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November 30, 2006
Security, Opportunity, and Tax Preferences
Joseph J. Thorndike

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Security, Opportunity, and Tax Preferences

Joseph J. Thorndike is a contributing editor with Tax Analysts. E-mail: Joe_Thorndike@tax.org.


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After trouncing Republicans in the November elections, Democrats squared off in their own intraparty battle to hog the credit. Well, it wasn't much of battle -- more like a rout. In the first blush of victory, party moderates made a plausible case for the their contribution. "Moderates Pick a New Congress," declared one blog posting from the self-consciously centrist Third Way.

But before you can say "William Jennings Bryan," activists from the center-left regions of the Democrasphere fired back. The election was a victory for economic populism, they declared, not Clinton-style triangulation. (And before you historical nitpickers write in to correct me, let me stipulate that Bryan was a Democrat, not a Populist. Nonetheless, the Great Commoner did accept the Populist Party's 1896 nomination for president, so I think he counts.)

The narrative of resurgent populism has carried the day. In the weeks since the election, media analysts have devoted plenty of ink to the phenomenon. "Here Come the Economic Populists," announced The New York Times in a November 26 article. According to reporter Louis Uchitelle, the populists have arrived to challenge Democratic orthodoxy, including the so-called investment approach to economic reform associated with former Clinton Treasury Secretary Robert Rubin.

Regulate or Compensate

Arguments between the populists and the Rubinites are old hat. To some degree, they boil down to a matter of emphasis. Populists focus on economic insecurity and growing inequality. They support substantial government intervention in the economy to help tame the sometimes brutal dynamics of globalization and competitive capitalism. Rubinites, by contrast, are more inclined to tolerate the free play of market forces. Where populists would regulate, Rubinites would compensate.

The division is most obvious in the area of trade policy. Populists dismiss the notion of "free trade" as a misnomer, citing the distributional inequities that surround that agenda -- not all of which flow "freely" from market forces. Instead, populists support notions of "fair trade" that include regulatory protection for workers threatened by global competition.

Rubinites, by contrast, tend to support market-driven trade policies. They are cognizant of the pain afflicting displaced workers. But rather than restricting trade, they would establish compensatory policies to help people cope -- programs like worker retraining, for instance.

This intraparty argument can get tiresome. Several months ago, Ruy Teixeira -- a joint fellow at the Center for American Progress and the Century Foundation and certainly one of the most compelling political analysts working today -- urged Democrats to move on. "The old debates between 'populists' and 'New Democrats' have clearly run out of gas," he wrote last spring in The Democratic Strategist. He urged Democrats to seek common ground, bridging the populist-Rubinite divide by embracing both. Progressive leaders must address the rising tide of economic insecurity and inequality, he said, while still acknowledging the "aspirational politics" of many middle-class families. People who hope -- and expect -- to make it big some day won't respond to messages focused solely on worry and insecurity.

Now Teixeira has teamed up with Yale University political scientist Jacob Hacker to suggest a rhetorical framework for threading this ideological needle. "The starting point for this vision is a simple but forgotten truth," they write in the December issue of The American Prospect. "Economic security is a cornerstone of economic opportunity." In concrete terms, this pan-Democratic vision implies a focus on key issues: affordable healthcare, secure retirement benefits, access to higher education, and available child care. Those pillars of economic security would encourage Americans to "invest in their own future"; given a little protection from the vicissitudes of the modern economy, Teixeira and Hacker contend, people will pursue specialized job training, explore new careers, and seek new jobs.

The Power of Preferences

So how do taxes figure into all this? Probably in the form of new credits, deductions, and other preferences. Democrats are tossing around plans for a variety of targeted incentives. House Democrats have declared their intention to create a new deduction for college tuition. Other liberal leaders have championed additional savings incentives and tax-preferred savings accounts. And almost all Democrats would protect and expand the earned income tax credit. Some of those ideas would boost security, but more often they emphasize the opportunity side of the Democratic divide.

Tax preferences are a useful tool in the quest for Democratic unity. For decades, incentives have been used to broker differences between the parties. They have eased the way for backdoor spending and social engineering, even as budgets tightened and tax cut rhetoric assumed its hegemonic dominance. Now preferences seem poised to play the same role within the Democratic Party, eliding divisions and blending the appeal of security and opportunity. Preferences also allow Democrats of all stripes to embrace the rhetoric of tax reduction, stealing a page from the GOP playbook without abandoning progressivity.

One suspects that populists might prefer a heavier dose of old-fashioned spending and redistributional taxation. In particular, some have complained that Democratic leaders are dodging vital distributional issues, like rolling back the Bush tax cuts. But for the time being, few Democrats seem to have the stomach for such a controversial agenda. Rubin has dismissed the notion as politically impractical. "Any solution that you put up is going to get knocked down before you put it up," he told The New York Times. Incoming House Ways and Means Committee Chair Charles B. Rangel, D-N.Y., has also signaled his intention to leave the Bush cuts alone -- at least for now. And even the poster child for liberal reform, House Speaker-elect Nancy Pelosi, D-Calif., has focused her tax talk on new education incentives, not progressive redistribution of wealth, income, or tax burdens.

So populists are left with a variety of incentive proposals. More sweeping reform seems unlikely before the 2008 elections, and probably even afterward. There's always a chance that Democrats could find common ground with the White House, perhaps using the tax reform plan sponsored by Senate Finance Committee member Ron Wyden, D-Ore., and Ways and Means Committee member Rahm Emanuel, D-Ill., as a starting point.

But as I've said before, reform happens when it must, not when it should. Things are going to have to get worse -- probably a lot worse -- before anyone tries to make them better.