes are allocated, department by department. What would be cool about this is that the result would be a fairly accurate aggregation of our collective values. You’d have to put some restrictions on it, of course, to ward against conflicts of interest and self-dealing (so, e.g., people in the defense industry could not allocate their taxes to, well, the defense industry). Combine this with a negative income tax to ensure that the poor are in better shape, and there you go. And yeah, I realize there are going to be some flaws in this idea, which is very, very poorly developed.

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    • My sense is that taxes and spending would have to actually bear some relation to each other for either of these plans to work. OTOH, for the first, you can break it down without too much effort using the budget receipts and budget outlay reports provided by the treasury. (PDFs for 2008) Just use the so-called ‘on-budget’ numbers, which exclude the SS and Medicare receipts/outlays.

      PS The international assistance section has one charming factoid: Foreign military financing program = $4.661 billion, Military sales program = -$4.657 billion. Only the US could lose money in arms dealing.

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  2. “A tax, by definition, is a compulsory payment for which no specific benefit is received in return.”

    This seems like splitting hairs. By this logic, we could reduce our tax rate by a tremendous amount by specifying a large percentage of the income tax for defense spending. See, that’s not a tax. It’s a special withholding for which we get a specific benefit.

    I am generally opposed to these schemes for the very reason Jamelle prefers them: Because they are easy to sell and, in the end, result in higher levels of taxation. Or service fees. Or whatever it is you call them. I think it’s particularly important to keep in mind that it’s really quite easy to divert these monies from the intended goals. For instance, a pittance of the tobacco settlement money actually goes the things we originally said it would go for. In Pennsylvania, they just hammered through a budget by diverting a good chunk of the tobacco money to the general fund.

    I might be old fashioned, but I prefer a system that’s a little more honest than that. As much as I dislike the idea of higher income taxes or a VAT, I would much rather see that than a piecemeal approach that taxes Pepsi for the expressed purpose of feeding babies, or taxes gasoline to fund health reform. But again, more broadly, Jamelle is of course correct; special taxes aimed at funding specific programs are far more politically palatable than general tax increases. (On a side note, they are also quite often regressive, as is the case with a soda tax.)

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  3. While I agree that transparent and concentrated user fees are a better alternative to pay for anything, I think you underestimate the opposition on both sides of the aisle to any mechanism resembling a tax. This is not just a problem with the Grover Norquist absolutist set.
    Perhaps the most logical and simple example of what I think you are proposing is the funding mechanism for federal-aid highways- the Highway Trust Fund and the gas tax. It is a dedicated funding source (except when it is raided for other programs) for an agreed-upon public good. Among its advantages: it is transparent, relatively accurately prices vehicular impact on roads via the correlated use of fuel, and it funds basic infrastructure requirements that most people want. Despite this structure and despite almost-universal agreement on the need for expanded highway monies to maintain existing capacity, there is almost no political will for a subsequent increase in the federal gasoline tax. Obama and Secretary o’ Transportation LaHood have both unequivocably ruled it out. This suggests to me that no matter how benign and logical a user fee is, it will inevitably lack a political constiuency strong enough to overcome American disdain for taxes.

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  4. “the best, most moral, and most democratic form of taxation would be if taxpayers could choose how their taxes are allocated, department by department.”

    Careful. Remember, as much as people talk about who pays how much in taxes… the very rich and the middle class pay a HUGE chunk of what rolls into fedral coffers. As has been muched discussed, a pretty good percentage of people pay no federal income tax at all. If you put people in charge of what their taxes pay for… I suspect we would get even more nice schools for nice neighborhoods, even more roads to exurbia, even more subsidies for stadiums, etc. That is, when they are looking at the tax bill in the comfort of their pown homes, and it comes time for the middle class attorney to choose between funding WIC or funding something that his family uses… which box is he going to check?

    On the other hand, this might be a good way out of farm subsidies.

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  5. This is a really bad idea from a policy perspective: see State of California, fiscal crisis in. If you “hypothecate” revenue to specific spending projects, you create bloat in that sector and starve others. Payroll taxes are particularly bad, because they punish employment.

    America needs to raise its broad-based taxes or cut its defence spending. The American people need to grow up.

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  6. I fantasize sometimes that we will do something like this. That somehow Obama or someone will raise the taxes some and slice the spending some (from bloated Agriculture and Defense especially oh please rainbow Jesus please!!!). And that the budget is either fully in the black or significantly and inarguably closer to the black. I would be fascinated to watch conservative heads explode as they tried to explain how Democrats are the fiscally irresponsible party. If we could just claim the mantle of fiscal sensibility how could the right wingers hold their coalition together? I mean I know our politicians are as corrupt as any politicians can be but damnit can’t someone figure out a way to do it? The republicans are out of power; can’t we gore enough of their sacred cows to get our senators in line and get the budget under control?

    But while I’m dreaming I’d love to have a sailboat.

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  7. I have nothing to say relative to the actual debate, only that, I’ll be damned if Jamelle hasn’t in one week got in a Sliders AND Childhood’s End reference. That is seriously impressive.

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  8. Sam M is actually tapping into an even more powerful counterargument to turning taxes into voluntary “user fees.” An elementary result in welfare economics shows that many people will want to support programs only if they know others will pitch in as well. The classical example goes as follows:

    A and B are rich. Z is poor. A and B both want to see Z’s income raised by one dollar (out of altruism, self interest, or whatever – the specific motivation doesn’t matter). However, neither A nor B want to give Z a dollar. However, both A and B would each pay 50 cents to see Z get a dollar. In this simple model, A and B can get together, talk their preferences over, and see to it that Z gets the dollar. However, if we assume that A and B cannot coordinate their actions (a reasonable assumption for real-world taxpayers), neither A nor B would transfer any money to Z. (Neither is willing to spend a dollar on Z, and seeing Z’s income rise by less than a dollar does not interest them.)

    That’s where government and taxation come in. A government that collects a tax of 50 cents from all rich people to fund a $1 transfer to Z will efficiently redistribute income and overcome the coordination problem.

    Back in reality, not only would a “user fee” system of taxation underfund projects that the bulk of taxpayers don’t care about, it would also underfund projects that the bulk of taxpayers do care about. If it costs, say, $1m to maintain a stretch of road, all the people using that road would want the road to be maintained, but none would pay $1m to maintain it. Asking people to voluntarily contribute an arbitrary amount to road maintenance will result in many cases as above, wherein any one individual has no incentive to pay her share of the maintenance bill since she has no assurance that others will pay theirs.

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