Needed: Small compromises on big budget

Republicans and Democrats have both proposed federal budgets, the first time in years that each has come up a plan.

Both parties call for tax increases and spending cuts.

The difference is mainly about what each would do with the money from the tax increases.  The Republicans would raise some taxes to reduce others.  The Democrats would cut the deficit.

The GOP plan is based on the idea that tax cuts stimulate the economy.  An improved economy produces more tax revenues and, when spending is under control, the new revenues would make it possible to reduce the deficit.

The Democrats have a more direct approach.  Use new tax revenues now, they say, to trim the deficit.

One way or the other, both say they want to reduce the annual federal deficit.  Unfortunately, when it is in power, each party increases the deficit, often by catering to the interests that contributed to its election success.

The picture that emerges shows both parties seem somewhat less serious than they claim to be about cutting the deficit. 

Recently, some Democrats have admitted they favor a permanent annual deficit, provided it’s not too large.  Because some federal spending benefits future generations, they say, it’s all right to pass some of the cost on to them. 

What taxes would the GOP cut?  They complain that at 35 percent, the federal corporate tax rate is among the highest in the world.  They want to reduce it.

The corporate tax rate would be a reasonable target, if only companies actually paid it.

Last year, General Electric, a huge, diversified company, paid 14.4 percent in taxes on its profits.  It can take advantage of tax preferences – more commonly called loopholes – that allow it to exclude income from taxation.

And Fairchild Semiconductor paid no taxes at all.  It can take advantage of having lost money in earlier years, a feature of the tax law that does not apply to most individual taxpayers.

  

A cut in the corporate tax rate would mostly benefit the corporations concerned.

The budget choice is to raise taxes or cut the programs.  In either case, the federal government would continue to run deficits.

Beyond taxes, the main differences between the parties are about cutting spending on Medicare, Medicaid, and Social Security.  Republicans want to reduce these entitlement programs, but Democrats aren’t enthusiastic about such rollbacks.

The elusive “Grand Bargain” would deal with all issues – taxes, entitlements and deficits.  The parties are so far apart, even to the point of allowing the sequester to kick in, that such a deal seems impossible.

One solution is for a party to takes control of the presidency, the House of Representatives and a filibuster-free Senate.  That’s not likely, leaving compromise as the only alternative to more deficits.

Let’s say each side was willing to hold its nose and accept something less than perfect.  Taxes could be increased with some of the money going to deficit reduction and some of it going to tax reform that could result in lower taxes for middle-income people.

The first step on this approach is to close as many of the worst loopholes as the parties can agree upon.  That’s not as impossible as it sounds, because there is already agreement on getting tough on a few tax breaks.

But that step won’t produce enough revenues.  The total amount of loophole benefits that any taxpayer – individual or corporate – can use could be limited to a fixed percentage of gross income.  Taxpayers could still choose their loopholes, but within limits.

In setting a cap on loopholes, Congress would have a good idea how much revenue would be raised.  As the economy changes, the cap could even be adjusted.

That way, Congress could keep on adding loopholes as it inevitably will, knowing the effect would be limited by the cap.

If too much of the income of the wealthy or of companies doing business abroad still escaped taxation, the much-maligned “alternative minimum tax” could be made to do what was originally intended.  It was meant to nullify or limit tax avoidance features used mainly by the wealthy.

In short, all of these measures show that it is possible to increase tax revenues without touching current tax rates.

Some diehard GOP House members won’t accept any compromise.  But electoral reality could push other House Republicans to join with Democrats in finding a compromise. 

Without abandoning their widely opposed positions on taxes and spending, the parties ought to concentrate on finding small steps on which they might both agree.  We’d call that progress.

Tax Reform Deal Jeopardized by Myths, Fear of Change

The obstacles to Maine tax reform illustrate almost perfectly the seeming impossibility of achieving bipartisan political solutions.

People say they want political cooperation to produce positive results, but then refuse to support compromise and insist on keeping their positions.

When it comes to tax reform in Maine, such positions may be based on opinion not supported by fact.

That same attitude is one reason why legislation dealing with the deficit, guns, immigration, or health care, all sorely needed, cannot get past deadlock in Washington.

This year, independent Sen. Richard Woodbury, a highly qualified economist, led a group of Democrats and Republicans to come up with a set of tax reform proposals that are both balanced and sensible.

They demonstrated just the kind of bipartisan cooperation that voters overwhelmingly say they want, but are not getting.

In brief, the proposed tax package does two things.  It would move Maine more into the mainstream of state taxation.  And it would take advantage of changing state characteristics, with emphasis on taxing tourists and catering to the state’s older population.

Maine ranks near the top in income tax rates, and it taxes the income of average people heavily.  If politicians want to do something for middle-class taxpayers, as they frequently say they do, then the best thing they can do is cut tax rates that target them.

Of course, the state would lose a lot of revenue if it cut the income tax.  The only other place to make up the loss is the sales tax, where Maine’s rate is low.  Maine ranks 43^rd out of 50 states.

A sales tax increase is the key to tax reform.  But doing anything about the sales tax means facing the myths surrounding it.

The proposal calls for an increase from five percent to six percent.  And it would put more items under the sales tax than now are covered.

Other states with six percent and more items covered produce no evidence that these factors cut the volume of sales or harm lower income people.

In fact, Maine has had a six percent sales tax without a significant impact on sales.  And its sales tax covers about 25 of the 168 items that other states may include.

Merchants resist tax reform, because they believe that they will lose sales.  They say that going up one percent would hurt them.  It simply stands to reason, they say.

Economic research finds no evidence that a one percent increase in the cost of consumer goods has such an effect.

Would thousands of Maine men trek across the border to New Hampshire, with no sales tax, to get their haircuts just to save about 78 cents – the added cost of the sales tax?

On the other hand, tens of thousands come to Maine to vacation.  They would pay the higher sales tax.  And they would pay a higher lodging tax also set in line with other states’ rates.

The proposals have something for each party.

The Republicans would see the end of the inheritance tax or, as they call it, the “death tax.”  The state would lose relatively little income and could reasonably expect some of its wealthy retirees, who now leave to avoid that tax, to stay home.  And there would be a flat income tax rate of four percent.

The Democrats would get tax breaks for lower-income people to cushion the effect of the change in the sales tax.  And everybody would get a bigger break on property taxes with the homestead exemption going to $50,000.

As the economy changes over time, the tax system needs to change along with it to ensure that the right people are paying.

Those who claim taxes will increase probably fear some of the tax burden will shift from others to them.

For example, in the United States the sale of services has skyrocketed compared with the sale of goods.  But Maine’s sales tax continues to focus mainly on automobiles and building supplies.

Tourism has become the state’s biggest business.

And Maine, which has become the state with the highest median age, drives away the many of the most affluent older people.

The changes in the economy since Maine’s tax rates were adopted suggest that there’s no way to know exactly what will happen to revenues if the bipartisan proposal were put into effect.  But it would be more fair.

In effect, Woodbury and his Republican and Democratic colleagues have called the bluff of those who demand bipartisanship. 

Do we really want compromise – in either Augusta or Washington?

GOP Wins Big in War Over Spending Cuts

Last week perhaps the biggest policy war in the country was quietly settled with the outright defeat of one side – the Democrats.

Despite President Obama, their standard-bearer, and their apparent control of the Senate, the Democrats lost their struggle with the Republicans over whether to reduce the deficit by spending cuts or higher taxes on the wealthy.

They lost quietly and without complaint.

The two parties have long been unable to find a compromise on how to cut an additional trillion dollars or more from federal spending over the next ten years.

In an effort to force the parties to make a deal, Congress agreed to the sequester, a cut in federal spending that would affect all programs to the same degree.  Obama and Congress thought that the prospect of such reductions, affecting everything from defense to food kitchens, would be so unacceptable that an agreement would have to be reached.

Wrong.  The parties did not agree, and on March 1, the across-the-board cuts went into effect.

Obama and the media waited for the public outcry.  It never came, probably because this year’s sequestration cuts of $85 billion were not large enough to hurt.

But then, one of the reductions did hurt.  When some air traffic controllers had to be furloughed, flights were delayed.  Travelers were unhappy, and the media displayed pictures of disgruntled crowds at airline terminals.

Then, the Republicans saw their opportunity.  In the House of Representatives, they easily passed a bill allowing the head of the Federal Aviation Administration to shift funds from some agency services to air traffic control, ending the plan for equal reductions for all functions.

Senate Democrats, eager to avoid any blame for travelers’ delays, went along without a single negative vote.  So did Obama.

The result was that the GOP achieved a cut in spending, while avoiding some of its unpleasant consequences.  That almost certainly means that for this fiscal year at least, no serious attempt will be made to end the sequester and come up with a compromise.

GOP Sen. Susan Collins hailed the deal as a triumph of bipartisanship, when it really was a straight GOP victory.

The Republicans are likely now to be in a position to force spending cuts without giving ground on tax increases.  As a result, the deficit may be somewhat reduced, though not enough, and public services will have to be scaled back.

The GOP policy of maintaining as much of the Bush tax cuts as possible and repealing as much as possible of the social welfare programs sponsored by Democrats seems to be working.

It was probably not by chance that the trigger for the GOP to modify the sequester was air traffic control, which mostly affects middle- and upper-income people and not cuts to welfare or other low-income programs.

The Republicans have masterfully employed their control of the House and their almost constant use of the filibuster in the Senate to set national policy.

Contending with the GOP, a party widely thought to have been rebuked by the voters in the 2012 elections, Obama and Harry Reid, the Democrats’ Senate leader, have given ground.

They have been faced by Republicans, who ignore polling data showing they are held in low repute by the electorate and show remarkable determination and discipline in pushing their policies.

In contrast, the Democrats seem to like holding office more than using their control to take some political risks to achieve gains for their policies. 

In a television interview last week, a top Reid aide, when asked about what makes a politician successful, answered: “Getting re-elected.”  Absent was any sense that accomplishing something for the country while in office was a sign of success.

Europe, which adopted austerity as the way of overcoming recession, is beginning to realize that slashing spending imposes too heavy a penalty on people and that some government spending is needed to stimulate the economy.  The United States is moving in the opposite direction.

Reducing taxes has not yet stimulated more business investment that in turn would create more jobs, as the GOP maintains.    

While what government can do is limited, because of the size of the deficit, its spending cutbacks have slowed recovery, at least according to most economic commentators.  Government’s historic role in pushing growth has been ignored.

Voters may be impatient with both parties for their failure to find workable compromises that would, over time at least, both reduce the deficit and provide some stimulus to the economy.

But why should the GOP compromise when it’s winning?

Guns may become a ‘wedge issue’ cutting both ways

Shootings from Connecticut to Colorado have caused a new national debate about safeguards on gun sales.

The debate has raised the possibility that gun legislation could become a so-called wedge issue, but one that cuts both ways, providing political opportunity to people on both sides.

What’s a wedge issue?  It is a political matter used to cause a deep enough split among members of an opposing party that the party’s ability to win elections is undermined.

If a single issue becomes important enough in the minds of at least some voters that they vote based on that issue alone, they may end supporting a party with which they usually disagree on many other issues.

Often social issues have been used as wedges, usually by Republicans seeking to pry Democratic voters away from their traditional allegiance.  Same sex marriage and abortion are perhaps the best known, but flag burning and prohibition have been used.

Wedge issues can produce great political value.  For example, a Democrat votes for a Republican with whom the voter disagrees on foreign military intervention, because of the candidate’s position on same-sex marriage.

Of course, even if a wedge issue does not produce that kind of a political payoff, it can influence office holders of the opposing party. 

Until now, opposition to virtually any proposal to place limits on the sale of guns has been used successfully as a wedge issue. 

The National Rifle Association has traditionally led this opposition, pouring funds into the political debate to ensure that, in many parts of the country, only candidates favorable to its views and those of gun manufacturers will be able to win elections. 

Many Democrats have worried enough about the effectiveness of NRA opposition to adopt its positions.  When they didn’t, the GOP candidate’s chances improved.

Recent U.S. Senate votes rejecting efforts to increase background checks on potential gun purchasers demonstrates the effectiveness of the NRA efforts.  Democratic senators from states evenly divided by party would not support any gun safeguards.

Some conservative commentators had openly worried that, if the Senate voted for increased background checks, gun laws could become a wedge issue for the Democrats in 2014.  With Senate inaction, their concern melted away.

Wedge issues begin to lose their effect when public opinion changes.  In 2004, a major national poll showed that 62 percent opposed same-sex marriage.  Now, only 42 percent hold that position, and 53 percent favor same-sex marriage.

This change has had its effect on politicians.  Recently, several leading senators have moved from opposition to support.  More states, including Maine, have voted to legalize it.

The Sandy Hook school killings in Newtown, Connecticut, and the movie theater shooting in Aurora, Colorado, seemed to have awakened public concern about the easy availability of guns.  But opponents of regulation believe that such concern will quickly decline, just as it has in the past.  

That may be true, but there is a possibility that, contrary to expectations caused by the Senate’s failure to overcome a filibuster on background checks, gun safeguards could be a wedge issue for Democrats

Polls show that a majority of Americans has almost continuously supported increased gun regulation since 1990.  Republicans and Democrats, gun owners and non-gun owners have been among those favoring stepped-up controls. 

But the NRA has mobilized its supporters no matter their affiliation.  Guns have never been a wedge issue that could peel Republican voters away from their traditional allegiances.

Two factors may be different this year.  First, the series of shootings, in relatively rapid succession over the past year, may keep the issue alive in the minds of many voters.  In other words, enough gun atrocities may have occurred to sustain public concern.

And two new leaders have emerged to face off with the NRA.  Billionaire New York Mayor Michael Bloomberg, an independent, has enough money to duel politically with that organization on at least an equal basis.  He seems determined.

Gabrielle Giffords, the former Arizona Democratic member of Congress who was gunned down in Tucson, has also launched an effort to support new regulation.  She, too, seems determined to keep pressing the issue.

Rather than seeking gun control, they have more realistic goals.  They have limited their focus to a relatively modest effort for more and better background checks. 

 
Whether guns can be made a wedge issue for the Democrats, allowing them to attract GOP voters, remains in question.  If Bloomberg and Giffords keep the issue in front of voters, there is a chance for Democrats to benefit from it in the 2014 congressional elections.