Blog No. 19 Senator Lee vs. Scrooge McDuck

Senator Mike Lee has not been a favorite of RINOcracy.com. Most particularly, we strongly disapproved of his effort, along with that of Ted Cruz, to seek the defunding of Obamacare at the price of a government shutdown. Nevertheless, we salute Senator Lee for his willingness to address an issue that most Republicans have tended to tiptoe away from: income inequality. While the subject is often raised by liberals, a typical Republican response has been to mutter a complaint about “class warfare” and attempt to change the subject.

Senator Lee, however, has introduced legislation intended to mitigate economic hardship through tax reform, and it has drawn favorable comment from several quarters. Nevertheless, as constructive as his proposal may be, Lee’s recognition of our underlying problems and the need for action–by Republicans–may be even more important. Speaking in September to the American Enterprise Institute, Lee’s remarks are worth quoting at some length:

On this Constitution Day, allow me to begin with thoughts from perhaps the two most important constitutionalists in American history.

The first, from James Madison, is that the “object of government,” is “the happiness of the people.”

The second, from Abraham Lincoln, is that the role of government is: “…to lift artificial weights from all shoulders, to clear the paths of laudable pursuit for all, to afford all an unfettered start and a fair chance in the race of life.”

Taken together, these two insights offer an almost perfect distillation of what America – and the Republican Party, at its best – stand for: equal opportunity, for all, to pursue happiness.

Today, this fundamental American ideal is hanging by a thread.

Up and down American society – which used to be defined and driven by what Tocqueville called our “yearning desire to rise” – we find a new and unnatural stagnancy.

We find the underprivileged trapped in poverty, sometimes for generations.

We find the middle class caught on a treadmill, running harder every year just to maintain the economic security and social cohesion that were once taken for granted.

Meanwhile, at the top of our society, we find a political and economic elite that – having reached the highest rungs – has pulled up the ladder behind itself, denying others the chance even to climb.

From Wall Street to K Street to Pennsylvania Avenue, we find special interests increasingly exempted and insulated – by law – from the rigors of competition and the consequences of their own mistakes.

All of this points to what really is an inequality crisis in America today – a crisis not of unequal wealth or income… but unequal opportunity.

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For the Party of Lincoln to indulge in the politics of privilege is a corruption of everything we are supposed stand for.

To rescue the nation – and ourselves – from this crisis of unequal opportunity, the Republican Party must return to its own truest self.

Not simply on behalf of those Americans who have fairly worked their way up the ladder of success – but for those still climbing… and especially those clinging to the lowest rungs.

For a political party too often seen as out of touch, aligned with the rich, indifferent to the less fortunate, and uninterested in solving the problems of working families, Republicans could not ask for a more worthy cause around which to build a new conservative reform agenda.

And so, the great challenge to the Republican Party is to craft such an agenda that is at once more responsive to the inequality crisis plaguing American society today, and more consistent with our true, conservative principles.

The core of that agenda should be restoring equal opportunity – the natural, God-given right to pursue happiness – to the individuals, communities, and institutions from whom it has been unfairly taken.

This new agenda should ultimately address the ongoing problems of immobility at the bottom of our economy, insecurity within the middle class, and cronyist privilege at the top.

Senator Lee’s legislative proposal is considerably less sweeping than the challenges he identified rather eloquently. The heart of his proposal is an additional $2,500 per child tax credit applicable to payroll taxes as well as income taxes. It is accompanied by various elements of tax reform including reducing to two the number of tax brackets, limiting the mortgage interest deduction and eliminating various deductions and loopholes.

Lee’s proposal drew a favorable comment from, among others, Jeb Bush (“Senator Mike Lee and others here are proposing incredibly sound policies to provide incentives for child rearing families to give them the kind of support that they need through our tax code.” ) and the National Review Editorial Board: (“Senator Mike Lee, the Utah conservative, announced an ambitious plan to reform taxes — much the most attractive one we have heard from any Republican for a long time.”) While the prospects for legislative action are at best uncertain, Lee’s analysis and proposal made a valuable contribution to the national conversation.

While Lee may be the most conspicuous conservative to take on income inequality, he is not alone. If Democratic politicians have been the loudest in urging that income inequality be addressed by change in the tax code, there have been other notable voices. Bill Gross and Sheila Bair have both focused on the gains realized by the top 1% which have been truly extraordinary:

Bill Gross, managing director on PIMCO (and listed by Forbes as the 252nd wealthiest American) published widely noted comments in the November issue of his Investment Outlook.  Gross called attention to the fact that “In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled from 10% in the 1970s to 20% today.”  Gross’s solution, in which he referred to the fictional billionaire, Scrooge McDuck, was higher taxes for the wealthy:

Scrooge McDuck would complain but then he’s swimming in it, and can afford to duck paddle to a shallower end for a while. If you’re in the privileged 1%, you should be paddling right alongside and willing to support higher taxes on carried interest, and certainly capital gains readjusted to existing marginal income tax rates. Stanley Druckenmiller and Warren Buffett have recently advocated similar proposals. The era of taxing “capital” at lower rates than “labor” should now end.

Gross did not, however, explain how he would deploy the revenue produced by the higher taxes on the top earners or how it would improve the lot of the “99%.”

Sheila Bair, a self-described “capitalist and a lifelong Republican,” was appointed chairwoman of the Federal Deposit Insurance Corporation by President George W. Bush. In February of this year, she wrote of “another depressing report on income inequality.” As Ms. Bair reported with obvious dismay, the report found that in 2009-2011 – the first two years of the recovery – the richest 1 percent of Americans saw their incomes grow, on average, by more than 11 percent while the income of the other 99 percent incomes shrank by nearly half a percent. Declining to support “redistributionist policies,” she nevertheless argued that “there are other policy options to demonstrate Republicans’ commitment to the average Joe and Jane that are very much in the party’s tradition.”

In particular, one of Ms. Bair’s suggestions was, like that of Bill Gross, to abolish the preferential (carried interest) tax treatment for hedge fund mangers (though, unlike Gross, she did not address capital gain tax rates):

For instance, as part of renewed fiscal discussions over sequestration, Republicans should put fundamental tax reform on the table and make it our priority to end preferential treatment of investment income, which lets managers of hedge funds pay half the tax rate of managers of shoe stores.

Defenders of this giveaway make the unsubstantiated claim that it encourages job-creating investments. But what we have now is merely an immense pool of investment funds that has created far too few jobs. A report last year by Bain and Co. projected that by 2020 there will be $900 trillion in financial assets around the globe, chasing investments in a real economy worth only $90 trillion in gross domestic product. Why in heaven’s name do we need to keep a tax preference to encourage more?

Ms. Bair also made a suggestion as to how the proceeds should be used:

If we eliminate [the tax preference for hedge fund managers] and other unjustified tax breaks, we can produce enough new revenues to lower marginal rates and reduce the deficit, according to both the Simpson-Bowles and Domenici-Rivlin debt-reduction plans.

RINOcracy.com has previously supported changes in the tax code that would generate net revenue to reduce deficit. In addition to being sound economics, deriving some increased tax revenue from the affluent would help to ease existing divisions in society and, not so incidentally, make the Republican party less vulnerable to Democratic forays into “class warfare.” Such forays will not cease altogether, but they should be less effective. (Should the Republicans go into the 2014 elections carrying the hedge fund managers, and their “carried interest” tax treatment, on their backs?)

Nevertheless, the benefits to the “average Joe and Jane” of the tax reforms such as those proposed by Gross and Bair would be indirect at best. Even the tangible benefit from Senator Lee’s proposal would be more of a palliative than a fundamental cure. Income inequality is a structural problem that requires structural solutions.

One structural solution is the reform of our educational system — from pre-K through college.  Specific proposals for reform are often controversial, but a momentum for change is already underway. A far more daunting challenge, but one that should not be simply ignored, is to find ways of rehabilitating our family structures. Research has demonstrated beyond argument that children raised in single parent homes have a far greater chance of growing up in poverty and remaining in poverty all their lives. Are we helpless to do any thing about it? Such issues will be addressed in future blogs.  In the meantime, RINOcracy.com urges RINOs and our friends to join with Mike Lee and others who seek to develop a spectrum of Republican approaches to income inequality.