The recent discussions in the area of tax policy have been confused and have displayed no coherence about the short-run objectives, the long-run objectives or about how to achieve them. For example, not only have both political parties decided to let the deep and elitist Bush tax cuts continue despite the deleterious effect it has had on the long-term sustainability of the public finances of the United States, but thay have begun to indulge in other myopic and opportunistic games in the field of tax policy. It has become quite clear that this political establishment, cutting across party lines, does not believe in systematically addressing serious issues, does not believe in acknowledging bad news about the economy and does not believe in informing the public about short-term and long-term problems. A few things have happened in the recent past when it comes to tax policy. Treasury Secretary Tim Geithner once made a statement that the Bush tax cuts should be allowed to expire. He was shouted down by other people in the establishment and today, there is no real voice or momentum in favor of letting the Bush tax cuts expire. What is even more interesting, however, are some recent announcements by the White House that it wants to increase taxes on the super-rich, that is wants to use the resulting increase in revenues to alleviate the public debt problem and that it wants to give the " middle class " income tax cuts and payroll tax cuts.
One is led to wonder, why payroll tax cuts ? It is well-known that the long-term sustainability of the Social Security system is a serious matter. It is also known that there can be shortfalls in the revenue required for the Social Security system for time periods as long as 50 years according to Congressional Budget Office documents. So, why bundle payroll tax cuts with income tax cuts and make the long-term sustainability of the Social Security system even more precarious than it already is ? After all, only the most naive can think that a privatized social security system is a good option given the recent experience about how the retirement savings of people were wiped out during the financial crisis of 2008-09. So, what exactly is the justification for cutting payroll taxes in a pay-as-you-go system ? Whether it is taxes on the super-rich or the taxes on the middle class, the one lesson that should be obvious from the past is that tax cuts are politically difficult to reverse. For tax cuts on the super-rich and on big corprations, money power buys off politicians and tries to perpetuate or implement tax cuts for the wealthy. As for the middle class, opportunistic politicians can easily play on their myopic instincts in order to gain votes and win elections instead of informing the middle class about the serious problems regarding public finance. The fact that the super-rich should shoulder a bigger share of the burden of taxes in no way excuses the middle class from also shouldering their fair share of the country's expenses and from the responsibility of contributing to sounder public finance fundamentals for the future generations. Both for this reason and due to the fact that the Social Security system is so vulnerable, a serious examination is due into the question of why payroll tax cuts should be bundled with income tax cuts for the middle class. Not only that, given the fact that the tax rebates, the bailouts and the monetary expansion following the 2008-09 financial crisis led to a stabilization of the economy, but not much beyond that, a serious examination is due about the question of how much middle-class income taxes can be cut without having an adverse impact on long-term public finances. While the rich and super-rich should be asked to pay more in taxes, the middle class cannot be expected to go on tax picnics while the country's economy is in such serious trouble. Not unless there is very good moral and quantitative justification. And as for the incentive effect of middle class tax cuts, the political establishment is far from providing detailed arguments in its favor. And the political establishment needs to explain to the public why tax increases on the super-rich should be accompanied by tax decreases on the middle class. Does the quantitative justification exist for this ? A country that refuses to face hard realities in these times of extraordinary economic distress may well find itself in tremendous trouble in the future. Short-term political opprtunism cannot be allowed to dominate over serious economic thinking, whether it is taxes for the super-rich or whether it is taxes for the middle class. The American political system is prone to making wild promises to the middle class. As the next Presidential election nears, one can expect the Democrats to try to promise tax cuts to the middle class and to promise tax increases on the super-rich. However, the Obama administation's record in this field is a disgraceful one. It has not really fought the battles it was supposed to fight to reverse some of the Bush tax cuts and to improve the fiscal deficit situation. Why is the adminitration now making these noises about the tax increases on the super-rich ? It has not really succeeded in implementing these in the Congress. Why should the public believe the empty promises of this adminitration. However, these abouts its seriousness in this regard and about its political ability to get these implemented ? Moreover, these are not normal times. These are not normal election cycles. Making reassuring promises to the middle class, no matter what the long-term considerations, like in normal times, is not the way to go. American politicians seem to be in the habit of follwing scripts, like automatons or robots. What is needed is not a robotic Democratic Party or a robotic Republican Party, but a serious appraisal of the country's needs. Never has there been a situation in recent times where it has been more necessary to put economics over politics. Since these are not business-as-usual times, one should not expect business-as-usual politics to deliver the goods. The public would do well to educate itself in these matters. It has probably become much wiser over the last couple of years and it will probably stiffle a big yawn as the Democrats try to play their populist games and as the Republicans try to serve their corporate masters. This election cycle, at least, economics is the litmus test of the relevance of the American political system, and when it comes to fixing the economy for the future generations, neither political party inspires at the moment. It is dull, oh so dull, the political discourse in this area. Warren Buffet has said that the rich should voluntarily start paying more in taxes. That may be a better way for the American system to move in the direction of fixing the economy than to have a few career-driven politicians play the usual political games and pander to the usual vested interests. The recent demonstrations in the country are another indication that the people want more than politics-as-usual. The political establishment risks becoming irrelevant if it ignores the need for transcending the normal political cynisism and opportunism.
by C. Jayant Praharaj ( send comments to [email protected] )