Tax Progressivity and Political Gridlock

It has become almost cliché in American politics to suggest that our budget problems can be solved by increasing taxes on the wealthy. Candidate Bill Clinton made the comment that they “need to pay their fair share” the staple of his 1992 campaign. Candidate Obama promised to keep the Bush tax cuts for everyone but the highest earners. Congressional Democrats are trying to pay for health care reform by taxing “Cadillac” insurance plans. It is simple and it is good politics. The rich are few and the not rich are many. That makes it easy in a majoritarian system.

For today, let’s leave aside the discussion of whether there are enough rich people and whether they have enough money to pay all our bills. Instead I want to explore the hypothesis that our progressive tax system has become so progressive that it is contributing to partisan gridlock. Although gridlock is nothing new in Washington, it seems that even with supermajorities, the Democrats still can’t get much through Congress. What is happening? Are we a more partisan country than 20 years ago? Have the rules of the game changed? Or does is have something to do with the way we finance our government? This article is going to argue it is the last option.

Here are some facts about taxes you may not know. In the past 30 years, even thought Republican presidents have controlled the White House for 20 of those years, our tax system has become more progressive. The rich pay a greater share of all taxes today than at any other time in our history. The top 1% of earners pay 40% of all the federal bills. If you look at the top 5% of earners, they pay 60% of all the bills. As of today, the bottom 50% of taxpayers only covers 3% of our expenses. Think about that. Half of America pays almost nothing for their government services. Under Obama’s current plans, that number will jump to 60%, meaning that by 2012, 60% of Americans will contribute nothing to the national pie.

Those numbers have consequences on politics. For starters, it causes what economists call a “moral hazard.” In simple language, it means that if 60% of Americans don’t pay anything, what incentive do they have to keep spending down or taxes low? If you walk into a store and don’t have to pay for anything you take, who cares what the prices are? In past, American balanced costs and benefits. They looked at the benefit of a federal program (say Medicare) and then examined the costs (taxes). If they thought it was a good deal, they supported it. If not, the program didn’t pass. But today, if the taxes for 60% of the people are zero, why would they oppose any program? It does not matter how small the benefits—they will still be greater than zero.

Which brings me back to partisanship. In our current state of affairs, whenever anyone proposes a new program, there is an immediate understanding that a minority of Americans will bear all the costs and a majority will bear most of the benefits. In that environment, even supporters of a policy may oppose it because they understand they will be picking up the entire tab. Imagine 4 guys on a road trip and they want to stop for lunch. They know that the driver has to pay for everyone’s lunch. I can guarantee you that in that scenario, the drive will vote against stopping for lunch even if he is starving!

In the real world, conservatives find themselves being the “party of no” because they know they the entire bill is coming their way. Liberals, suffering from the moral hazard of bearing no costs, support every expansion of the federal government. Thus, we end up with extreme partisanship. To bring balance back to politics, we may need to bring balance back to the way we pay for politics. If we all share the benefits and we all share some part of the costs, then and only then, we will begin to see a return of bipartisanship.