Month: August 2007

If you’re going to offer the thesis statement that Larry Summers is a smart man, you’ll get no argument from me.

The huge problem with VAT proposals in this country is that the right muddies the issue by saying we should completely replace the income tax structure with only a VAT — or as they thought to call it in a fit of sloganeering, the “Fair Tax.” If someone needs to call his proposal the “Fair Tax” in order to make it sound good, then you know something must be wrong with it.

And I’m not automatically opposed to any regressive tax. I just don’t think for a moment that the whole tax system should be built around it, as the “Fair Tax” acolytes seem to think. For example, the gas tax is regressive in that a poor man’s and a rich man’s personal gasoline needs probably won’t differ all that much, if we assume they’re using the same types of vehicles. But at the end of the day, the gas tax is a sensible user fee for the construction and upkeep of the roads they both drive on, and the argument that it can be regressive doesn’t really outweigh that.

That said, I’d certainly be open to enacting a national sales tax alongside the present income-tax structure. After all, most state governments use both and seem t get along just fine, so why not the federal government, too? Obviously we’d cut the income tax rates somewhat as we make room for the brand-new VAT, but the income tax system would have to essentially remain in place.

I remember reading a Jack Kemp piece a few years ago in Human Events*, in which he was practically calling George W. Bush an economic visionary on taxes and spouting the basic Lafferist line. And he’s only gotten worse over time. It’s kind of hard to respect him as an intellectually honest man after that — he’s become just another ideologue, in a covenant marriage to theories that were relevant to the problems of the 1970’s but are now out of date.

As for the distinction between “taxes” and “tax rates,” this strikes me as just so much Lafferism. It held true to a certain extent in the late 70’s and early 80’s, but I don’t think it really has a place in current discourse. Nowadays if you cut taxes you will get some increase in revenue after a short while, but it’s only through a backdoor mechanism of Keynesian deficit stimulus. And this means the increase in tax revenue will be more than wiped out by the concurrent growth of the national debt, so you’ll have to raise tax rates (yes, I said “rates”) even higher in the future. The Kudlow-Kemp types are looking for a free lunch.

(*The original Kemp piece had paragraph breaks. Human Events’ formatting got botched on old stuff when they switched to a different platform.)

It’s true that Larry Kudlow has never seen a tax cut he didn’t like, but I know that’s not true of Jack Kemp. When I worked for him, he would berate me if I ever said we were trying to cut "taxes." He patiently explained that there were any number of ways of doing that, some good, some bad. Our interest was in cutting marginal tax rates. So he insisted that I always use the term "tax rates" and never just say "taxes."

In my view, the tax debate we should be having is how to raise a fairly substantial amount of revenue over the next few years–on the order of several percentage points of GDP–in such a way that we pay for the spending that is in the pipeline without killing the goose that lays the golden eggs. Without such a debate, there is a great danger, when the crunch comes, that Congress will raise taxes in ways that will be very harmful to growth–soaking the rich and things of that sort.

I know there are people on the Democratic side who understand this. They know that those on the left in Europe figured out in the 1960s that the price of a welfare state is a broad-based tax on consumption. Those on the left in this country haven’t figured this out yet so they will probably make a lot of mistakes when they move to raise taxes. If the left tries to do something really stupid like jacking up the capital gains rate, the economy will tank.

Conservatives will capitalize on this to get back in power, but they will quickly discover that there is no public support for the magnitude of spending cuts in entitlement programs, especially Medicare, that would be necessary to allow for the tax increases to be reversed. At this point, I think they will finally come to appreciate the wisdom of a VAT and implement it as a tax reform so that income tax rates and taxes on capital can be cut.

To put the issue more succinctly, let me quote Larry Summers, who once said something to this effect. We don’t have a VAT because liberals think it is regressive–it takes more in percentage terms from the incomes of the poor–and conservatives think it is a money machine. We will have a VAT, Summers went on, when liberals figure out that it is a money machine and conservatives realize that it is regressive.

Wiser words were never spoken on this topic.

I can see some of your points, Bruce. The problem, however, is that you’ve so far cited Larry Kudlow and Jack Kemp as important supply-side names. And those two guys are some of the same people spouting today what you call bastardized supply-side economics.

I’d agree that it was important in the late 1970’s and early 1980’s to cut marginal income tax rates. They really had crossed the point of diminishing returns and were stifling the economy. But at the end of the day, tax rates are just one part of the equation. And this fundamentalist-like devotion to constantly cutting taxes that we see from modern Republicans is simply irresponsible. They’re playing Santa Claus for current gains and passing a bill to future generations that would make Lyndon Johnson blush.

So given that we have a massive national debt, expensive foreign engagements, literally crumbling infrastructure, and grand new entitlements from the same administration that cut our taxes — as you said, “starving the beast” is a sham — we’ll need to get the government revenue somehow. The alternative is we eventually default on Treasury Bills, which would plunge the economy into an even worse mess than any large-scale tax increase. It would be so bad, Americans would be illegally crossing the Southern border to look for jobs in Mexico while the United States is making concessions to the IMF and the World Bank.

So what would you do? You’ve mentioned passing a VAT/national sales tax, but what would the tax system look like when you were done? How much of it would be income tax, how much sales? And what would the total tax rate be, relative to GDP?

And remember, Larry Kudlow and Jack Kemp will probably hate just about any answer you give. After all, you seem like a pretty smart and responsible guy to me.

I guess I need to repeat an argument I made in a New York Times op-ed on April 6. In that article, I explained that tax-cutting has gotten completely out of hand. People are now making outlandish claims for the power of tax cuts that are far, far beyond what people like Jack Kemp were talking about in the 1970s when supply-side economics first developed.

The supply-siders’ original concern was less about the level of taxation than its structure. If we had only been interested in cutting taxes we would have not been so particular about the way we wanted taxes cut. It was essential, in our view, that marginal tax rates be cut; we opposed gimmicky tax cuts like tax credits and tax rebates. We thought those were worse than doing nothing.

Obviously, all this has been forgotten by the current crop of Republican candidates. I can’t really blame them, however, because it’s also been forgotten by George W. Bush, Republicans in Congress, and many of the Republican-oriented pundits as well. In short, supply-side economics has become thoroughly bastardized and bears little, if any, resemblance to its original form. This is a sufficient reason to get rid of it, which I explained in my article.

One of these days, conservatives will have to get back to basics. They need to understand that in the long run spending must be paid for and if spending is going to rise, then so must taxes. Unfortunately, somewhere along the way, conservatives became convinced that cutting taxes was the ONLY thing they had to do to restrain the growth of government. Through a mechanism that I call starving the beast, lower taxes would automatically reduce spending. I just published an article in an academic journal explaining why this is a myth. It’s online here. Here’s a link to a new paper by UC/Berkeley economists Christina and David Romer that comes to the same conclusion–starving the beast doesn’t work.

I have said on many occasions, including in my Impostor book, that taxes must rise and will rise. This conclusion has made me persona non grata in the conservative movement, but killing the messenger won’t change reality. I am on record as saying, repeatedly, that America must give serious consideration to a value-added tax to pay for all the spending in the pipeline. If we add to that a crash program to rebuild our aging infrastructure in the wake of the Minnesota bridge collapse, the case becomes even stronger. If we try to raise the kind of revenue we are going to need by raising tax rates, the economy will collapse. That is a lesson of supply-side economics that is still true.

I have to disagree with your contention, Bruce, that supply-siders are a dying wing of the Republican Party. If anything, they’re now all supply-siders to the point that it’s not even a point of self-identification anymore. Just look at this morning’s Republican debate: Not one of the candidates said they would raise taxes to repair roads and bridges. Rudy Giuliani and Mitt Romney started saying they’d cut taxes to raise the government revenues.

If that’s not a consensus of Lafferism, I don’t know what is. Republicans have really bought into this little fairy tale, that we are forever and always on the far side of the hypothetical curve, and it seems like nothing can convince them otherwise — no matter how big the national debt gets along the way.

And furthermore, what exactly does the Laffer Curve look like? Can anybody produce one, based on actual economic statistics over a long period of time? As it is, the GOP has made a religion out of the fiscal solutions of 1981, and the imaginary curve just keeps getting pushed further and further back to justify more tax cuts. Forget about the religion and the articles of faith, I want to see some evidence.

Which brings me to these questions: under what circumstances would our modern Republicans approve of tax increases? Is there any such scenario where a pressing need would justify a raise in the marginal tax rates? Or is the solution to every last problem a tax cut, resulting in a quasi-Keynesian stimulus and debt accrual, all of which is then hailed as a victory of small-government conservatism? How will those Treasury Bills finally get paid?

It was absolutely tacky and shameless for ABC to have George Stephanopoulos read their new Iowa poll while introducing the candidates. The point of a debate is that viewers have an opportunity to weigh the candidates on their own merits, free from press spin and poll numbers, and see them as human beings running for office. Instead, even this small hour-and-a-half oasis was ruined.

Hopefully, this will never happen again. Sadly, I suspect it will become the new big thing.

Today, I have a column in the San Diego Union Tribune in the subject of health care, and just how much is wrong with Britain’s National Health Service, which Michael Moore praises in his new film.

I’ve just finished watching the GOP debate on George Stephanopoulos’ show, and I’m struggling to pick a winner.  I think I’m going with Giuliani, but only just.  Here’s why. 1. The big thing that impressed me about Giuliani’s performance today was his ability to distinguish himself from the President, and indeed based on my reading of their prior statements, McCain and Romney, on the question of democratization as a major foreign policy tool.  Possibly my biggest critique when it comes to the Iraq War has been of those leading the charge (i.e., neoconservatives) who have demonstrated their utter, and misplaced, faith in people voting as an answer to all of our problems– despite all the evidence we have seen from Algeria, Gaza and the West Bank, and now Iraq, that just letting people vote does not a) guarantee democracy as we tend to conceive of it or b) guarantee that the country holding the elections will automatically shift its behavior, and become more attuned to US interests and objectives.  I have always identified in both neoconservative and liberal approaches to foreign policy (which in truth are not all that far apart in terms of their conceptions) a deep undercurrent of belief that if we just let people vote, they’ll move much closer to us, and if every country in the world were a democracy, there would be peace everlasting.  Now, I don’t believe this, but the real reason that I have a problem with it is because this kind of thinking fails to lend appropriate weight to the role that an established and recognized system of liberties plays in enabling a democracy to thrive– and it fails to recognize that without that basic foundation of liberties, democracy cannot thrive.  This is essentially the theory espoused by Fareed Zakaria in an essay he wrote back in 1997, which has remained probably my favorite essay on international relations since back in the day when I was still studying for my MA– and it’s a theory that many liberals and neocons just completely ignore, but which Giuliani evidenced in one of his answers today, he is not ignoring.  Whereas I feel that both McCain and Romney (and to be fair, the latter to a much, much greater extent) have been willing to ignore the distinction between what Zakaria would term "illiberal democracy" (which is what we see in Iraq and many other parts of the world, where voting preceded the establishment of a foundation of liberties) and "liberal democracy" (which is what we have here, and in the UK, and in India), Giuliani evidenced that he gets this.  This is a major point for him to score with me, and it’s something that makes me much more confident in his ability to run an effective foreign policy that will be very different from that of Bush-Cheney (which I don’t think has been very effective at all).

(more in the continuation)

www.lizmair.com

2. Some people won’t like this, but I think Giuliani was absolutely right to say that Barack Obama had a point in his comments about Pakistan this week.  And apart from Romney having a good line to throw out, criticizing Obama, he basically demonstrated his total naivete and untrustworthiness when it comes to foreign policy with his answer.

While I agree that it isn’t ideal to have public figures of any sort saying "hell yes, I’d bomb Pakistan" (it puts President Musharraf in a difficult position with his critics, no doubt), were Al Qaeda pinpointed at a precise location in Pakistan, were a call placed to Musharraf asking him to take them out, and were he to refuse or were the Pakistani military to refuse to act, absolutely it would be the right move for the US to go in and take action.  This is effectively no different a situation than what we saw with Afghanistan, after 9/11– except much, much smaller scale, and in a country with a "friendly" leader– though I would underline that Pakistan, in terms of its population, is not exactly friendly to the US. 

Romney’s view seems to be that alliances are static and that we have to abide by them and do exactly what our allies want, even when it is not in our own national interest.  This is exactly the kind of thinking that, were he in office, and were that thinking implemented as policy, would risk us de facto taking orders from foreign regimes (like Pakistan, or hell, let’s just throw out France).  That’s something that should sit badly with the party, and should sit badly with Americans.  While it’s almost always better to cooperate, and work with people, and rely on diplomacy and collaboration, instead of seeking out conflict and behaving like the proverbial bull in a china shop, at the end of the day, it is absurd, I think, to suggest that one should say "OK, we’ll just ignore that all the Al Qaeda members are assembled in one easy-to-target location, because our ally has asked us to, and we’ll sit on our hands, even if it gives Al Qaeda an advantage."  If these people really are a major, existential threat, that kind of thinking makes no sense.  It’s time for a good dose of realism to be reintroduced into US foreign policy, and I cannot see Romney doing that to any notable measure.  But I can see it happening with Giuliani, at least a little.

3. Giuliani’s answer on what mistakes he has made was just inspired.  And he did a very good job of explaining supply-side economics (side note: I hope Romney economic adviser Greg Mankiw was watching this, and I’d love to know what he has to say about Giuliani’s answer, since the guy has described views like these as representing "extreme" fealty to supply-side economics, something from which we can only presume his candidate doesn’t suffer).

Ultimately, I think McCain, Romney, and in fact Mike Huckabee did decently (Ron Paul didn’t do as much for me as he has in previous debates, but maybe that’s because he didn’t call for eliminating the Department of Education), but Giuliani has to be the winner for me.

When I saw Liz’s post, my first thought was, I didn’t even know there was a debate. It reminded me of that scene in one of the James Bond movies where some mobster throws Bond’s lady friend out a window. She ends up landing safely in a swimming pool, but the mobster tells Bond, "I didn’t know there was a pool down there."

My point is that once upon a time, not too long ago, I would have cared that there was a Republican debate. Now I would just as soon watch an infomercial.

Incidentally, there was something in the Fabrizio poll that I meant to mention for Andrew’s benefit. Republicans were asked if they had any friends or family that are gay. Almost half indicated some gay contact: 18 percent have a gay family member, 28 percent have a gay friend, 15 percent have a gay co-worker, and 1 percent said they were gay. Obviously, there is some overlap among these.

I don’t know what these numbers mean. No comparison to 1997 is presented, so there is no way of knowing whether the contact that Republicans have with gay people has changed. But I think it is reasonable to assume that the figure has grown over time as more and more gays come out of the closet. I don’t what, if any, political impact this may have, but my casual observation is that issues such as gay marriage don’t have the political potency they used to have. This may be because as more and more people realize that they have gay family members and acquaintances, the more they come to accept that it is not a life style decision, but just the way some people are; a condition akin to left-handedness and nothing more.

"Leave the gun. Take the cannoli." "The Godfather."