More Taxation with More Representation

Obama’s State of the Union Address was pretty great. Sure, he took too much credit for killing bin Laden. A few lines seemed like missteps (in particular, copyright/trademark enforcement through customs [aka ACTA] and putting “boots on the border”), and a few proposals seemed highly unlikely to pass through a Republican-controlled House (e.g., most of them). What’s more, I expect that I will disagree on the specifics of a lot of his proposals to “bring jobs back home,” given that they sounded like they were based on a form of tariff-driven mercantilism rather than free markets and free trade (e.g., “stopp[ing] a surge in Chinese tires” helps domestic producers, but hurts consumers in the form of higher prices and limiting what they might have otherwise spent on other goods and services). Let’s not even talk about the “spilled milk” “joke.”

And even though I have been burned by Obama’s grand overtures and lack of follow-through before, and even though this is an election year, I think that Obama did do what he needed to: wax philosophical on broader questions of how government and society should coexist. Because that’s where we are as a country. The now-received wisdom is that gov’ment can’t get any darn thing right and that it’s “class warfare” to raise taxes on the rich (as though it is self-evident why the vast majority of Americans should not engage in “class warfare”). So apparently, we need to have an adult conversation about whether taxes may ever be raised or whether government regulation is proper.

Specifically, Obama was at his strongest in focusing on the disparate tax treatment afforded to people depending on their level of income or industry of employment (in terms of available deductions and other tax loopholes like the treatment of carried interest). A minimum basic tax on millionaires and corporations would do a lot to “level the playing field” between regular taxpayers and corporations or the super-rich (or at least create that perception, which is perhaps equally important). So too would Obama’s proposed ban on Congressional insider trading, for that matter.

Taxation: it’s that one unifying force (other than death) that brings Americans together to demand a level playing field from government.

But when you look at the breakdown of how income actually gets taxed in this country, it’s clear why there is a perception that the super-wealthy (like Mitt Romney) are given special treatment. Romney’s tax returns for the last two years (all 550 pages of them!) show that his income was almost entirely profits, dividends, or interest from investments, which is taxed at the 15% rate. None of that money came from wages or salaries like the vast majority 0f the rest of America. Those wages and salaries, unlike Mitt’s profits and investments, get taxed for FICA and Social Security (payroll taxes, which are around 15% on their own) as well as income taxes (once a wage-earner reaches the minimum income threshold). So, by having enough money to invest for a living, Romney is able to make more than $20 million each year that is taxed as investment income levels rather than salary-earner levels. No wonder people assume that government is irretrievably captured by the wealthy.

On the other hand, most Americans pay less in tax than they think they do, and that amount is significantly less than the value of the services they demand that the government provide.

When people heard that Mitt Romney’s federal income tax rate was about 15 percent, the immediate reaction of many was to assume that their own rate was higher. The top marginal rate is 35 percent, after all, and the marginal rate on a couple with $70,000 in taxable income is 25 percent…Many Americans see themselves as struggling under the weight of a heavy tax burden (partly for the understandable reason that wage growth has been so weak). Yet taxes in the United States are quite low today, compared with past years or those in other countries. Most important, American taxes are not sufficient to pay for the programs that many people want, like Medicare, Social Security, road construction and education subsidies.

…

All told, most households pay less than 15 percent of their income to the federal government because of tax breaks, like the exclusion for health insurance, and because marginal rates apply to only a small part of a taxpayer’s income. On the first $70,000 of a couple’s taxable income, the total federal income tax rate is only 13.8 percent.

And the understanding of just how much/little taxes are collected isn’t a frivolous example of the discontinuity between what voters think and the actual facts (see, e.g., the oft-cited percentages people think we spend on foreign aid [25%] vs. what they’re comfortable with [10%] vs. what we actually spend [0.5%]). Instead, our oft-uninformed griping about taxing and spending has colored the entire tenor of American politics leading into 2012.

The Tea Party deserves at least a little credit for opening the debate on what levels of either taxation or spending would be tenable in the long term (even if their substantive answer to that question is infantile in its provincial interpretation of the range of desirable government activity). So too does the Occupy movement deserve some credit for calling attention to our hypocritically regressive economic attitudes, and for calling into question the desirability of culture organized around mass consumption and perpetual “growth” into oblivion.

And yet, none of our popular political discussions have really addressed the proper scope of either taxation or government spending in a holistic matter. It’s either “shrink it down to the size where we can drown it in the bathtub” or “ummmmmmmmm.” We don’t talk about how we’re paying dramatically less in taxes than the majority of the 20th Century, or about whether increasing spending on monitoring for corporate or individual malfeasance would result in geometrically increased tax revenues (hint: it would). We don’t make voters figure out whether or not the services they demand are justified by the tax burden they shoulder, or even what services would be demanded if one didn’t already know what economic or social situation he or she would be born into. We don’t ask voters to wax philosophic or political. Instead, we ask them to make a binary decision between two candidates who will have institutional incentives to frame things in short-sighted and/or narrow frames to avoid having the passing buck stop with them. This dynamic excuses voters from having to actually understand any issues; they need only “understand” the candidate, whatever that means.

In essence, this is the Baby Boom mentality at its zenith. It’s the doublethink-ish amalgam of “how dare you attempt to take what is mine by rights since the outside world did nothing to create what my paycheck and accumulated wealth represent” and “government should spend on people now (while I’m alive) because these are the birthright spoils we have attained along with our empire.” We assume that unadulterated Capitalism is the baseline correct answer in every circumstance, that all government spending is per se less efficient than if the private sector had spent it (and that efficiency is the only value worth looking at), that regulation is mostly composed of arbitrary and undue burdens, and that all taxation is an evil to be minimized to the greatest extent possible. But when a politician doesn’t have to respond to the general populace’s demands because he or she knows that those demands will melt away come election day, those demands are contorted and twisted in the service of those interests that are more persistent in pushing for their own special carve-outs.

So, I applaud Obama for taking to the bully pulpit and encouraging Americans to demand some basic fairness in the way they are treated by government. If the state of our union really is strong, we will need to start rising above the behavior of our government.