And secret friend of the one percent.
by Jay Cost • The Weekly Standard
In last week’s State of the Union address, President Barack Obama came across as the ultimate class warrior. His domestic agenda consists of more spending on roads and infrastructure, new entitlement programs for community college and preschool, and tax preferences targeted to low- and middle-income earners. All of this he would pay for with new inheritance taxes on the wealthy, a hike in the capital gains tax, and a special levy on the biggest financial institutions.
But don’t be fooled. Obama may seem like the newest member of Occupy Wall Street—chanting “We are the 99 percent!”—but his record shows him to be a corporate liberal, and a closer look at last week’s proposals confirms it.
The corporate liberal offers the following deal: In exchange for greater authority—to tax, to regulate, to distribute—government will dispense benefits to the top and bottom of society. The poor will receive more generous social welfare benefits; the wealthy will be granted special provisions, exemptions, and benefits. Often those at the top get to reap a private profit for distributing benefits on the government’s behalf.
Obamacare is a perfect illustration. The government subsidizes health insurance, but it does so through private companies, which are not forced to participate. Instead, insurers agree to get involved because they believe it will make them better off. The government implicitly guarantees that insurers will profit in the individual marketplace.
Far from being a flaw in corporate liberalism, this is its dominant feature: The welfare state is expanded, and powerful corporate interests are drawn into a web of client-patron relationships. The more interests are drawn in, the more our Madisonian system resists reform, and the more ensconced in power corporate liberalism becomes.
This approach is very old and far from exclusive to the Democratic party. Perhaps its earliest large-scale incarnation was the War Industries Board during World War I. Later, corporate liberalism undergirded New Deal labor and agricultural policies. Today, the logroll that links food stamps to corporate-friendly farm subsidies supported by both parties is an instance of corporate liberalism. So is Medicare, another bipartisan program. Medical service providers don’t have to participate, but when they do they are barely regulated, and the government is effectively on the hook for provider profits.
Corporate liberalism is generally unpopular. Americans do not like the idea of Uncle Sam guaranteeing the status of private interests. So corporate liberals go to great lengths to distract voters from discerning the actual nature of the regime. Again, consider Obamacare: Its supporters regularly and viciously attacked insurance companies during the debate over the bill in Congress, even as the government was establishing a backstop for insurer profits.
Similarly, corporate liberals, at least the Democratic variety, can sound like down-on-the-farm populists when they talk about the top marginal tax rate for individuals. But for those at the apex of the economic pyramid, the cost of “paying their fair share” is a pittance compared with the windfalls they can reap from favorable regulations, tax preferences, and redistributive schemes.
This sleight of hand—essential to the corporate liberal’s public persona—was on display in the State of the Union. Obama talked like a populist about taxes, but note his timing. He is calling for massive new taxes on top individual earners from the most Republican Congress in generations—which will reject his proposals. Why not have asked for this in 2009 or 2010, when Democrats were in charge and such measures probably could have been enacted? And his plan to sock it to Wall Street—why now? The perfect vehicle was the Dodd-Frank bill, which Congress passed in July 2010, when Democrats had outsized majorities. Now Obama faces the most Republican Congress in 80 years.
Yet the president’s rhetoric was not empty. It served a purpose. By presenting a tax package with no chance of passage, Obama undermines the slim hope that this Congress will enact real tax reform. He may claim that he is committed to fairness, but his publicity stunt last week probably ensured that our deeply unfair corporate tax code will remain intact for at least two years. The sectors of corporate America that spend through the nose on lobbyists to protect their tax benefits must have been delighted.
The president’s ceaseless talk about fairness actually serves to obscure the fact that there are two types of tax fairness—vertical and horizontal. By insisting on greater vertical fairness, he has killed any hope of reforms enhancing horizontal fairness.
Vertical tax fairness is the principle that those who make more money should pay more. A flat tax, which applies the same percentage to all earners, achieves vertical fairness: Those who make more pay more. A progressive tax, which taxes higher earners at higher rates, intensifies this effect: Those who make more pay still more. Our system of taxation is progressive, and last week Obama called for making it more steeply so. The trouble, as we have seen, is that the idea is a dead letter in the new Congress. The only tax increase Republicans have passed in recent years came in late 2012, when they agreed to it only to prevent the entirety of the Bush-era tax cuts from being repealed.
Horizontal fairness is the principle that individuals or businesses with similar incomes or assets should pay similar amounts of tax. Our tax code egregiously violates this principle by playing favorites. The favoritism comes under many names—tax preferences, tax expenditures, targeted tax cuts—but all have the same result: Uncle Sam discriminates based on how we earn and spend our money.
The individual tax code privileges homeowners over renters, parents over nonparents, those with student loan debt over those without, those who get health insurance from their employer over those who get it from the individual market. It does this through all the deductions, exemptions, and credits that make filling out our tax returns so taxing. Many tax breaks are broadly popular. Nevertheless, our elaborate regime of tax preferences is an inefficient and often unfair way to transfer wealth.
On the corporate side of the ledger, the tax code is riddled with similar provisions—the Apple loophole, the GE loophole, the NASCAR loophole, the Hollywood loophole, and on and on. In theory, corporate tax preferences can make sense: The government should use its taxing power to stimulate broad-based economic growth. In practice, however, our corporate tax code is a labyrinth of cronyism favoring the well-connected for dubious benefits. Everybody wants to fix it.
Well . . . almost everybody. Two groups like the tax code as it is: the interests that lobby to get their favored provisions embedded in law, and professional politicians, who use the taxing power to extract from those interests campaign contributions, donations to favored causes, public statements of support, cooperation in other areas of policy, and lucrative sinecures after they leave office.
Corporate tax reform would promote horizontal fairness, undermining tax preferences based on political connections. It could be accomplished without raising net taxes. Revenue-neutral reform would not make the code more progressive, but it would redistribute the existing tax burden—from those without political connections to those with them. That would be a winner for everybody except the interest groups who “buy” preferences and the politicians who “sell” them. Public-spirited liberals and conservatives would have reason to cheer. And the public would benefit because reform would simplify the tax code, halt this type of political favoritism, and ultimately encourage capital to go to the most socially useful purposes.
Here we get to the heart of the matter. Tax reform makes a lot of sense, but politically it is difficult to enact. It requires vigorous leadership from a committed president to help Congress defy special interests. Republicans in Congress are amenable to reform, but they need that help from the commander in chief—which he did not offer last week. By insisting instead on unrealistic tax hikes, he probably killed any chance of tax reform during his tenure.
Was this a purposeful move on the president’s part? Possibly. Perhaps the plan was to talk like a class warrior, leave it to the Republicans to kill the proposals, and in the process take the wind out of tax reform. As we have seen, the administration did something similar with the health insurers, and not only them. The president also went after drug manufacturers during the 2008 campaign, blasting them for cutting a deal with the Bush administration in the development of Medicare Part D, only to cut the same sort of deal on Obamacare.
On Dodd-Frank, too, Obama has talked like a populist while behaving like a corporate liberal. He touts Dodd-Frank for bringing Wall Street to heel, but his claims are specious. While Dodd-Frank layered regulations on Wall Street, they were just the wrapping paper that hid the true gift—too-big-to-fail protection for the largest firms, which had contributed lavishly to Obama’s 2008 campaign and had close ties to his top economic advisers when Dodd-Frank was being written. Then there’s Obama’s flip-flop on the Export-Import Bank. Running for office, he blasted it as corporate welfare; last year, when House conservatives sought to kill it, he declared the program a job creator. Famously, the Department of Energy’s green energy grants were given out in a manner partial to the president’s financial patrons; Solyndra was just the most infamous of many outrages. And the $787 billion stimulus was a presidentially sanctioned exercise in pork barrel politics for congressional Democrats.
So, too, with tax reform. When push comes to shove, corporate liberals—and corporate conservatives—do not really want tax reform. Horizontal equity may be good for the country, but it is bad for them. To borrow a phrase from Rod Blagojevich, tax preferences are a valuable thing; you don’t just give them away.
The professorial Obama would never put matters so bluntly. But the fact remains that he is a corporate liberal. In the State of the Union, he may have talked a good game about tax fairness, but real reform is dead until 2017 at the earliest. I suspect that is just how Barack Obama wants it.
Jay Cost is a staff writer at The Weekly Standard. His new book is A Republic No More: Big Government and the Rise of American Political Corruption.