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May 7, 2009
News Analysis: Reform for Sale, No Money Down
Joseph J. Thorndike

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What's with all the down payments?

Every time you turn around, the White House is making a "down payment" of some kind or another -- for healthcare, foreign aid, mass transit, energy independence, you name it.

It's a puzzling metaphor to use in the midst of a mortgage crisis. It's also a confusing one.

On March 5 President Obama described his $634 billion healthcare reserve fund as a "significant down payment that's fully paid for [and] does not add one penny to our deficit." This was real money (in theory, if not legislative reality), gathered from higher Medicare premiums and deduction limitations for well-off taxpayers. But a month earlier, Obama called the economic stimulus bill, replete with unfunded spending, a "down payment on the American Dream that serves our children and our children's children for generations to come." This was money out the door, not cash in the Treasury.

Clearly, the White House has lumped several different concepts under the rubric of a down payment. (The rhetoric flows fast and loose in the Obama administration, but not always coherently.) Some down payments represent new revenue. Others describe new spending or programmatic reform. Still others cover both.

Obama's package of international tax reforms falls into this third category. "It's a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations," the president explained. That sounds like programmatic reform.

Later in the day, one of his key economic advisers, Jason Furman, echoed that comment. "You should understand that today's announcement is a down payment on the President's overall tax agenda," he said on a White House blog. That, too, sounds like a policy initiative, not just a money grab.

But clearly, the tax proposals are also about raising revenue. Obama needs cash to support a range of policy initiatives, especially healthcare reform. For months he has been signaling that international tax reform would help foot the bill. So these proposals are also down payments in the traditional sense -- upfront money for a debt-financed purchase.

Why Make Payments?

The down payment metaphor is popular all across Washington, not just in the White House. Reporters use it uncritically to describe policy initiatives, especially when they come from the administration. Democrats use it to justify incremental policy reforms. Republicans have even tried to co-opt it -- the stimulus law, according to House Minority Leader John A. Boehner, R-Ohio, was "one big down payment on a new American socialist experiment."

Sometimes rhetoric is empty, and sometimes it's meaningful. Every once in a while (like now), it's both.

So what exactly is a down payment in Washington terms? When it comes to spending, it seems to be synonymous with "half measure." Down payments advance the policy ball without trying to cross the goal line (to explain one metaphor with another). Down payments, in this usage, are careful, judicious, and moderate. They hold out the promise of sweeping change (assumed to be necessary) without trying to pull it off right now (which might be expensive or scary).

Down payments that involve new revenue -- like the healthcare reserve fund and last week's tax proposals -- are also trading on notions of responsibility and measured change. They represent an effort to inoculate the Democrats against charges of radicalism.

But here's the difference between spending down payments and revenue down payments: Only the former seem to get any traction. Obama's plan to pay for some of his healthcare reform with a deduction limitation barely survived its delivery to Capitol Hill. Democratic lawmakers shelved it immediately, with scarcely an apologetic nod toward the other end of Pennsylvania Avenue.

And now it looks like Obama's international tax reforms are poised to meet the same fate. Democratic leaders have been distinctly lukewarm, endorsing the need for change but underscoring the pitfalls associated with it. Several have suggested that the corporate income tax, including its international elements, needs a complete overhaul, not a down payment.

In Washington, any call to scale up reform is usually a strategy for avoiding it altogether.

Why Now?

The timing of Obama's tax initiative is puzzling. Why now? And why did the White House make such a big deal out of it? The president announced the package personally, which seems out of step given the scale and technicality of the proposed reforms. Why has the administration invested so much political capital?

The most plausible explanation is strategic. The White House needs to bolster its progressive credentials, at least among supporters on the left. The Wall Street bailout has left many liberals deeply unhappy. Trade policy, too, has been a disappointment to the left. This explains why Obama, in a May statement, tried to link international tax reform to job protection:

    For years, we've talked about ending tax breaks for companies that ship jobs overseas and giving tax breaks to companies that create jobs here in America. That's what our budget will finally do. We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits. And we will use the savings to give tax cuts to companies that are investing in research and development here at home so that we can jump-start job creation, foster innovation, and enhance America's competitiveness.

Such rhetoric is red meat for progressive activists. But the connection between jobs and tax reform is dubious. In a blog post, Eric Toder of the Urban-Brookings Tax Policy Center dismissed Obama's effort to link the two: "Despite the great sound bite, these provisions won't increase U.S. jobs," he wrote. (Some liberal commentators have been dubious, too, treating the tax proposals as a smoke screen for less-than-progressive trade policies.)

But if the two issues are not linked by economics, they are inextricably bound to one another by politics. The key to last week's tax proposals can be found in Obama's opening remarks:

    Nobody likes paying taxes, particularly in times of economic stress. But most Americans meet their responsibilities because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being.

These words provide the most likely -- and powerful -- explanation for Obama's recent venture into tax reform. Money is certainly the issue. Obama will need more of it to finance his ambitious plans for social and economic reform -- much, much more. Currently, he has ruled out any tax increase for 95 percent of the population. But that doesn't mean he's counting on international tax reform to pay the tab for healthcare or anything else.

Bigger, broader tax increases are inevitable. But to build the case for them, Obama must first provide some guarantee that rich Americans (and the corporations that serve as their taxable proxy, at least in the popular mind) are already paying their fair share. He's building a political case for broader tax increases.

Obama doesn't need to worry too much about the success or failure of these particular proposals once they reach Capitol Hill. Simply by proposing them, he adds to his store of political capital. When it comes time to spread some real pain around the electorate, he will be better positioned to make the case.

If we want to stick with the real estate metaphors, last week's tax plan wasn't a down payment; it was earnest money. Obama is putting together a deal with the American people. As a first step, he's signaling his intention to make rich Americans pay their fair share. He's offering that signal now, before he asks less exalted taxpayers to accept new burdens later. Last week's package of tax proposals is simply the first element in a broader political bargain. It's a tax deal unlikely to be completed anytime soon, but certain to be closed down the road.