Friday, September 19, 2008

Reds

One of the certainties of being a tax policy scholar who is not opposed to all taxes is that I am called names on a regular basis. The most common epithets are the standby favorites of the Cold War era: commie, pinko, commie-pinko, socialist, red, Marxist, Marxist/socialist . . . you get the idea. It pretty much does not matter what one says -- again, unless one says that all taxes are theft -- but the most surefire way to become subject to this kind of name-calling is to advocate any kind of income redistribution. Thus, while giving a talk last year, someone asked me if my argument might suggest that we should increase the estate tax. When I said yes, another academic (!) in the room said, "Oh, I see, so you believe in 'from those who have the ability to those who have the need,' right?"

I bring this up now because of the recent increase in the frequency of the attacks on Sen. Barack Obama as a "socialist" because of his tax positions. As should be well known by now, Obama has proposed a tax plan that would cut taxes for couples with income under $250,000 per year (and singles under $200,000) and raise taxes on those with higher incomes, especially those with the highest 0.1% of taxable incomes. Sen. John McCain's tax plan would lower taxes for everyone, but the cuts for lower-income people are small while the cuts for the highest income people would be enormous. (For a nice chart, see here. See also the nonpartisan Tax Policy Center's analysis here, which criticizes both Obama's and McCain's plans not on distributional grounds but because of concerns about future deficits, finding that Obama's plan increases the total debt by less than McCain's over ten years.) The choice on distributional grounds couldn't be more stark.

Is Obama's plan socialism? Of course not. There is no nationalizing of key industries or any of the other hallmarks that distinguish socialist economies from mixed capitalist economies. His plan is, however, an attempt to redistribute the tax burden. If someone wants to claim that the tax burden is already skewed too much toward the rich, they're free to do so. I have argued otherwise elsewhere. The charge of socialism, however, just doesn't fit. Sharing a common goal (reducing income disparities) doesn't make a non-socialist a socialist any more than wanting peace on earth makes a Christian a Buddhist.

This will not stop the name-calling, of course. Those who have a comic-book version of capitalism in their minds, in which there is either no government or only a government "so small that it can be drowned in a bathtub" (in one anti-taxer's famous phrase), will always feel free to describe any deviation from their pure system as a movement in the direction of a state takeover of the economy. The charge of socialism thus really means "having at least one thing in common with a socialist system that I disapprove of."

In any case, this has been a rather bad week for pure free marketeers. Even Europeans (those socialists!) have reportedly been "stunned" by the Bush administration's participation in bailouts in the financial sector. Calling Obama a commie because he wants to increase tax progressivity looks pretty weak next to Republican-led government takeovers of financial companies that are not being allowed to fail. One scholar asked in apparent horror, "Do we live in a market economy or not?" in response to one of the recent federal rescue efforts.

I have argued recently that these efforts are necessary, because the alternative is worse. The bailouts, however, are necessary not to undermine capitalism but to save it. Full-scale crises are the playground of extremists, and no time in American history saw a larger or more energized domestic movement of genuine Communists than the Great Depression. The Republican neo-socialists of 2008, therefore, are welcome on my red bandwagon. I like mixed capitalism, and I want to see it continue in an improved form. As far as I can tell, so does Sen. Obama. Pure free markets are not even possible in practice (as I'll argue in a future post), but if any deviation from the results of absolutely unregulated market outcomes is socialism, we are all socialists now. In fact, we have been for quite a long time.

[Note: During September, I am cross-posting my Dorf on Law posts on the Concurring Opinions blog.]

-- Posted by Neil H. Buchanan

18 comments:

egarber said...

And when people like Rudy G red bait Obama because he wants to re-apply the framework of the 90's for those at the top, it's glaringly obvious that John McCain must be a "socialist" as well under that definition.

After all, McCain essentially supports the thrust of Obama's idea. He voted *against* the tax cuts that lowered them in the first place, and here's his quote at the time:

"I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle class Americans who most need tax relief." McCain reiterated this position in an April 11, 2004, interview on NBC's Meet the Press, saying: "I would have -- I voted against the tax cuts because of the disproportionate amount that went to the wealthy Americans."

So the question is about timing and conditions when examining candidate positions, not whether one is advocating a different *kind* of thing.

Heck, we have a progressive tax code right now, even if nothing else happens -- and this is the framework W has overseen and supported. So to your point, we all must be "socialists"; of course, the truth is that these observations are indications that the term is being thrown around too broadly to mean anything.

Craig J. Albert said...

It's hard for me to imagine how the estate tax can be held up as an example of taking from those with ability in order to transfer to those in need. In fact, it's the exact opposite. By definition, a zero percent estate tax means that those who had the ability to accumulate the wealth get to pass the wealth at death to those who might not have that ability. After all, if the recipients had the same ability as the giver, then they wouldn't need the inherited wealth, would they?

One thing that you can be said in favor of a low-to-zero estate tax is that, if the giver hasn't been so unwise as to create too many idiot children, then the presence of inherited wealth reduces the probability that the children will become public charges.

Michael C. Dorf said...

Note that by the logic of red-baiting, even a flat tax is socialist. X percent of a large paycheck is a lot more than X percent of a small paycheck. Only a medieval-style head tax is non-redistributionist.

Neil H. Buchanan said...

Good comments all. Craig is quite right about the idiot children. It is truly mystifying how estate taxes have been spun as anti-capitalist.

Craig J. Albert said...

Here's some inexpensive tax planning advice for people who are really bent out of shape about the estate tax: Arrange to die in 2010. The estate tax is scheduled to be zero that year. If you'd like to let us know of your plans for demise, that's certainly polite, but please don't expect us to spend our own money sending flowers.

Paul said...

I personally think a 100% estate tax replacing whatever income tax it could replace would be a fine plan. There is nothing more anti-meritocracy (e.g. anti-capitalist) than income tax and inheritance.

Sherry F. Colb said...

Great post, Neil! I too favor an estate tax and agree that inherited wealth and meritocracy (the capitalist aspiration) are at odds. Nonetheless, I am not sure I would favor a 100% estate tax (as proposed, perhaps for comic effect, by Paul). In fact, I would almost certainly oppose such confiscation (which, in the past, was one of the penalties for some crimes). What drives hard work and innovation in a capitalist system is selfishness, right? But the desire to pass along one's possessions to one's children is just a variant on selfishness, and it is as predictable and motivating as individual-oriented selfishness. Therefore, with a 100% inheritance tax, I would predict that people would make sure to give away their possessions to their children before death (which they already attempt to do in various forms, even with a low estate tax) -- a kind of grey market inheritance. I'm not sure how this would help solve our tax problems. Even Bill Gates (who has admirably refused to pass along much of his wealth to his children) is leaving his kids something. One of the perqs of having a lot of money is the ability to spend it on your children, and I wouldn't necessarily draw a clear line between spending during one's lifetime and anticipated spending via inheritance.

Craig J. Albert said...

There are two important things that get left out in current political debates over the estate tax, and they deserve mention here.

First, few estates actually are liable for the tax, because the exemption is so high. The federal exemption is now $2 million. In 2006, for example, there were around 2.5 million deaths in the US. But there were fewer than 23,000 estates that actually owed federal estate tax. In other words, 99% of all estates owed no tax, and in fact there were fewer than 50,000 estate tax returns, meaning that 98% don't even have to file the paperwork.

Second, there's a dual reason for why the estate tax is imposed so rarely: it's an easy tax to avoid if you're fortunate enough to have accumulated enough wealth for it to be taxable. Most people aren't fortunate enough to accumulate that wealth, but the senators and representatives who rail against the tax maintain the illusion that it's a tax that affects the average citizen. But if you are lucky enough, then it's easy to avoid by prudent estate planning.

Tam Ho said...

For me, the key to thinking about the tension between achieving a meritocracy and securing financial security for one's children is properly to define the American Dream. Given the extreme materialism and obsession with celebrity that has come to dominate our present culture, it's no surprise that the fantastic wealth of movie stars, athletes, and hedge fund managers has come to symbolize the American Dream for so many.

But for me, the American Dream - if defined by reference to the economic opportunites and results sought by immigrants to this country, and what separates America from the rest of the world - is the opportunity, widely available to all, to live a comfortable life, and which is achievable primarily as the product of hard work. In that event, Tiger Woods and Peter Lynch are hardly symbolic of that ideal. For if such an unfeasably slim chance at unimaginable wealth represents the American Dream, then America would offer no more than Zimbabwe, for, even Robert, and his wife, Grace "Gucci" Mugabe, live opulently while their country starves.

Moreover, as a prescriptive matter, the first of the foregoing descriptions is what the American Dream should be, to the extent that permitting massive and excessive accumulations of wealth for the few is inconsistent with promoting prosperity for all. After all, a fundamental principle of liberalism (in the sense that all Western democracies are liberal, not in the Democrat vs. Republican sense) is that we should each have the most extensive set of freedoms, compatible with like freedoms for all.

With this in mind, I would support an estate tax which exempts, say, the first, $5 million, but which progressively taxes anything above that, and which taxes 100% of an estate above a certain amount, so that the most one can pass on is $10mm, all indexed to inflation. This would still enable people to secure extremely comfortable lives for their children through their amassed wealth, which as Prof. Colb points out, is a legitimate goal, while preventing dynastic concentrations of wealth that are anathema to a meritocracy.

And this is not only perfectly consistent with, but required by what I submit is the American Dream properly understood.

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