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November 18, 2010
Tax History: The Myth of Political Cover
Joseph J. Thorndike

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Last week I attended a roundtable on the deficit reduction plan released by Erskine Bowles and Alan Simpson, co-chairs of the National Commission on Fiscal Responsibility and Reform. At the end of the session -- which was a mix of polite criticism and less-than-rapturous applause -- attendees were asked a simple question: If you had to vote yes or no, would you support the plan?

The Bowles-Simpson plan won overwhelming approval from that audience of economists and budget wonks. But not from me (and not from three other cantankerous characters in attendance).

I can't speak for the others, but mine was a protest vote. It's not that I object to the plan's tax proposals (which are varied, vague, and more than a little bold). And I have no particular opinion about its spending components. Rather, I object to the very idea of a blue-ribbon deficit commission. It's simply a waste of time.

First, let's say what needs to be said: The Bowles-Simpson plan represents an honest, earnest, and provocative effort to address a serious problem. The commission's members (or at least its staff and chairs) clearly took their job seriously.

But what, exactly, is a commission supposed to accomplish? It's not an instrument of creative analysis. Although the particular plan offered up by the deficit panel's chairs is unique, its constituent elements aren't news to anyone. There are no surprise solutions lurking in it or any other blue-ribbon report (including the one released last week by the Bipartisan Policy Center). (For related analysis, see Doc 2010-24681 .)

The point of the commission -- any commission -- is political, not intellectual. Commissions are a Hail Mary pass, thrown up in the face of intractable problems and intransigent politicians. They have one job and one job only: to provide political cover.

And it's a job they can't possibly complete. In this hyperpartisan era, there is no such thing as cover. Were it possible, cover would necessarily derive from the stature of a commission's membership. Each side would pack the panel with individuals of such standing and character that no one could question their sincerity, wisdom, or political correctness.

But do such paragons of politics even exist today? No. There is no politician in either party above reproach by his colleagues. That is especially true of the Republicans, who seem willing to throw even their most loyal servants to the wolves of an angry electorate. Is there any Republican whom Grover Norquist wouldn't dub a RINO if he recommended, say, a VAT?

Commissions can't provide cover because no one in Washington has cover to spare. Everyone is too busy trying to save his own skin. All of which makes commissions pretty much useless as a political device.

Commissions represent an effort to substitute expertise for leadership. They distract from the real work of deficit reduction: political mobilization and public education. Politicians will begin that work when they're caught between a rock and a hard place -- and not one moment before.

Despair or Hope?

Assuming that deficit reduction will require some sort of major tax increase -- a safe bet if ever there was one -- when can we expect to see it? Don't hold your breath.

History suggests that dramatic tax increases require a war, and not the sort of war we're fighting today. Lawmakers muster the will to ask for fiscal sacrifice only when wars disrupt existing structures of federal finance. The wars in Iraq and Afghanistan may be expensive, but their fiscal disruption has not been acute.

The Revenue Act of 1932 was an exception to the tax-hike-as-war-measure rule. But it's not a precedent we're likely to repeat. In the last three-quarters of a century, we've learned a thing or two about raising taxes in a depression. The Reagan tax increases of the early 1980s also may qualify as an exception, although their staggered enactment and relatively modest size probably disqualify them.

History, then, offers no precedent for a major peacetime tax increase, at least not until we see the sort of debt crisis that my colleague Martin A. Sullivan recently described. But just because it hasn't happened doesn't mean it can't happen. As they say on Wall Street, past performance is not a guarantee of future returns. (For Sullivan's analysis, see Tax Notes, Nov. 8, 2010, p. 647, Doc 2010-23766 , or 2010 TNT 215-2 .)

While history can't provide a recent precedent for peacetime belt-tightening, it can provide clues about what a non-crisis tax hike might look like. Generally speaking, successful efforts to raise taxes in peacetime have been rooted in arguments about horizontal equity. Americans respond well -- or at least with productive anger -- to campaigns against tax avoidance. President Franklin D. Roosevelt defended many of his signature tax increases as an effort to combat tax avoidance. Even when framed in crude populist terms, attacks on tax "chiselers" can set the stage for meaningful tax reform.

President Reagan understood the political utility of horizontal equity, and he used it to great advantage in marshaling support for the Tax Reform Act of 1986. Of course, no meaningful effort at deficit reduction will develop under the same revenue-neutral rubric that shielded the 1986 effort from public ire. But tax increases framed within the context of base broadening may still be able to tap a reservoir of public support for standards of horizontal equity.

In that respect, the Bowles-Simpson plan may be on the right track. Its proposal to eliminate all (or nearly all) tax expenditures might be a reasonable starting point for raising taxes under the rubric of tax reform. But that approach carries its own risks. Tax expenditures have long been used to grease the skids for public acceptance of the individual income tax. While problematic, breaks for housing, healthcare, and whatnot may be a necessary element of the modern tax regime.

On balance, I think history offers more reason for despair than hope. Any sort of major tax increase seems highly unlikely, at least for now. Absent strong leadership -- of the kind I can't imagine in today's political climate -- we seem destined to wait for a crisis. And if the economists are right, it won't be pretty when it gets here.