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May 29, 2007
News Analysis: Conversations — Mark Schmitt
Joseph J. Thorndike

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Mark Schmitt (New America Foundation)Mark Schmitt is a senior fellow at the New America Foundation, where he focuses on reform of the political process, campaign finance, congressional procedure, and state-level politics. He has written extensively on budget and tax policy and on the history and role of ideas in politics. He is a columnist for The American Prospect and a contributor to the blog TPMCafe. Before joining the New America Foundation, Schmitt was director of policy and research at the Open Society Institute; he also served for seven years as a speechwriter and later policy director for former Sen. Bill Bradley.

Tax Analysts: You're a leading figure in the Democratic blogosphere, birthplace of the "new populism" that we've heard so much about during the past year or so. To what extent will this movement — which you've described as "more of an attitude than a policy agenda" — shape tax policy in the years ahead?

Mark Schmitt: There's a strength of the progressive blogosphere or "netroots" that is often overlooked by those who see it only as an angry partisan force urging Democrats to be tougher, meaner, faster. And that is the ability to put new issues on the agenda, particularly fundamental economic issues that don't fit into any of the traditional interest group frames. So, for example, a couple years ago bloggers started going after members of Congress who voted for the bill limiting bankruptcy. This was a bill that had passed one house or the other several times, and members of Congress had never heard a word about it, except from a small cadre of bankruptcy lawyers. All of a sudden they started getting calls about it, and voting in favor of the bankruptcy bill became a major obstacle to, for example, Sen. Joe Biden's hope of reaching the bloggers. This wasn't an issue that affected many of them personally; it was just something that they saw as fundamental to a progressive vision — the credit card industry should not use its political power to wipe out people's ability to get a fresh start.

And for this reason, I think the netroots can be very important in the politics of tax policy, because the key is breaking down traditional liberal interest group politics. Traditional politics involves creating letterhead coalitions of all sorts of interest groups, but when the Head Start Association gets its funding increase, and the Medicaid providers prevent their cuts, they are happy and move on. The fact that tax cuts will eventually, in the future, threaten all their programs is of no concern. They figure their program will be the exception. The politics of cutting taxes without confronting the choices on spending breaks down traditional interest group politics, but the bloggers have shown themselves able to think about it in a different way.

TA: In a recent article for the Washington Monthly, you wrote: "Just as the tax revolt era had a beginning, so it will have an end. And there are indications that the end might be approaching." What makes you think so?

Schmitt: Journalist and blogger Christopher Hayes recently quoted an interview with a conservative Texas state senator who was "complaining about how the conservative movement had essentially been reduced to one single, inviolable principle: Never raise taxes ever. It's crazy, [the senator] said. 'I'm as much against having my taxes raised as anybody, but the voters don't send us to the capitol just to make sure taxes don't get raised, they send us here to spend their money wisely. And if there's some program that can benefit the residents of the state, then we should fund it.'" That's the mood at the state level, which makes sense because states can't separate tax cuts from their consequences indefinitely, as the feds can. It's why the Taxpayer Bill of Rights limits were defeated or withdrawn in four states this year, and why there was far less backlash against Democratic Gov. Jon Corzine's tax increases in New Jersey than there was against Gov. Jim Florio's 15 years ago.

I interviewed a number of pollsters for the article, and while they were not ready to say that the tax revolt era was over, they did tell me that the public had grown skeptical of gimmicks like TABOR and promises that taxes could be cut without reducing services. I think voters will always be wary of taxes — as they should be — but I think the day of politicians whose agenda is tax cuts and only tax cuts, avoiding any mention of actual choices that have to be made, has come and gone.

TA: You have urged Democrats to confront the long-term fiscal shortfall, including the need to raise taxes. You've even suggested that they "seize the opportunity to define a new era of the politics of taxes, as Republicans did 30 years ago." That sounds appealing, maybe even noble. But is it realistic? Won't the politics of pain prove to be their undoing?

Schmitt: It is a huge challenge. It can't be just pain. It can't be just the abstract "deficit reduction." There has to be an optimistic, aspirational vision of what the country can be. I don't have a secret formula for doing that; it's just what we need to think about doing. I hope I made the case that if Democrats don't try to redefine the era, the default option is a grinding, endless battle over short-term budget cuts and tax increases, which never quite solve the problem and never bring us to the point where our country can live up to its potential. I'd vote against the party that let that happen!

TA: You worked for Bradley, joining his staff shortly after the tax reform of 1986. To what extent can we use 1986 as a model for another round of tax reform?

Schmitt: It's a model in part because it shows that even things that seem impossible at one moment can become possible with patience and imagination. Tax reform is one of those moments that should restore your faith in government: five Republicans and four liberal Democrats standing behind President Reagan in the Rose Garden as he signed a bill that reduced marginal rates, got corporations to pay their fair share, and got 10 million low-income families off the tax rolls forever.

One of the things I discovered in researching the article, however, was that people who were involved in the 1986 reform (I was still watching Saturday cartoons at the time) think the scope was too narrow, that because it was limited to taxes, it still left the tax code doing many things that shouldn't be done through taxes. And the powerful ground rule of 1986 — revenue neutrality — is clearly inappropriate to the current situation, when the number one problem with the tax code is that it fails to deliver enough revenue. So my conclusion was that reform will have to be an order of magnitude more ambitious even than 1986: It should include changes in spending, both cuts (to bring conservatives to the table) and potentially new programs.

TA: What do you think of the Wyden-Emanuel "Fair Flat Tax"?

Schmitt: It's the essential first step, much as Bradley and Gephardt's "Fair Tax" of 1982 got the conversation going. The first principle of tax reform should be that income from any source should be treated the same. It's not about taxing the rich or deciding who's rich. It's saying that if one person makes $40,000 through hard work, and another makes $40,000 by collecting dividends on stock he inherited, the two should pay the same taxes. I am mystified why any Democrat would be unable to say that in every speech.

TA: You've suggested that, given the nation's long-term fiscal outlook, liberals should consider the possibility of a VAT. That would be a major departure from liberal orthodoxy — and history, too. Wouldn't it be simpler to just raise income tax rates?

Schmitt: A balance of taxes is appropriate — some tax on consumption, some on income, some on wealth (such as a reformed estate tax), and some in the form of Pigouvian taxes that also attempt to internalize external costs, such as taxes on carbon or tobacco. Too much weight on any of those creates adverse consequences, but a reasonable balance can raise sufficient revenues for the things we want as a society without burdening economic growth.

TA: Would you support the enactment of a special "war tax" to defray the cost of the conflict in Iraq — and perhaps as a means to underscore its economic and moral cost?

Schmitt: At the outset of the war, perhaps. It is fascinating to think what would have happened if the administration had been forced to confront the choice between war and the desire for tax cuts ad infinitum. At this point, however, I think the economic costs of the war will be with us for a long time, whether in the cost of rebuilding the army, or our moral obligation to help Iraq rebuild. So I think this is a long-term cost that should be built into budgetary assumptions, and we need sufficient revenue to meet those long-term costs.

TA: Your colleague at the New America Foundation, Maya MacGuineas, has suggested that the corporate income tax is dying. Is she right?

Schmitt: I think that at some point, the costs of enforcing the corporate income tax, together with the costs and the economic distortions involved in evading it, reach a level that the $150 billion or so in revenues may not be worth it — if we are fully taxing corporate income when it is received by individuals in the form of dividends, capital gains, or stock options. The latter is a much higher priority. It is interesting to note that in recent years, as corporate profits have skyrocketed, corporate income tax as a percentage of GDP has held relatively steady — an indication that the corporate income tax is easily gamed. We can either fix it or abandon it in favor of taxing corporate profits when received by individuals, although that is not an even trade-off and will require additional revenues.

TA: Growing inequality has been getting a lot of attention lately — from liberals, journalists, and even a few conservatives. Should the tax system play a role in slowing, or even reversing, this trend?

Schmitt: I don't think that reducing inequality should be a major explicit goal of a tax system. There are other reasons to have a generally progressive structure, such as ability to pay. But a tax system that exacerbates inequality, in which, as Warren Buffett says, his secretary pays a higher average tax rate than he does, is badly out of whack. On the low end, I actually think that we have been relying on the tax system almost too much to subsidize low-wage work through the earned income tax credit and other credits. Taxes are much too complex on the low end, and we're letting employers off the hook. The best way to reduce inequality is to create an economy that provides opportunity at all levels, along with the economic security that allows people to take advantage of opportunity. My primary concern would be that the tax system raise enough revenue to allow us to build that kind of social contract.