Reihan Salam

The outrage over Mitt Romney’s extended off-the-record riff to wealthy donors about the fact that “47 percent of Americans pay no income tax” has shown no sign of dying down. As of now, this looks like the defining moment of his presidential campaign. In lumping together those who have no federal income tax liability with those “who believe the government has a responsibility to care for them,” the former Massachusetts governor gave new life to every crude caricature of conservatives as class warriors for the ultrarich.

But did off-the-record Romney have a point? Is it a problem that we have narrowed the federal income tax base, or is there a case that conservatives seeking to contain the growth of government should strive to make the income tax base even narrower?

In a 2001 interview with Nicholas Lemann of the New Yorker, Republican Senator Jim DeMint of South Carolina called the narrowing of the tax base “a major crisis in democracy.” Just months before the first Bush tax cut removed millions of households from the federal income tax rolls, DeMint warned that “the tax code will destroy democracy, by putting us in a position where most voters don’t pay for government.” DeMint’s dark premonition wasn’t enough to get President Bush to revamp his tax cut, but the idea has grown more popular among conservatives in the intervening years, hence Romney’s riff.

Critics of DeMintism point out that virtually all of the households that don’t pay federal income taxes pay other taxes, including payroll taxes and state and local taxes. Indeed, some pundits have declared that this is Romney’s saving grace: Hardly anyone in the GOP nominee’s 47 percent actually believes that he or she is part of the 47 percent.

The deeper problem isn’t that too few people are paying federal income taxes, as DeMint and Representative Michelle Bachmann and now Mitt Romney maintain. Rather, it is that most of the taxes we do pay, with the big exception of retail sales taxes, are quite stealthy. In the days before income tax withholding, taxpayers had to write checks to the federal government. Now, many taxpayers have a better sense of the size of their income tax refund than of what they’ve actually forked over to the federal government.

It turns out that the best way to address Romney’s underlying concern – that a large and growing number of Americans have lost sight of the real cost of government – might be to remove even more households from the income tax rolls and create a very visible new tax to make up the difference. That is why Republicans, Mitt Romney included, should give serious consideration to Michael Graetz’s Competitive Tax Plan (CTP).

Conservatives hate the idea of new taxes. But imagine if every time you bought a cup of coffee, it said on the receipt that you had also just paid a 12.3 percent consumption tax to the federal government. Instead of paying your taxes once a year, you would pay taxes every time you made a purchase. What better way to remind people of all of the money government spends, and all of the money government spends foolishly, than to make them pay for government several times a day?

That’s not all. Imagine also that the federal income tax only applied to income over $100,000 for married couples, $50,000 for single filers, and $75,000 for head of household filers. Households that earn less than this “family allowance” would be under no obligation to file a federal income tax return. In that case, the 12.3 percent consumption tax would pay for liberating millions of Americans from the IRS. According to a recent analysis from the Tax Policy Center, the tax policy rules in effect today will require 147,540,000 tax units to file taxes in 2015. Under Graetz’s CTP, that number would fall to 36,625,000.

Even those poor souls who still have to file under the CTP will benefit, paying a much-reduced federal income tax at a basic rate of 16 percent and a surtax rate of 25.5 percent on income above $200,000. These low marginal tax rates would improve work incentives for high earners far more than Mitt Romney’s proposed tax cut and would be an even bigger improvement relative to President Obama’s proposed tax increase for the top 2 percent of households. And though the CTP wouldn’t completely eliminate taxes on savings and investment, it dramatically lowers them, particularly for families of modest means.

One concern is that even with this radical shrinking of the income tax, poor families that spend the bulk of their income would pay more under a consumption tax. That is why the CTP includes a generous per-worker and per-child rebate that would be used to offset payroll taxes. These rebates would also serve as a replacement for the earned-income tax credit, which is the chief reason tens of millions of low-income households have to go through the hassle of filing income tax returns. The end result is that the tax burden under the CTP would be exactly as progressive as it is under today’s tax rules.

The CTP would strike a blow against the IRS’s intrusiveness, a cause all conservatives should cheer. And as Graetz explained to me, “by eliminating millions of people from the income tax, you’ll never get them back.” Once the inflation-indexed exemption is raised, “you’ll never get a politician to agree to lower the exemption from $100,000.” It has many other benefits as well. For example, while Mitt Romney has called for a 25 percent corporate tax rate and President Obama has called for a 28 percent rate, the CTP cuts the corporate rate to 15 percent. In one fell swoop, this would make the U.S. a far more attractive destination for foreign investment, reduce tax avoidance and be conducive to economic growth.

So why haven’t conservatives signed up for Graetz’s ingenious proposal? The big barrier on the right is the view that a consumption tax is a one-way ticket to socialism. While most states have retail sales taxes, the United States is one of a small handful of countries that does not use a value-added tax, or VAT. In Europe, VATs raise a huge share of government revenue, and the statutory rates tend to be very high. The worst thing about the European approach to the VAT, from a conservative perspective, is that it’s invisible. That is, consumers often have no clear indication of how much of what they’re paying is accounted for by the VAT. This is one reason why many European governments have hiked their VAT rates over the years – because taxpayers won’t know the difference. Anti-VAT conservatives fear that an American VAT would be susceptible to the same tendency to creep higher, indiscernibly.

But outside of Europe, the picture looks very different. Canada’s VAT, known as the GST, for goods and services tax, was 7 percent when it was first introduced in 1991. Since then, it has fallen to 5 percent. Although the GST remains extremely unpopular, it has played a crucial role in helping Canada shrink its yawning federal budget deficits. Moreover, the two decades since the introduction of the GST have seen Canadian federal spending and federal debt plummet as a share of GDP while the United States has gone in the opposite direction. That is an outcome all small-government conservatives should respect

There are, to be sure, huge obstacles in the way of Graetz’s Competitive Tax Plan, as he freely acknowledges. If a Republican gets behind it, we can expect Democrats to demonize it as a tax hike on the poor to fund income tax cuts for the rich, leaving aside the generous rebates and the family allowance. If a Democrat gets behind it, Republicans might wage war against the VAT as a diabolical foreign plot.

All the same, the CTP is the only realistic plan that will preserve progressivity while giving 100 percent of Americans the sense that they are bearing the cost of our federal Leviathan.

PHOTO: U.S. Republican presidential nominee and former Massachusetts Governor Mitt Romney pauses as speaks to reporters in Los Angeles, September 17, 2012. REUTERS/Jim Young

This coming Monday, Sept. 17, is the first anniversary of the day when protesters gathered in Lower Manhattan’s Zuccotti Park under the banner of Occupy Wall Street. The occupation was first dreamed up by Kalle Lasn and Micah White, the close collaborators behind Adbusters, a slickly produced, high-art magazine that uses the tools of commercial culture to make the case against capitalism. Having decided that America needed an uprising akin to those that had shattered authoritarian governments across North Africa, Lasn and White chose a date, created an arresting image emblazoned with the Occupy Wall Street slogan, reached out to potential collaborators and then watched as their creation seized the imagination of millions of Americans.

One year on, the encampments that had sprung up in Lower Manhattan and in cities, college campuses and foreclosed homes across the country have for the most part been abandoned. And so at least some observers are inclined to think, or to hope, that the Occupy movement has been of little consequence. That would be a mistake. Occupy’s enduring significance lies not in the fact that some small number of direct actions continue under its banner, or that activists have made plans to commemorate “S17” in a series of new protests. Rather, Occupy succeeded in expanding the boundaries of our political conversation, creating new possibilities for the American left.

As our slow-motion economic crisis grinds on, it is worth asking: How might these possibilities be realized? For some, Occupy was a liberating experience of collective effervescence and of being one with a crowd. As one friend put it, it was “the unspeakable joy of taking to the streets, taking spaces, exploring new relations and environments” that resonated most. For others, it created a new sense of cross-class solidarity. Jeremy Kessler, a legal historian who covered the Occupy movement for the leftist literary journal N + 1 and the New Republic, senses that it has already shaped the political consciousness of younger left-liberals. “There is more skepticism towards the elite liberal consensus,” and so, “for instance, there is more support for the Chicago teachers union and more wariness towards anti-union reformers.” Ideological battle lines have in this sense grown sharper. Yet it is still not clear where Occupy, and the left, will go next.

Perhaps the most politically fruitful path for the American left would be to go back to the future – to draw on the lessons of the Populists of the William Jennings Bryan era, who sought to unite farmers and industrial workers against the stranglehold of Eastern capital. Back then, the Populists failed, as the interests of industrial workers were more closely tied to their bosses than to those of highly indebted smallholders living in the prairies. Now, however, millions of middle-income households struggle under the burden of underwater mortgages.

In the latest issue of the Nation, David Graeber, the anarchist anthropologist considered an intellectual leading light of the Occupy movement, argues that the “financialization” of the economy should be understood as “an enormous engine of debt extraction,” through which the 1 percent extracts wealth from the 99 percent. Rather than champion specific policies designed to reduce the burden of debt, Graeber calls for a campaign of mass resistance devoted to delegitimizing what he calls “Mafia capitalism.” While Graeber’s language is bracing, and it will undoubtedly appeal to at least some radicals who hope to keep the spirit of Occupy alive, it is not obvious that his idea of mass resistance can build a mass movement.

But might a softer version of Graeberism succeed? As the Georgetown University historian Michael Kazin argues in The Populist Persuasion, American populist movements have traditionally pitted the producing majority against a parasitic elite. That is one reason why “We Are the 99 Percent,” the slogan coined by Graeber and his allies, has proved so resonant: It invokes older American political traditions.

And the case for placing debt at the heart of our politics is stronger than you might think. As the heterodox economic thinkers J.W. Mason and Arjun Jayadev recently observed, household debt has climbed from 50 percent of GDP in 1980 to 100 percent just before the financial crisis. Yet according to Mason and Jayadev, this sharp increase does not primarily reflect an increase in borrowing. Had interest rates, growth and inflation remained the same in the three decades following 1980 as they had in the three decades preceding 1980, household debt levels would have actually decreased. One of the central problems, Mason and Jayadev argue, is that inflation levels decreased faster than households could decrease their borrowing levels. Back in 2009, Christopher Hayes, author of The Twilight of the Elites and host of MSNBC’s Up with Chris Hayes, argued that  “a period of moderate, sustained inflation” was essential to addressing America’s economic woes. While this argument seems very technocratic, it has the virtue of speaking directly to the challenge of household debt.

The latest Census data indicates that real median household income in the United States has fallen to levels last seen in 1995. Income inequality, meanwhile, has increased. It is easy to imagine that healthy gains in median household income would mitigate concerns about income inequality as such. But instead, sluggish wage and household income growth have fueled a great deal of anxiety and resentment. Millions of households that had hoped and expected to be climbing the ladder to middle-class prosperity instead find themselves burdened by debt. If the political right and center can’t find a way to revive economic growth and to create shared prosperity, the future might very well belong to Occupy.

PHOTO: Occupy Wall Street protesters relax on a tree at Marshall Park prior to the start of the Democratic National Convention in Charlotte, North Carolina September 3, 2012. REUTERS/John Adkisson

When Barack Obama accepts the Democratic presidential nomination in Charlotte, he will no doubt channel party heroes of the past like Bill Clinton and JFK and FDR, all of whom are celebrated still for their charisma and raw political skills. But he would do well to heed the wisdom of Walter Mondale.

Yes, that’s right. Most Democrats see Mondale as a faintly embarrassing relic from an era in which Democrats had lost their way, and of course there is something to that. He was also one of the last Democrats to make the case that government was worth paying for, not just by the rich but also by the middle-income households that rely on expensive social programs.

By the summer of 1984, Mondale, the former Minnesota senator who had served as vice-president under Jimmy Carter, knew that he was facing an uphill battle for the White House. The brutal Reagan recession had given way to a V-shaped Reagan recovery, and Reagan Democrats were thick on the ground. So Mondale decided to do something very strange at that year’s Democratic National Convention. Rather than make the most anodyne, ultra-cautious, poll-tested argument he and his team could conjure up, he told the truth as he understood it. “Mr. Reagan will raise your taxes,” he told the assembled delegates. “And so will I.”

Mondale lambasted Reagan for his secret tax plan that would “sock it to average-income families” and “leave his rich friends alone,” just as critics of the Romney-Ryan ticket have alleged that the GOP’s conspicuously vague tax reform ideas would almost certainly mean shifting the tax burden downward.

Yet the really interesting part of Mondale’s tax plan that year is that it didn’t just raise taxes on America’s highest-earning households. In an era of relatively high inflation, during which “bracket creep” was a big concern for middle-income families, he called for limiting the indexing of tax brackets for roughly half of all households, a step that raised most of the revenue he hoped to generate from individual taxpayers. There were, to be sure, steeper tax increases for high-income households, but Mondale maintained that all non-poor families should chip in to tackle yawning deficits and to make the investments he believed were necessary to foster “the best-educated, best-trained generation in American history.”

That fall, of course, Mondale suffered a crushing defeat at the hands of a sunny, upbeat Ronald Reagan, who, as it turned out, really did raise taxes in his second term. Reagan’s grand ideas for containing the growth of spending – which included an ambitious swap of responsibilities between the federal and state governments and building on President Carter’s tough reforms of Social Security Disability Insurance in the middle of an economic downturn, to name only two politically explosive money-savers – had been bitterly opposed by Congress and largely abandoned by the mid-1980s. Accepting tax increases was a price Reagan was willing to pay to continue waging his war on Soviet Communism.

In 1985, coming off his huge electoral triumph, President Reagan actually campaigned for tax reform by blasting “unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” as Tim Dickinson recounted in an anti-GOP jeremiad published last year in Rolling Stone. In classic fashion, the Teflon president embraced the popular part of the Mondale message and discarded the rest.

The lesson battle-hardened Democrats of that era learned was that they could never again openly call for tax increases on middle-income households. Bill Clinton, at the time the conspicuously young governor of Arkansas, took the lesson to heart when he pledged during his 1992 presidential run to cut taxes on middle-income households and to raise them on households earning over $250,000. The Clinton administration did succeed in persuading a Democratic Congress to raise the two top marginal tax rates on ordinary income as part of its 1993 budget deal. In his second term, however, President Clinton agreed to a deep cut in capital gains taxes backed by a Republican Congress in 1997, a move that helped fuel the investment boom of that era. Clinton had successfully reinvented the Democrats, GOP protestations notwithstanding, as a low-tax party.

Recognizing the success of Clinton’s tax pledge, then-candidate Barack Obama made the same promise, even using the same $250,000 threshold, despite the fact that $250,000 in 1992 would have been worth roughly $380,000 in 2008. The bigger difference between 1992 and 2008 was that the Bush-era tax cuts meant that there was far less scope for cutting the taxes paid by middle-income households.

The tax overhauls of the Clinton and Bush years had made the federal income tax highly progressive. To be sure, factoring in payroll taxes and state and local taxes makes the overall U.S. tax burden considerably less progressive. But the tax systems in most affluent democracies are actually slightly regressive, as they rely more heavily on national consumption taxes to fund universal social programs. The central virtue of these tax systems is that they undermine work incentives less than progressive tax systems that rely heavily on high marginal tax rates.

So now, as President Obama runs for a second term, he faces a serious dilemma. Despite having inveighed against the Bush-era tax cuts, he has committed himself to preserving the four-fifths of them that apply to income that falls below the all-important $250,000 threshold. At the same time, he has pledged to protect Medicare, expand Medicaid, and create a new health entitlement for young and middle-aged Americans who aren’t covered by either program, commitments that will grow more expensive as the U.S. population ages and as the voting public demands expensive new medical treatments and who knows what else.

Republicans are in a similarly tight spot. In his epic Wednesday night speech, Bill Clinton came roaring out of retirement to warn swing voters that Mitt Romney has backed extremely deep cuts to the Medicaid program. Political genius that he is, Clinton realized that while Medicare has attracted all of the attention, it is Medicaid, which covers almost 50 million beneficiaries, many of them elderly voters in need of nursing home care, that is the real sleeper issue of this election. In the very likely event that a President Romney refused to follow through on politically toxic Medicaid cuts that would leave voters and Republican governors howling, he would either have to preside over a significant tax increase or allow debt levels to keep spiraling out of control.

Other affluent democracies pay for social programs through value-added taxes that are embedded in the cost of virtually all goods and services, a measure that Paul Ryan has seriously considered as a replacement for America’s jerry-built corporate income tax. It is safe to say that the president is not going to go down this road, at least not before November.

Obama has thus left himself with only one option for raising revenue. He will have to raise taxes on high earners to levels far higher than those that prevailed during the Clinton boom. The Obama White House has, for example, championed the idea of curbing tax deductions and credits for over-$250,000 households. Soaking the rich might be a cherished tradition in Democratic politics, but as effective marginal tax rates approach 50 percent, the impact on incentives would be brutal.

The irony is that President Obama might have been better off taking a page from Walter Mondale and forthrightly arguing that universal health coverage and high levels of public investment and a fairer society and a greener environment and everything else Democrats want from government are actually worth paying for – not just by the top 2 percent of the top 1 percent, but by the top 50 percent. The only real alternatives are rolling back the growth of government, Ryan-style, or accepting sluggish growth for years to come.

PHOTO: Minnesota Democratic senatorial candidate and former Democratic presidential nominee Walter Mondale smiles at a student’s question at a town meeting at Macalaster College in St. Paul, Minnesota, October 31, 2002. REUTERS/Stringer