How Democrats Can Make Their Case For Raising Revenue

(Bloomberg) — Social Security may be known as the “third rail” of American politics, but it is the debate over taxes that has been the “kryptonite” of the Democratic Party in recent decades.

President Barack Obama has put the question of revenue increases on the front burner as part of his fiscal-policy agenda, and the discussion will grow in visibility and intensity as the early December deadline for a report from the congressional supercommittee approaches.

Although almost every expert, economist and open-minded leader in both parties (excluding, of course, the hard-line Republican leadership) agrees that we need more revenue to bring future deficits under control, the political danger for Democrats in the debate remains severe.

Indeed, one Democrat with a proven ear for politics, Bill Clinton, has expressed doubts about the administration’s decision to wade into the revenue controversy, saying, “I personally don’t believe we ought to be raising taxes or cutting spending until we get this economy off the ground.” (More recently, though, Clinton acknowledged that deficit reduction requires “adequate revenues,” scooting a bit closer to the administration’s line.)

How can Democrats tackle the tax question without courting political disaster?

Obama has tried two approaches. Last spring, when he was pressing for revenue increases during the debt-ceiling talks, his emphasis was on a “balanced approach”: If spending was to be cut, then revenue should be increased, too.

Not Balanced

The “balanced” argument was perhaps too effective. When the president reached a debt-limit deal with the Republicans that was all spending cuts and no revenue increases, he was excoriated for accepting a package that didn’t meet his own standards.

In the end, though, the argument for a balanced approach has limitations, because it requires only a mix of spending cuts and tax increases, without specifying how much of each — or both — is needed. That’s a bit like saying, “If you are going to serve liver, you should also serve Brussels sprouts” — perhaps correct, maybe even candid, but hardly compelling.

More recently, Obama has emphasized “fairness,” in particular in pushing for his proposed Buffett rule, which would raise taxes on incomes of $1 million a year or more, and with his plan to require private jets to pay a landing fee. The president has rallied his base with these populist appeals, and polls show that most Americans agree that those in the upmost tax brackets pay too little in taxes.

Fairer Package

In addition, because the bulk of the pain from spending cuts falls disproportionately on those at the bottom, tilting the revenue increases toward higher-end taxpayers would make any overall package fairer.

But the limitation of the fairness argument is that it frames the revenue increases as a penalty that should be imposed on the wealthy for paying too little. It is more of a jab at the rich than an appeal for raising needed revenue.

The argument that billionaire investor Warren Buffett should pay at least the same tax rate as his secretary fails to explain why either is paying what they are paying, or why anyone should be paying more. Even if middle-class voters are stirred by the populist sentiment behind such rhetoric, they may be unnerved by its implicit zeal to raise taxes, and the tone of the debate leaves the administration vulnerable to the usual caricatures of Democrats as overenthusiastic tax hikers.

Making the Argument

So what is a better way to make the case for much needed revenue increases?

First, the administration needs to reiterate, time and again, that tax increases — on anyone — are a last resort. This may seem like a tweak, but it is an important one. Even when voters favor mixed approaches to our ballooning deficit, more of them believe that our fiscal problems are caused by too much government spending, not too little taxation.

To avoid being burned by the tax debate, Democrats need to begin the conversation by reiterating that they support revenue increases — not because there are people who can afford to pay more, but because there is no other way to get our fiscal house in order.

Second, the administration needs to understand that this debate is playing out against a backdrop of unprecedented public doubt about the effectiveness of government spending. For political purposes, it matters little if Americans believe the government actually spent too little trying to reverse the Great Recession — as progressives such as Paul Krugman argue — or if they think government spent too much, as Republicans contend. Either way, the necessity for more revenue is being weighed in an environment that is highly skeptical of government’s ability to use that revenue wisely.

Mythical Muffins

The strong reaction to the report that the Justice Department bought $16 muffins — a story that, as should have been immediately obvious, was wrong — illustrates the depth of the public’s cynicism. The president and the Democrats must engage the tax debate with that skepticism in mind.

One approach that addresses this challenge is tying specific revenue increases to specific uses. For example, revenue from the so-called Buffett rule could be used to endow a trust fund dedicated to education reform and rebuilding our schools, popular investments in our nation’s future that are starved for resources. Revenue generated from new fees on private plane flights could be set aside to fund improvements at airports. This would neutralize arguments about “class warfare,” and remind the public of our vital shared needs.

Bush Cuts

The single largest revenue item — allowing the Bush-era tax cuts for the highest-income taxpayers to expire as scheduled at the end of next year — could be devoted to several purposes. For example, a large portion could be applied directly to paying down the debt. In other words, easing the future burden on our children, not expanded government spending.

Another dedicated use could be funding an infrastructure bank to rebuild roads and bridges, with projects selected by an independent board of governors, not elected officials.

Alternatively, a portion of the funds could be set aside for loans to small businesses to help spur economic growth; in the past, Small Business Administration loans have helped launch or grow some of the most innovative and successful U.S. companies, including Apple Inc., FedEx Corp., Nike Inc. and Under Armour Inc.

Here’s the bottom line: Tying tax increases to dedicated and popular uses insulates proposals for much-need revenue from attacks of “class warfare” or general anti-tax sentiment, and can help rebuild faith that marginal dollars collected by the government will be put to a clear and important public purpose.

Advocates of revenue increases need to develop an effective way of defending their side if they are to prevail in the contentious debate that will soon start in Congress, and in the critical election just 13 months from now.

(Ron Klain, a former chief of staff to Vice President Joe Biden and a senior adviser to President Barack Obama on the Recovery Act, is a Bloomberg View columnist. He is a senior executive with a private investment firm. The opinions expressed are his own.)

Copyright 2011 Bloomberg.


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