Thursday, October 16, 2008

Talking Taxes and Truth in 2008

by Bruce Fisher

Maybe the presidential race will get closer, but so far Senator Barack Obama’s success demonstrates that the Republican campaign against taxes is failing.

That’s a profound and historic shift.
Obama is succeeding with a calm reassertion of popular notions of mutual obligation, of interconnected destiny and of fairness, even as he gives voice to a widespread resentment of self-dealing and of excess.
His perspective reflects the formative crisis of his early 20s. In the early 1980s, when the steel plants of the South Side of Chicago were abruptly closed, when Chicago Mayor Jane Byrne ignored the pleas of destitute residents of public housing, when faraway General Jaruzelski crushed the Solidarity movement in Poland and put African-American and Polish-American protesters out in the frigid streets of Chicago on the same cold nights to march against injustice, and when in March 1983 the late African-American Congressman Harold Washington brought together a coalition of labor, progressives, intellectuals, and minorities to eke out a historic victory for mayor, the subject was never, ever taxes. Right there in the middle of the age of the anti-tax, anti-government conservative icon Ronald Reagan, the issue that captured the imagination of Chicago was fairness.
But tax talk has dominated American politics since then. Intellectuals, especially University of Chicago economists, have been the respectable beards for Republican political operatives who have turned all talk about taxes into a vicious rant about race. The late Lee Atwater, but also Karl Rove and the guy who beat former Rochester Mayor Bill Johnson’s pro-consolidation campaign for Monroe County executive, won Republican victories with TV ads that told the following story: Hard-working white folks pay taxes to bureaucrats who turn around and give that money to grasping, undeserving, violent and irresponsible blacks.
All the while, the intellectuals write exquisite notes to one another in the Wall Street Journal about the ideas of Edmund Burke, Adam Smith, Friedrich Hayek, and Milton Friedman, while their think-tanks in Washington and Fox News alternately explain away and celebrate the extraordinary concentration of wealth, and the upward redistribution of income, that has taken place since the 1980s. I see the advent of aristocracy that has been facilitated by pro-capital and anti-labor tax policy; the Chicago boys see it as a natural, and desirable, consequence of the robust marketplace.
Republican tax policy is part of what has made the owners of wealth wealthier and the workers for wages more resentful, and more stressed. Preferential treatment for income that comes from investments means that investors, speculators, and people who get their income from trusts, dividends, and interest (i.e., not from work) pay lower rates than people who work for salaries and wages.
And all those loopholes that were eliminated in the historic 1986 Tax Reform Act—all those exclusions, credits, special rules for depreciation, loss-carryforwards, and the like—have come back into the federal tax code as a horde of lobbyists has made neutrality, and fairness, into an obscure or quaint notion rather than the small “d” democratic policy guidelines they once were.
The great innovation of the 20th century was Franklin D. Roosevelt’s compromise: Robust capitalism gets government help, so long as capitalism funds social stability through progressive taxation. That was our social contract, until the racialization of tax rhetoric by Republicans. Fast-forward to 2008, and now Republican political success in demonizing progressive taxation has become Republican demonization of all taxation—which is why Sarah Palin didn’t hesitate to question, in her recent deabte with Senator Joe Biden, how paying taxes could ever be patriotic.
Obama’s non-radicalism
Obama has been forthright about raising taxes on high-income individuals. He asserts a return to progressivity.
Political conditions are such, just now, that Obama’s plan seems not to upset too many people. Why? In part because lots of folks (and not just the senior economists who are advising Obama) remember the Clinton years, when the economy felt better for all and when tax rates on the well-off were much higher—but also because Obama isn’t very radical at all. He only seeks to “raise” taxes on the well-off if by “raising” taxes one means that Obama plans to allow the George Bush tax cuts for individuals with incomes over $200,000 a year to expire.
Independent observers, including most news organizations as well as the Institute on Taxation and Economic Policy (of which I was research director from 1985 to 1990), totally reject Senator John McCain’s characterization of Obama’s plan as a general tax increase.
But independent observers also note that Obama isn’t even talking about restoring Clinton-era progressivity in the tax code. Labor-funded Citizens for Tax Justice is quite tepid in its defense of Obama against McCain’s distortions. Why, CTJ asks, can’t we all admit that Clinton-era tax rates were more fair and should be reinstated?
Let us not let the perfect be the enemy of the good—and the good news is that the old Republican scare tactic on taxes isn’t working at the national level.
But because of the combined weight of the regional daily paper, local TV and radio, and the lingering effects of the Erie County political crisis of 2005, the war against taxes may work here in Upstate New York.
Dishonest discourse
The race for retiring Congressman Tom Reynolds’s seat pits progressive Democrat Alice Kryzan against Republican Chris Lee, whose ad campaign is entirely a reprise of every scary thing you’ve ever heard about taxes.
Notwithstanding the fact that Kryzan has never held public office, Lee asserts that she is responsible for the specific kind of taxes that kills jobs. What kind of tax is it that kills jobs? The unspoken premise of the Lee ads is that any tax, of any kind for any purpose—even the kind that pay for roads, the army, healthcare, police, schools, or homeland security—kills jobs.
Meanwhile, in the same general suburban, overwhelmingly Caucasian area, notorious pork-barreling Erie County Legislator Mike Ranzenhoffer runs for New York State Senate promising to end mandates, cap property taxes, and generally continue to pay for all the things we like without actually having to charge anybody anything.
It’s an insane contradiction, but it’s discourse that is empowered and legitimized by the region’s daily newspaper, which editorializes that Erie County—which is about to increase property taxes for the first time since 2001—should not raise taxes no matter how much the cost of road maintenance, labor contracts, gasoline, healthcare for old people, or jail costs have risen. At the very same time, the daily paper editorializes that New York State should continue to fund UB, and to allow UB special status to avoid state procurement and labor rules, so that UB can proceed with its 2020 plan.
Here’s a news flash, folks: The money to provide basic services, and big public works, comes from taxes. The question is whether the money will come from progressive income taxes, which take a larger share of income from those who have more income (especially from unearned income), or whether it will come from people with less income.
Nobel Prize winners like Joseph Stiglitz and Paul Krugman argue that things need to be paid for with taxes, and that people with more income should pay more taxes.
That has a sort of Obama-esque ring to it. But I first heard that concept in Sunday school, when I read Saint Paul’s assertion that more is expected from those to whom more has been given.
That fundamental Christian notion is not empowered by any political campaigning here. Other than Obama, I never hear a Democrat say “tax the rich.” Elected officials avoid or are ignorant of the views of St. Paul or of these prize-winning, world-renowned economists who firmly advocate public investment in things like roads, schools, sewer systems, and other public projects that sustain enterprise, and who say that the well-off should pay their fair share in paying for this stuff. What is empowered here is the Republican rhetoric that slams the notion of actually paying for public works with money collected from taxes, especially if those taxes are collected from the well-off.
But the contradictory rants of these Western New York voices is nothing compared to what’s coming out of Massachusetts.
St. Paul: Welcome in Boston?
The main event this year in Massachusetts is a referendum on the state income tax.
“Our goal is to reach and persuade 1,600,000 voters to vote “YES” to END the State Income Tax,” says the Small Government website.
“With less government and no income tax, Massachusetts will become a magnet to private, productive businesses and individuals. More good jobs and more good workers.”
Sounds good, eh?
But just a minute.
Massachusetts has for the past 20 years been a magnet for some of the smartest, most productive and most highly paid workers in America.
Most observers credit the massive public and private investment in higher education for having transformed Boston from a snowy, mob-ridden, class-polarized dump into a global center for innovation. A hundred thousand English-speaking, hard-working, educated Irish immigrants didn’t hurt, either.
Taxing income is the only way to get distributional equity—taking more from those who have more in order to support stuff that benefits everybody.
The campaign to eliminate the income tax has some momentum. But the threat of suddenly starving the state of 40 percent of its operating budget is real. Folks are starting to understand that local services from schools to police stations to senior centers would be on the chopping block. “Property taxes—the most unfair and hated of all assessments—would likely rise to make up the difference,” opines the Boston Globe.
Maybe that explains why the Massachusetts Municipal Association, representing all the state’s 351 cities and towns, opposes the referendum.
The moral imperative for progressive taxes is backstopped by practical economics, even at the state level. Lower-income people spend all of their income; upper income-people spend less than their income. So for our consumer-driven economy, leaving more money in the hands of people who spend all their income gets their spending into the economy. Even Ronald Reagan understood this: He was an enthusiastic proponent of the Earned Income Tax Credit, which gives low-income working people a greater reward for working. That’s why the Massachusetts plan to kill the income tax, and substitute regressive property taxes, is so dumb.
There is still time for the Republican anti-tax religion to get its Reagan-era energy back. But a little bit of tax sanity may yet prevail this year.
Bruce Fisher is visiting professor of Economics and Finance at Buffalo State College, where he directs the Center for Economic and Policy Studies.

Wednesday, October 15, 2008

The local impact of presidential politics

The Next President and You

Predicting each candidate’s impact on your money, your health, and your security

Here on America’s North Coast, we are so very, very far from Washington that electing a president may seem to be an abstract exercise, a chance to express ourselves emotionally, rather than a practical choice with practical consequences.

Barack Obama

Make no mistake. Your vote will make a difference right here at home.

A Barack Obama victory would mean strong one-party rule for at least the next two years. A cooperative working relationship between the Obama White House and the Reid-Pelosi Congress could achieve

• possible local property tax stability (probably not relief) if a very sharp shift in healthcare financing succeeds in extending coverage while also bringing US healthcare expenditures more in line with those of other industrialized countries. Obama’s federal policy mix could also include an increase in the federal matching share for Medicaid for New York, which means that Washington would pick up more of the cost now covered by taxes paid to the State of New York and county governments, to bring it into line with the ratio Washington pays in other states;

• more construction jobs because of a federal commitment to infrastructure funding, through the establishment of an infrastructure bank, which would get to work on big projects like the long-overdue regional sewerage-management problem that nobody talks about any more, but that the Environmental Protection Agency estimates will need $300 billion nationally over the next 20 years. At least $100 million will be needed locally to deal with sewers that are in some cases more than 100 years old;

• more road money to older suburban roads through a federal policy change (which will take a few years to actually implement) that will favor densely-populated areas before new money is made available for roads that serve fewer people, so that old suburbs and cities get help before sprawled-out suburbs;

• a potential rebound in manufacturing after a review and possibly renegotiation of some of the trade treaties (probably not NAFTA, but World Trade Organization agreements) that many see as having injured the manufacturing economy of our region;

• more local National Guard volunteers remaining Stateside for the public service they signed up to do, rather than shifting overseas, but only if there is a successful draw-down of forces in Iraq, and deployment of regular forces (i.e., not reservists) to Afghanistan, which are Obama’s stated goals.

The consequences of a John McCain victory for this region would certainly reflect a fundamental division between Congress and the executive branch of the federal government. McCain employs “red budget” ideologues who are serious about reducing the federal safety net, starting with the biggest Great Society programs. The consequences of McCain’s first budget for 2009-2010 would include:

• higher state taxes and higher local property taxes, as McCain intends to radically reduce the federal commitment to Medicaid and Medicare. Practically speaking, this means that Washington would off-load the cost of mandated programs to state capitols, which will continue to do what state capitols always do: protect Medicaid recipients (who are mainly the high-needs elderly), protect healthcare workers, and protect long-term care providers. States like New York also have a long-standing practice of off-loading costs to local government, which fund mandated services with property taxes. This will set up a political dynamic that will favor local Republicans, as local property taxes rise to meet the cost of mandated health services to seniors, who are becoming a larger share of the regional population (not only in Buffalo but everywhere where it snows) but who are politically receptive to the anti-tax message;

• no new construction jobs because of no increased federal commitment to infrastructure funding, as McCain has explicitly and relentlessly criticized federal spending as undesirable. McCain has been particularly hostile to any funding for Amtrak and for light-rail projects;

• no federal policy shift on funding roads, meaning that while there may be some continuity in the Bush administration’s exploration of various congestion-relief strategies in major markets (especially Southern California, Washington, and some other big metros), there would be no change in the highway-funding regime in force today;

• no rebound in manufacturing, because there is no reason to expect any change in US trade agreements;

• the same or increased levels of reliance upon reservists for continued deployments in Iraq and Afghanistan, plus a renewed requirement for forces should McCain’s policy toward Iran grow require personnel.

What presidents really get to do

John McCain

Remember when Bill Clinton beat George Herbert Walker Bush?

Folks today remember voting for Clinton and getting a great economy for several years. For those areas of the country like Buffalo and Upstate New York that missed out on the great American economic expansion of the Clinton years, but who have seen the trouble of the Bush years, the 2008 election is more than eerily reminiscent of the 1992 election. It’s like a replay.

But the trouble for Obama is that there is a big difference between the George Herbert Walker Bush recession of 1992 and the George W. Bush recession and credit crisis of 2008.

In 1992, Bill Clinton won decisively with a focus on domestic programs, especially his pledge to restore progressivity in the federal tax code, which meant ending the favorable treatment of unearned income like capital gains and dividends and raising the marginal tax rate for those with incomes over $250,000. The Clinton plan also included expanding access to health insurance with a top-to-bottom reform, investing in infrastructure and in education, science, and technology, while also taking on the culture of Washington insiders and lobbyists.

Obama reprises the Clinton program, but goes it a couple better. Snow-state Senator Obama recognizes that the Great Lakes cities have been shrinking and their metropolitan regions have been failing to thrive. His urban policy position paper, in contrast to Senator McCain’s, actually exists. (Go see it on his Web site; McCain has a Web site but no urban policy.) Obama has pledged to create a new cabinet-level office of urban affairs—in recognition of the ongoing relevance of cities, but also of the observed fact that dysfunction in cities is a drag on regional economies.

But Clinton’s experience should be a warning.

Bill Clinton inherited a $400 billion deficit in a declining economy soon after a war in the Mideast. Obama, should he win, will inherit a $1 trillion deficit in a deeply disturbed global economy, and take the helm of a nation engaged in two wars.

Unless something changes in the next few weeks, the most powerful person in economic policy will not be the new president or his secretary of the treasury, but rather the group bankers that includes the chairman of the Federal Reserve, Ben Bernanke.

Bill Clinton had to wait a couple of budget cycles to get his program going—but first, he had to meet the needs of the debt markets by raising income taxes (in his first budget in 1993-94) in order to tame the deficit monster. The result was a political nightmare. Republicans successfully labeled his “the largest tax increase in American history,” and overnight, Clinton no longer enjoyed a unified Democratic Congress. The Republican Congressional triumph of 1994 was attributed to effective Republican advertising (the “morphing” ads) in a campaign led by retiring Congressman Tom Reynolds; some of us recall that Democrats went into a crouch rather than defend the deficit-killing tax increases.

The lesson: The credit markets are more powerful than the leader of the free world. And when the leader of the free world acts responsibly to save the free world, there is a heavy political price to pay.

McCain and his campaign team do not like the 1992 analogy. They prefer 1980, when Ronald Reagan defeated a Democrat in an economic downturn. Reagan won on a program of less government, tax cuts and an appeal to national security. (Credible historians and former operatives also suggest that Reagan’s candidacy benefited from an intentionally prolonged Iran hostage crisis.)

But to get right back to the practicalities of budgets and governing, a McCain victory, like Reagan’s win in 1980, would leave a politically isolated Republican with two overwhelmingly Democratic chambers of Congress.

That means that McCain’s budget will reflect his radical antipathy to Medicaid, Medicare, and other programs that cover every American who is eligible by virtue of age, income, or disability—and it is reasonable to expect that McCain and his advisors will cite the current economic crisis as the rationale for this fundamental change away from the decades-old policy of income and healthcare support for the elderly.

The predictable response in the snowy states would be to fill the gap that Washington made, and to do so with increased local taxes—which would result in very much greater polarization of rich from poor, black from white, and even old from young.

Thus McCain plus a Democratic Congress would means more of what we’ve been seeing for some time now—except more so. The new politics of rich and poor could become a whole lot uglier, but that’s the subject of another essay.

The other players

As powerful as presidents are, automobile company executives also exert a lot of power over our region, too—despite the shuttering of American Axle, Delphi, and many other parts suppliers in the past few years.

The governor of New York State—especially because of a lawsuit that former Governor George Pataki won against legislative leaders a few years ago—has a lot more power over his state’s budget priorities than the president has over the federal budget.

Right now, in October 2008, we are one month away from an Albany showdown between legislative leaders accustomed to power and a governor who has to reduce spending by billions of dollars to close a growing budget gap.

Contractual obligations of the state government will have to be met. But the State University of New York at Buffalo has been told to expect a 10 percent cut, or $20 million, in its next budget. Buffalo State College has been told to expect a multi-million-dollar cut as well. The impact on the local economy of reduced expenditure by SUNY will be quite negative, because SUNY is such a large employer and a large purchaser of local services and of goods from local suppliers.

County governments—which operate largely as branch offices of state government, with very little independent budget flexibility—will be commanded by Albany to raise funds to cover non-Medicaid mandated expenses. Former county executives Joel Giambra of Erie County and Tom Suozzi of Nassau County were successful in negotiating the three percent cap on annual Medicaid increases, but they were not successful in getting Albany’s commitment to cap other mandates…and that’s where the Albany hammer will fall.

Meanwhile, the leaders of General Motors Corporation, Ford Motor Corporation, and the entity that owns Chrysler were successful two weeks ago in obtaining $25 billion in federal loan guarantees so that they can re-tool their plants in New York, Ohio, Michigan, and other snowy places in order to make energy-efficient cars. (Honda and Toyota, which like the Big Three have seen sales plummet between 20 percent and 35 percent as the recession settles in upon us, have somehow managed to make their own hybrids and electrics market-ready without access to such aid.)

That credit lifeline is meaningful here. There are still about 10,000 workers in the Buffalo-Niagara Falls area (out of the region’s workforce of 580,000 or so) who rely on Ford and General Motors, directly or indirectly, for a paycheck. We should all hope that the executives in Detroit make good decisions—and that those decisions include making fuel-efficient vehicles or vehicle-parts here.

But the credit crisis, and especially the loss of over 100,000 jobs on Wall Street since 2007, means very tough budget times for New York State—and that puts public employees at risk now, too. About 16 percent of the regional workforce consists of teachers, professors, troopers and cops, firemen, health workers, parks and road and sewer and water workers, all of whose salaries and benefits are an important part of the regional economy.

Central bankers, exchange rates, and Wall Street are all like presidents, and together they are more powerful than presidents. And neither of the two candidates for president will ever be able to exercise king-like power to turn words into policies. Anyway, presidential policy-making in itself does not the world command.

But the power of the presidency is still very, very great.

Long-term trends like the polarization of income and wealth, the abandonment of snowy central cities, and suburban sprawl, and problems like over-spending on healthcare despite indifferent outcomes, and under-investment in keeping water clean despite measured outcomes, won’t be solved in the first term of either Barack Obama or John McCain.

The difference is, these issues might possibly see some change during the second term of President Barack Obama, but will never see any change at all in the first or second terms of President John McCain.

At least not here.