Commentary Magazine


Topic: tax reform

It’s Time to Talk About Serious IRS Reform

On the eve of the 25th anniversary of the Watergate break-in, the Washington Post noted an amusing coincidence: “Almost a quarter century ago, Tennessee Sen. Fred Thompson served as Republican counsel on the Senate Watergate committee. Now he chairs the Senate panel investigating the current White House fund-raising scandal.” The timing was interesting because, as the Post explained, the “controversy came to light last year because of the reforms of Watergate, including requirements that campaigns and political parties regularly submit lists of their contributors to the Federal Election Commission.”

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On the eve of the 25th anniversary of the Watergate break-in, the Washington Post noted an amusing coincidence: “Almost a quarter century ago, Tennessee Sen. Fred Thompson served as Republican counsel on the Senate Watergate committee. Now he chairs the Senate panel investigating the current White House fund-raising scandal.” The timing was interesting because, as the Post explained, the “controversy came to light last year because of the reforms of Watergate, including requirements that campaigns and political parties regularly submit lists of their contributors to the Federal Election Commission.”

The Post went on to list seven major reforms that stemmed either from the scandal itself or the atmosphere of distrust in government in the wake of Watergate. Of course these reforms had at best a mixed record. And some of them, like the campaign-finance reforms, ended up strengthening the government’s hand over Americans, reducing transparency, and infringing on voters’ constitutional rights. There was also the famed Church Committee, designed to expose abuses in the intel community and rein in its associated federal agencies.

And it is quite clear that while some have called for a new Church Committee in the wake of Moscow defector Edward Snowden’s theft and dissemination of American secrets to investigate the intel community, what is really needed is a full accounting and reform of a different federal agency: the IRS.

We have covered here exhaustively the massive abuse-of-power scandal surrounding the IRS’s targeting of conservatives ahead of the 2012 presidential election, and doing so at the encouragement of prominent Democrats. That surely should be enough to prompt a full investigation–especially since it was revealed that Eric Holder’s Justice Department is apparently coordinating with congressional Democrats to undermine the investigation and protect the IRS. But there’s another IRS scandal brewing, and it suggests the agency is long overdue for a reckoning.

John Fund notes that the private-jet company NetJets has been in a tax dispute with the IRS, and is claiming the IRS–you guessed it–destroyed evidence by having “wiped clean a number of computer hard drives containing emails and other electronic documents that the Government was required to produce.” Fund provides the background to the case:

NetJets sued the IRS in 2011, claiming that it improperly applied a ticket tax on users of its aircraft that is meant for commercial airline passengers. The IRS countersued claiming that NetJets “has failed, neglected or refused to pay its federal tax liabilities . . . in full.” But its argument was undercut in 2012 when Congress changed the tax code to make it clear the air-passenger-ticket tax doesn’t apply to private firms such as NetJets, whose customers buy time-shares in planes operated by the company.

In its latest court filing, NetJets claims the IRS has been concealing evidence. Its lawyers say the computers of three key IRS employees were wiped clean, including the computer of “an excise-tax policy manager and a key decision maker regarding the application of the section 4261 ticket tax to whole and fractional aircraft-management companies.”

Amazing. The agency assigned to take your money at will covers its tracks by destroying evidence, apparently routinely. I had noted in the past that destroying evidence seems to have become the IRS’s key strategy in the targeting scandal. It appears to be its policy with regard to disputes in general. It should go without saying that at this point there is really no denying the agency needs serious reform.

That poses its own challenges, to be sure. For one, high-level Democrats in the president’s Cabinet and in Congress are supporting and enabling the IRS here, so Democrats are unlikely to be very cooperative in the kind of investigation that would expose them to transparency and accountability as well.

Another challenge is the law of unintended consequences. As we saw with some of the post-Watergate reforms, giving politicians the power to pass sweeping regulations often just exacerbates existing problems. The regulatory regime is partly to blame for the current IRS scandal as it is, because the agency was tasked with being the gatekeeper to Americans’ political activism. Since the IRS is a creature of big-government bureaucracy, it went after the Americans who supported limited-government causes. The current regulatory regime governing the IRS pits the American government against the people, with the inevitable results.

Additionally, if the IRS has been routinely destroying evidence or deleting emails it’s supposed to save then it’s already breaking the law. There’s not much sense in going through a reform process if the result is only to take something that’s currently illegal and make it super-duper-illegal. That would be classic Washington behavior, and it should be avoided.

Perhaps the best answer is a much-simplified tax code and fewer rules limiting political speech. The IRS can’t abuse power it doesn’t have, after all. In fact, serious tax reform would be saving the IRS from itself–think of all the computers and phones it won’t have to completely destroy each year in an attempt to evade accountability.

Whatever the case, it would be criminal–figuratively, though very possibly also literally–for the scandals to pass without reforming the agency.

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Twenty-First Century Conservatism

In a recent Wall Street Journal op-ed, Senators Mike Lee and Marco Rubio laid out a pro-growth, pro-family tax reform plan. It recommends two rates (35 and 15 percent), cuts the current corporate tax rate, eliminates or reforms certain deductions, ends the marriage penalty, and increases the child tax credit.

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In a recent Wall Street Journal op-ed, Senators Mike Lee and Marco Rubio laid out a pro-growth, pro-family tax reform plan. It recommends two rates (35 and 15 percent), cuts the current corporate tax rate, eliminates or reforms certain deductions, ends the marriage penalty, and increases the child tax credit.

While important details would need to be worked out, this proposal holds great promise both for what it can do to strengthen the economy and help families. (For more, see here and here.) But I want to focus on how Messrs. Lee and Rubio frame their proposal.

In describing the challenges facing middle class Americans, they identify some of the fundamental transformations we’re undergoing and write this:

Despite these dramatic changes, the policies and practices of Washington remain stuck in the 20th century, leaving too many Americans unable to access the enormous potential of this new era.

If we hope to realize a new American Century, many institutions and government programs will need to be updated, reformed or replaced. Both of us have spent a large portion of the year proposing such reforms.

Perhaps no function of the U.S. government is more antiquated and dysfunctional than its tax system, so we are joining together to propose a federal tax-reform plan that will remove obstacles to investment, innovation, growth and opportunity.

This way of thinking about things has long had resonance with me. It’s especially effective now, I think, because our public institutions and programs, in some cases designed before the middle part of the last century, are badly outdated and desperately in need of reform; because modern-day liberalism is sclerotic and reactionary, in the sense that “progressives” fiercely oppose adjustments to our entitlement programs, education system, tax code, energy policies, and much else; and because advocating reform allows conservatives to be agents of change, modern, responsive, and serious about governing.

We’re seeing a collapse of confidence in the federal government; Americans understand it’s not aligned with reality (including demographic trends, advances in technology, and globalization) or our contemporary needs. Which means conservatives have an opportunity to reconceive the role of government in the 21st century, to do so in bold (but not radical) ways, and do it in a way that is a little less theoretical and a lot more practical, by which I mean showing how conservative policies are going to improve, on a daily basis, the lives of middle-class Americans. (In the 2012 GOP primary we heard more about electrified fences than we did about the costs of higher education.)

This is what Senators Lee and Rubio are attempting to do, and Republicans would be wise to follow them.

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The Right Kind of Tax Reform

Count me among those who think one obvious response to the IRS scandal is tax reform. The IRS and its few defenders have, even if inadvertently, made the case for simplifying the tax code and scaling down the IRS’s reach and powers just as well as the agency’s critics have (though critics of the taxman, unsurprisingly, outnumber defenders).

The revelations that the IRS targeted conservative organizations specifically and groups that seemed to disagree with President Obama generally have been in the public square for the better part of two months now, and we have two explanations for the abuse of power. Either the influential higher-ups at the agency were deliberately seeking to silence conservatives, or the agency’s bungling bureaucrats were too confused and overwhelmed to do their jobs properly. In neither scenario does the agency justify retaining the power it currently wields.

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Count me among those who think one obvious response to the IRS scandal is tax reform. The IRS and its few defenders have, even if inadvertently, made the case for simplifying the tax code and scaling down the IRS’s reach and powers just as well as the agency’s critics have (though critics of the taxman, unsurprisingly, outnumber defenders).

The revelations that the IRS targeted conservative organizations specifically and groups that seemed to disagree with President Obama generally have been in the public square for the better part of two months now, and we have two explanations for the abuse of power. Either the influential higher-ups at the agency were deliberately seeking to silence conservatives, or the agency’s bungling bureaucrats were too confused and overwhelmed to do their jobs properly. In neither scenario does the agency justify retaining the power it currently wields.

Part of this is a problem with campaign finance reform efforts, which result in limiting political speech and in some cases tasking the IRS with those responsibilities. But the IRS is either corrupt or irredeemably incompetent. Surely this argument can be made about much of the federal government, though the IRS is in the news now and has a rare slice of the public’s attention. As such, this would be a good moment to push for tax reform. But this, which the AP reported yesterday, does not seem like the best way to go about it:

The top Democrat and Republican on the Senate’s tax writing committee said Thursday they’re starting with a “blank slate” approach to tax reform that envisions stripping the code of every single tax break as a setup to a debate over which ones to add back in.

But wouldn’t that just lead to a massive lobbying frenzy which would eventually result in insignificant tax breaks disappearing but the bulk of them right back in the tax code? Indeed, as the Hill reports:

Senators only have until July 26 to get back to Baucus and Hatch, giving K Street shops little time to formulate their strategy for what one lobbyist dubbed the Full Employment for Tax Lobbyists Act of 2013.

A separate lobbyist said the wide-open debate could result in something resembling a food fight, as various groups sparred and jockeyed for position, hunting for lawmakers to make the case for them.

“You’re going up against the entire world,” the lobbyist said. “There will be a ton of money spent on this.”…

Backers of the most popular big-ticket tax breaks – like the mortgage interest deduction and the exclusion for employee-sponsored health insurance – could be on safer ground, according to some on K Street.

The Hill offers what is intended to be good news, sort of: some of the tax breaks will be in trouble because their supporters don’t want to go on record defending them. But isn’t that just another way of saying that the tax code is even more in need of reform than the public knows? Anything resembling a lobbyist bidding war on tax breaks won’t exactly inspire confidence among the public looking for a leaner and cleaner government.

Additionally, I don’t think anyone believes that the final version would stay that way–that exemptions of all sorts wouldn’t creep in again when no one is paying much attention. That is one of the major weaknesses of centering tax reform on the strength of lobbying. We’ll end up, most likely, with a very similar tax code to what we have now and set it on the road to eventually be identical to what we have now, the major difference being along the way we’ll have a period of adjustment and uncertainty that the IRS is manifestly unprepared to navigate.

But the fact that we’re even talking about major tax reform is at least a start. Government agencies that prove themselves too big to succeed should be scaled down, and tax agencies should not have the power to bar their critics from equal participation in the political process. Though those two points may seem obvious (or at least they should), the current size of the federal government and the scandals it’s experiencing prove commonsense governance cannot be taken for granted.

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Jindal, Brownback, and the State-Led Conservative Opposition

Since the one bright spot for Republicans in this past November’s general election was the party’s performance in gubernatorial elections, it’s no surprise that the states have become battlegrounds for conservative opposition to the Obama White House. The GOP increased its share of the country’s governorships to 30, and well before November had been leaning on those governors for conservative policymaking. The most visible issue was the role and power of public-sector unions, something John Steele Gordon wrote about earlier, but education reform and the battle over state health insurance exchanges as part of Obamacare have been and will continue to be high-profile policy fights as well.

Energized by a string of such victories, Republican governors seem to have identified the next element of President Obama’s big-government agenda to push back on: taxes. A recent USA Today story details plans to cut certain taxes (and in some cases, raise others to compensate) from Virginia’s Bob McDonnell, Ohio’s John Kasich, New Mexico’s Susana Martinez, Florida’s Rick Scott, Idaho’s Butch Otter, and Louisiana’s Bobby Jindal. Today, the New York Times reports on Kansas Governor Sam Brownback’s dramatic tax cut plan:

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Since the one bright spot for Republicans in this past November’s general election was the party’s performance in gubernatorial elections, it’s no surprise that the states have become battlegrounds for conservative opposition to the Obama White House. The GOP increased its share of the country’s governorships to 30, and well before November had been leaning on those governors for conservative policymaking. The most visible issue was the role and power of public-sector unions, something John Steele Gordon wrote about earlier, but education reform and the battle over state health insurance exchanges as part of Obamacare have been and will continue to be high-profile policy fights as well.

Energized by a string of such victories, Republican governors seem to have identified the next element of President Obama’s big-government agenda to push back on: taxes. A recent USA Today story details plans to cut certain taxes (and in some cases, raise others to compensate) from Virginia’s Bob McDonnell, Ohio’s John Kasich, New Mexico’s Susana Martinez, Florida’s Rick Scott, Idaho’s Butch Otter, and Louisiana’s Bobby Jindal. Today, the New York Times reports on Kansas Governor Sam Brownback’s dramatic tax cut plan:

This month, the largest tax cut in Kansas history took effect, and most of its Medicaid system was handed over to private insurers. The bill introduced this week would pare taxes further, with the goal of eventually eliminating the state’s individual income tax. Mr. Brownback has already slashed the state’s welfare roll and its work force. He has merged government agencies and is proposing further consolidation. He is pushing for pension changes, to change the way judges are selected and for altering education financing formulas.

“I think it is the leading edge of the conservative economic and political movement,” said State Representative Tom Sloan, a Republican representing the area around Lawrence. “As such, it is the example that other state leaders will look to to determine whether the political philosophy can mesh with the expectations of the public.”

The Washington-centric focus of the press and the drama over negotiations between the Republican-controlled House and the Obama White House tend to overshadow the far-reaching economic reforms taking place at the state level. And that focus is exactly what Jindal plans to take aim at in his keynote speech tonight to the Republican National Committee’s winter meeting. Jindal, who has been at the forefront of conservative education reform and is a possible contender for the 2016 GOP presidential nomination, plans to argue forcefully against his own party’s concentration on Washington. As the Washington Post reports:

“By obsessing with zeroes on the budget spreadsheet, we send a not-so-subtle signal that the focus of our country is on the phony economy of Washington, instead of the real economy out here in Charlotte, and Shreveport (La.), and Cheyenne (Wyo.),” Jindal is set to say at one point in the speech. At another, he will argue that “Washington has spent a generation trying to bribe our citizens and extort our states,” adding: “As Republicans, it’s time to quit arguing around the edges of that corrupt system.”

It will be interesting to see just how clearly Jindal can pair his critique of Washington with a conservative alternative. On the broad strokes, Jindal is certainly correct: Washington’s buddy system and its self-perpetuating bureaucracy make it ripe both for bad policy and for cronyism that often too easily seduces Republicans as well as Democrats.

But there’s also a trap here Jindal is setting for himself, and his party. Conservatives are on firm ground when they talk of the need to reform Washington, but they should be careful not to treat the capital as incidental. Congress’s approval ratings may be low, and there is certainly a limited amount of policymaking the GOP can do with only one house of Congress and Harry Reid’s refusal to permit even basic Senate business from taking place in the other house. But conservatives should learn the right lesson: they need to be in a position to legislate.

Nothing proved this more clearly than the Obamacare debacle. Republicans didn’t have enough seats in Congress to block it, and then Chief Justice John Roberts allowed himself to be bullied and intimidated into ruling in favor of the president’s constitutionally suspect legislative overreach out of concern for his legacy and his public stature rather than his own best judgment. Roberts is an example of how the conservative movement cannot rely on the courts to protect the country from unconstitutional big-government schemes. Conservatives have the right idea on state-level reform to act as a bulwark against some of the terrible policy coming from the White House. But they also can’t ignore the battles on Capitol Hill.

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Liberals’ Idea of Tax Reform Shows Who Are the Real Extremists

President Obama made it clear he wasn’t going to be satisfied with the tax increase on upper income earners that he forced on Congress during the showdown over the fiscal cliff. Though in fact all wage earners suffered a loss this week as the payroll taxes surged, the president and his liberal supporters are determined to inflict even more pain on more people in any upcoming budget talks. However, one of the leading advocates for the president’s redistributionist position, the New York Times editorial page, is worried that in settling for a deal that raised taxes on those earning more than $400,000 a year, he has made it harder for the left to foist another job-killing tax increase on the country. So, to make this bitter pill easier for Americans to swallow, the Times claims that plans to confiscate more private income for government use is actually “reform.”

Leaving aside the fact that trying to squeeze more revenue for the government out of taxpayers won’t do much, if anything, to avert the budget crisis, the use of the word reform in this context is straight out of Orwell. Reform implies making the system fairer, which for some on the left is synonymous with soaking the rich. But a genuine reform of the system is one that will incentivize achievement, not penalizing it as well as making the labyrinthine code simpler and more understandable. But when liberals use this word it is merely code for policy driven by left-wing ideology and not pragmatism or the country’s economic health.

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President Obama made it clear he wasn’t going to be satisfied with the tax increase on upper income earners that he forced on Congress during the showdown over the fiscal cliff. Though in fact all wage earners suffered a loss this week as the payroll taxes surged, the president and his liberal supporters are determined to inflict even more pain on more people in any upcoming budget talks. However, one of the leading advocates for the president’s redistributionist position, the New York Times editorial page, is worried that in settling for a deal that raised taxes on those earning more than $400,000 a year, he has made it harder for the left to foist another job-killing tax increase on the country. So, to make this bitter pill easier for Americans to swallow, the Times claims that plans to confiscate more private income for government use is actually “reform.”

Leaving aside the fact that trying to squeeze more revenue for the government out of taxpayers won’t do much, if anything, to avert the budget crisis, the use of the word reform in this context is straight out of Orwell. Reform implies making the system fairer, which for some on the left is synonymous with soaking the rich. But a genuine reform of the system is one that will incentivize achievement, not penalizing it as well as making the labyrinthine code simpler and more understandable. But when liberals use this word it is merely code for policy driven by left-wing ideology and not pragmatism or the country’s economic health.

In the view of the Times, anything that creates a more progressive system in which more money is siphoned out of the private sector and into the hands of Washington is a form of reform no matter how convoluted the system might be. That’s a distraction from the country’s real problems that have everything to do with spending and little to do with not enough taxes. But it is also pure liberal cant rather than sensible economics.

But the Times is right on target in one respect. Having bulldozed Congress into the fiscal deal tax hike, the president and his followers are in no position to push for even more tax hikes. The payroll tax windfall for Uncle Sam also makes this argument difficult to sell to a skeptical public, let alone a Republican House of Representatives that is determined that it won’t be scammed in this manner again.

We can expect to hear more of this distorted argument in the coming weeks and months, but the main takeaway from this discussion ought to inform the way the upcoming debt ceiling fight is covered. Redistribution isn’t tax reform. It’s actually a way to avoid reform as well as irrelevant to the cause of preventing the country from sinking into bankruptcy. The Times editorial as well as the rhetoric coming out of the Democrats in recent days makes it apparent that instead of this confrontation being one between extremist Republicans and a sensible White House, the real ideologues in this argument are among the ranks of the president’s supporters.

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The Times’s Idea of “Tax Reform”

The New York Times has a lead editorial today called “Why the Economy Needs Tax Reform.”  It starts off briskly enough:

Over the next four years, tax reform, done right, could be a cure for much of what ails the economy. Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research. More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge.

Higher and more progressive taxation, in other words, is just the medicine the economy needs to begin to flourish again for the first time in six years. If the Times can produce even a single instance in history where higher and more progressive taxation led to economic prosperity I will eat my hat. The Times’s formula is precisely what FDR tried in the Great Depression. It didn’t work; the depression lingered on and on. But I can give you numerous instances where tax cutting produced near-instant prosperity (the 1920s, the 1960s, the 1980s, the 2000s in this country and many another instances in other countries; see this from Power Line).

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The New York Times has a lead editorial today called “Why the Economy Needs Tax Reform.”  It starts off briskly enough:

Over the next four years, tax reform, done right, could be a cure for much of what ails the economy. Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research. More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path. Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge.

Higher and more progressive taxation, in other words, is just the medicine the economy needs to begin to flourish again for the first time in six years. If the Times can produce even a single instance in history where higher and more progressive taxation led to economic prosperity I will eat my hat. The Times’s formula is precisely what FDR tried in the Great Depression. It didn’t work; the depression lingered on and on. But I can give you numerous instances where tax cutting produced near-instant prosperity (the 1920s, the 1960s, the 1980s, the 2000s in this country and many another instances in other countries; see this from Power Line).

Yes, Clinton raised taxes in 1993 and the economy prospered for the next seven years. But that is a classic case of the post hoc ergo propter hoc fallacy. The economy was already growing well and the real economic growth of the 1990s (and the great rise in the Dow Jones Industrial Average) began only in November 1994, when a Republican Congress was elected and put real brakes on government spending. Government spending rose only 22 percent between 1994 and 2000, while revenues rose by 61 percent. 

As for increased spending on education, the country spends about four times as much, per pupil, in constant dollars, as it did in 1950. So public investment in education has hardly been long-neglected, but the results have been dismal. Obviously, money is not the problem here. Neither is it in higher education, where tuition has been rising far faster than either inflation or medical costs (a clear indication that a cartel is at work). But much of the increased income has gone not to better educating students but to administrative bloat on an epic scale. The University of Wisconsin at Madison has someone on the payroll with the you-can’t-make-this-stuff-up title of Vice Provost for Diversity and Climate.

As for reducing income inequality—which is simply assumed by the left to be pernicious without a shred of evidence being presented that it is—you can read what I think about this spectacularly stupid idea here.

The Times goes on:

A logical way to help raise the additional needed revenue would be to tax capital gains at the same rates as ordinary income. Capital gains on assets held for more than a year before selling are taxed at about the lowest rate in the code, currently 15 percent and expected to rise to 20 percent in 2013. That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.

Let’s pick apart this farrago of intellectual dishonesty. Yes, capital gains are taxed at a low rate compared to ordinary income. But capital gains in stocks and small businesses come, indirectly, out of after-tax income. Publicly-held corporations pay corporate income taxes (35 percent). What’s left over and not paid out as dividends (also taxed a second time) adds to the book value and hence, indirectly, the stock price. The profits of sub-chapter-S corporations are taxed as the personal income of the stock holders, so, again, the retained earnings have already been taxed when the capital gains are realized. As for the capital gains in, say, a house sale, they are taxed without regard to inflation. So a house that was owned for, say, 40 years and sold in 2012 would have experienced over a five-times inflation but would be taxed as though there had been no inflation in those 40 years.

As for much of total capital gains flowing to the top 1 percent of taxpayers, this is lying with statistics. It implicitly assumes that the top 1 percent is the same group of people year after year (a group of J. P. Morgan clones sitting around in frock coats and top hats, I suppose, lighting cigars with $100 bills). But many of those in the top 1 percent this year won’t be there next year. For example, a small-business owner who worked for 50 years to build his business and then retires and sells the business for, say $2 million. He’s in the 1 percent that year. Next year, living on his retirement income and with no capital gains, he is not. But he worked hard for 50 years, so let’s penalize that effort and that success with confiscatory taxation.

The Times even calls for higher corporate taxes, although American corporate income taxes are now the highest in the world. Has the Times not noticed that capital is now totally global, that it can–and will–flow to where the return is the highest?

Finally there is this:

Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving; and a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share.

It’s hard to escape the conclusion that for the New York Times editorial board, tax reform and more and higher taxes are simply the same thing. And that the purpose of taxation is two-fold. One, to feed, without restraint, the ever more ravenous federal beast, and, two, to punish economic success. The financial sector earns a higher return on its capital than other sectors? How dare it? We’ll fix that!

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Norquist Doesn’t Want GOP “Fingerprints” on Tax Hikes

Grover Norquist spoke at a Politico breakfast this morning, and it sounds like he’s leaving the door open for some creative tax compromises from Republicans. If tax rates go up, it would have to be without any active help from pledge-signers:

Americans for Tax Reform president Grover Norquist said Wednesday Republicans need to have “credible” separation from any tax hike as part of a deal to avoid the so-called fiscal cliff — in order to make a case to voters in 2014 and 2016 that their vision is distinct from that of Democrats.

The party “can’t have their fingerprints on the murder weapon,” Norquist told POLITICO’s Mike Allen at a Playbook Breakfast. … 

Norquist said by having negotiations in public, Republicans would be able to “change the conversation” from raising taxes to holding Democrats feet to the fire over spending cuts.

“We have a spending problem, not a failure to raise taxes problem,” Norquist said.

He would not directly answer Allen’s questions if there was wiggle room for Republicans to raise taxes with out breaking his no-new-taxes pledge. But he did call Rep. Tom Cole’s proposal for Republicans to agree to a tax cut for 98 percent of Americans and negotiate the top rates later “an interesting tactic.”

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Grover Norquist spoke at a Politico breakfast this morning, and it sounds like he’s leaving the door open for some creative tax compromises from Republicans. If tax rates go up, it would have to be without any active help from pledge-signers:

Americans for Tax Reform president Grover Norquist said Wednesday Republicans need to have “credible” separation from any tax hike as part of a deal to avoid the so-called fiscal cliff — in order to make a case to voters in 2014 and 2016 that their vision is distinct from that of Democrats.

The party “can’t have their fingerprints on the murder weapon,” Norquist told POLITICO’s Mike Allen at a Playbook Breakfast. … 

Norquist said by having negotiations in public, Republicans would be able to “change the conversation” from raising taxes to holding Democrats feet to the fire over spending cuts.

“We have a spending problem, not a failure to raise taxes problem,” Norquist said.

He would not directly answer Allen’s questions if there was wiggle room for Republicans to raise taxes with out breaking his no-new-taxes pledge. But he did call Rep. Tom Cole’s proposal for Republicans to agree to a tax cut for 98 percent of Americans and negotiate the top rates later “an interesting tactic.”

As the Wall Street Journal argued yesterday, reforming the tax code without lowering the rates is a possible compromise. Another is the proposal from Rep. Tom Cole, which Norquist actually didn’t close the door on. It would entail Republicans agreeing to a tax cut extension for those making under $250,000 immediately, and then hashing out the tax extension for those making over $250,000 afterward: 

Republican Rep. Tom Cole urged colleagues in a private session Tuesday to vote to extend the Bush tax rates for all but the highest earners before the end of the year — and to battle over the rest later.

The Oklahoma Republican said in an interview with POLITICO that he believes such a vote would not violate Grover Norquist’s anti-tax pledge and that he’s not alone within Republican circles.

Cole’s position is striking because he’s hardly a “squish” — Norquist’s term for a weak-kneed lawmaker — when it comes to Republican orthodoxy. Cole served as chairman of the National Republican Congressional Committee and in other official posts within the party.

He might also provide cover for other Republicans looking to make an agreement to avoid a sharp fall off the so-called fiscal cliff. 

This would, at the very least, take away the Democratic Party’s most potent political argument that the GOP is holding middle class tax cuts hostage in order to extend breaks for the wealthy. It would also allow Republicans to make a more pointed case against tax hikes on upper-income earners, and its impact on the economy. 

However, a chance to make the case may be all Republicans would get in return. Agreeing to an immediate extension of 98 percent of the cuts would probably kill any chance the GOP has of negotiating for tax reform, and basically guarantee that rates will go up for the upper 2 percent. But, per Norquist’s criteria this morning, Republicans wouldn’t have their fingerprints on the tax hikes.

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