Friday, August 5, 2011

Beat'em First

Charles Krauthammer proposes what he thinks just might be "The Solution" to the debt crisis.

As he envisions it, his proposal would proceeds in three stages, the first and most important of which is "Tax Reform":
True tax reform that removes loopholes while lowering tax rates is the Holy Grail of social policy. It appeals equally to Left and Right because, almost uniquely, it promotes both economic efficiency and fairness. Economic efficiency — because it removes tax dodges that distort capital flows (and thereby diminish productivity) while cutting marginal tax rates (thereby spurring growth). Fairness — because a corrupted tax code with myriad breaks grants deeply unfair advantage to the rich who buy the lobbyists who create the loopholes and buy the lawyers who exploit them. Which is why the 1986 Reagan-Bradley tax reform was such a historic success. It satisfied Left and Right, promoted efficiency and fairness, and helped launch two decades of almost uninterrupted economic expansion.
I'm afraid his premises here are seriously flawed.

To begin, removing "loopholes" has only lately, and conveniently, become a demand of the American Left.  The fact is, various loopholes, alongside a progressive income tax scheme with multiple and increasing marginal rates have historically been the bedrock of liberal tax policy.  (By the way, the definition of a "loophole":  Any legal tax deduction or subsidy with which I disagree.)

The desire by the Left for progressive rates should be obvious.  The rich, who have benefited most (and probably unfairly, i.e., at the expense of others), should pay more taxes and at higher rates than those with fewer advantages in life's lottery.  But loopholes, too, have always been championed more by liberals than by conservatives, much more.  The meddling Left is forever striving to encourage one behaviour, installing solar panels, for example, while discouraging others, using tobacco products.  The provision in the tax code for  deductions and subsidies that try to accomplish just that is an all-too-easy avenue for social engineering that the Left, and the Democrat Party that represents it, will not abandon easily.

Moreover, and almost as important, loopholes reliably create constituencies that become increasingly dependent upon them, constituencies that are thereby extremely loyal to the political party that promises to secure them.  Think labor unions, think "green" anything, etc.

As a result, the Left has little to no interest in making grand, or even small, bargains exchanging flatter income tax rates for fewer tax loopholes.

So, you might ask, why did they agree to just such a bargain in 1986?

First, the Left didn't, the Democrats did.  They did so because Reagan, not Obama, was president.  They did so because the GOP, not the Democrats, controlled the Senate.  They did so because there were still enough truly conservative, mostly southern, "Blue Dawg" Democrats in the House to give Reagan and the Republicans a working majority.

With all due respect to Dr. Krauthammer, the only sure solution to the debt crisis is the very real prospect of electoral defeat by the Democrats, not contracting clever deals with them.

And even after we beat'em, we had better keep the Republicans on a very short leash as well.

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