DECEMBER 16, 2010.
What Are Taxes For?
Should the primary purpose of taxation be to support the government or maximize economic growth?
By DANIEL HENNINGER
Sarah, Mitt and several tea party groups say the tax compromise with Barack Obama is a bad idea, sells out the GOP's anti-spending promises and, worst of all, helps you-know-who's re-election chances.
But Newt, Mike and Tim think it's a decent deal. Far be it from me to interrupt the GOP's holiday spirit. Let us stipulate, however, that the furtive, ragged tax bill being let out the back door of a lame duck Congress proves—officially and conclusively—that tax policy in the United States has hit the wall.
A compelling, even frightening article in Tuesday's Wall Street Journal about a tax system that is a morass of extenders, extrusions, loopholes, credits and bubble-gum fixes ended with the story of a grievously ill cancer patient balancing the benefits of taking an experimental drug against the estate-tax benefits to his family of an early death.
Whether the tax rates in place for most of the past 10 years are extended for two more years this week or next month is politically interesting but doesn't get to the more important question we should be asking Govs. Palin, Romney, Pawlenty and the rest: What exactly do you think taxes are for?
Do we pay taxes to support federal, state and local government, to reduce the deficit, or just maybe for something else?
It's possible this question hasn't come up in a serious way since it was first asked by a peasant in Robin Hood's Sherwood Forest. For centuries, no one has doubted that the textbook answer suffices: Taxes are levied on behalf of some public purpose. But the modern tax-paying peasant insists on asking: With a U.S. budget at $3.5 trillion annually, with Harry Reid this week off-loading a 1,924-page "omnibus" spending bill, what is the public purpose of taxes?
Someone is going to answer that question because suddenly tax reform is gaining "momentum"—a phenomenon that occasionally interrupts what Washington does the other 99% of the time.
Barack Obama told National Public Radio last week that he's for tax reform. This followed calls for tax reform from the Bowles-Simpson commission, another group led by former Clinton OMB director Alice Rivlin and, not least, from the next chairman of the tax-writing Ways and Means Committee, Dave Camp of Michigan.
Obama economics adviser Larry Summers—who is shrewd enough to anticipate that a challenge to taxation's traditional role is gaining momentum in the American countryside—gave a farewell speech in Washington this week that included a forceful argument for taxation's public purpose.
"We risk a vicious cycle," he said, "in which an inadequately resourced government performs badly, leading to further demands that it be cut back, exacerbating performance problems, deepening the backlash and creating a vicious cycle. . . . While recovery is our first priority, it is essential that we establish long-run parity between revenues and expenditures."
Mr. Summers and others are worried that the new, Republicanized Congress that floated in on a tide of tea party sentiment represents some visceral antipathy toward government and its functions. This is a caricature of their concerns.
The more serious question that lies beneath the disaffection with government is this: What balance between the private and public economies will best allow the U.S. to remain the world's pre-eminent economic (and military) power for the next generation? That premise matters to how one answers the question about taxation's purpose. Barack Obama won't say it, but a school of thought linked to his presidency no longer sees a justification or need for U.S. primacy.
That posture would indeed make it easier to maintain the "parity" between taxes and outlays that Mr. Summers seeks on behalf of the public sector.
There is an alternative. A radical (in the best sense) 21st-century tax debate—such as over Bowles-Simpson's three stripped-down marginal rates, topping at 23%, and lower taxes on business—would challenge the conventional 100-year-old idea in the U.S. that the first purpose of a tax regime is to ensure the functioning of the state. In the hypercompetitive world we will inhabit for at least a generation, might not it be time to rewrite the textbook? To ensure American well-being, the pre-eminent purpose of a modern tax system should be to achieve the highest possible level of growth in the private economy with a competent, efficient state in a supporting role.
The first tea party was about taxes, not British spending. That tea party happened when Americans were determined to have the means and freedom to start their long economic ascent. Now the time has come to discover yet another path to strong growth. The tax system along this path matters, and this month's debate shows that we are essentially at a dead end with the tax system we've got. By asking themselves "What are taxes for?" the Republican Party's presidential contenders may find a way to offer us a system of taxation that puts the country's economic aspirations ahead of Washington's. That would be an historic reversal and a worthy achievement.
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