The rise of the ‘Drawbridge Republicans’

By Matt Miller, Tuesday, August 21, 6:23 AM


As Republicans head toward next week’s convention something extraordinary has come into view now that their ticket is complete.



Mitt Romney came from wealth and went on to build his own quarter-of-a-billion dollar fortune. Paul Ryan, who has never worked a day in the private sector (outside a few months in the family firm) reports a net worth of as much as $7 million, thanks to trusts and inheritances from his and his wife’s family.



Wealthy political candidates are nothing new, of course. But we’ve never had two wealthy candidates on a national ticket whose top priority is to reduce already low taxes on the well-to-do while raising taxes on everyone else — even as they propose to slash programs that serve the poor, or that (like college aid) create chances for the lowly born to rise.



Call them the Drawbridge Republicans. As the moniker implies, these are wealthy Republicans who have no qualms about pulling up the drawbridge behind them. Such sentiments used to be reserved for the political fringe. The most prominent example was Steve Forbes, whose twin obsessions during his vanity presidential runs in 1996 and 2000 — marginal tax rates and inflation — were precisely what you’d expect from an heir in a cocoon.



(In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent, were truly damaging to the economy. But as GOP business leaders now tell me privately, the Clinton-era top rate of 39.6 percent, let alone today’s 35 percent, are hardly a barrier to work or investment).



Most rich Republicans who champion regressive tax plans find it necessary to at least pretend they’re doing something to help average folks. John McCain, who’s lived large for decades thanks to his wife’s inheritance, famously had trouble keeping track of how many homes he owned — but McCain also tried bravely to create a path to citizenship for illegal immigrants. George W. Bush campaigned as a “compassionate conservative,” and touted education initiatives that made this claim plausible.



Today’s Drawbridge Republicans can’t be bothered. Yes, when their political back is to the wall — as Romney’s increasingly is — they’ll slap together a page of bullet points and dub it “a plan for the middle class.” But this is only under duress. The rest of the time they seem blissfully unaware of how off-key they sound. As the humorist Andy Borowitz tweeted the other day, “As a general matter, it’s a bad idea to talk about austerity if you just had a horse lose in the Olympics.”



Contrast conservative Prime Minister (and heir) David Cameron’s decision to defer his plans to lower the top 50 percent marginal rate in the UK. “When you’re taking the country through difficult times and difficult decisions,” Cameron said, “you’ve got to take the country with you. That means permanently trying to make the argument that what you’re doing is fair and seen to be fair.” As his spokesman added: “We need to ask those with the broadest shoulders to contribute the most.”



Now that’s a conservative ruling class with a conscience! Can anyone imagine Romney and Ryan saying the same?



The interesting question concerns psychology. Drawbridge Republicans are flesh and blood human beings peddling indefensible priorities. How do they manage it and still feel good about themselves? One possibility is that they’re simply missing the genes for empathy and self-awareness. (Steve Forbes always did seem a bit like a bubble boy whose inheritance left him impervious).



But for today’s GOP ticket that explanation feels off. Romney, for all his awkwardness, campaigned and governed in a liberal state, and he enacted a pioneering universal health care law that’s helped many of modest means achieve health security. Ryan is equally mysterious — the boy-next-door who pays lip service to “upward mobility” yet seems to have no notion his plans would likely produce what liberal analyst Robert Greenstein calls “the largest redistribution of income from the bottom to the top in modern U.S. history.”



My hunch is that extreme forms of rationalization and other defense mechanisms help Drawbridge Republicans cope with the cognitive dissonance. The growth of partisan media makes it easy to tune out disquieting dissenting views.



Whatever lies behind it, the rise of the Drawbridge Republicans makes the stakes of this election even higher. If Romney and Ryan actually win on their Drawbridge agenda, the United States will have crossed a scary new Rubicon for a supposedly advanced democracy. For years, whenever I’ve heard people criticize “limousine liberals,” I’ve always thought, well, at least that’s better than being a “limousine jerk.” Now it turns out that’s exactly what a Drawbridge Republican is.



Matt Miller is a senior fellow at the Center for American Progress and co-host of public radio’s “Left, Right & Center.” He writes a weekly online column for The Post.

Recognizing Paul Ryan’s ‘tell’ when he is trying to avoid something

By Matt Miller, Published: August 16


In poker a “tell” is the physical giveaway or tic that lets you know someone is lying about his or her hand. In politics it’s the mode of evasion a politician chooses to sidestep a truth he or she doesn’t want to admit or to avoid saying something against self-interest. In his debut interview with Fox News’ Brit Hume Tuesday, Rep. Paul Ryan’s “tells” were audacious and revealing. They suggest an opening Democrats would be wise to pursue.



Ryan (R-Wis.) tried to cloak himself in his supposedly charming “wonky-ness” to sidestep two simple questions from Hume: When does Mitt Romney’s budget reach balance, and when does Ryan’s own budget plan do the same? Ryan pirouetted because Hume’s queries threatened to expose his famed “fiscal conservatism” as a fraud.



It’s worth parsing Ryan’s tactics in this exchange because it shows the brand of disingenuousness we’re dealing with. So let’s go to the videotape. Have a look at the relevant two-minute portion of the clip (excerpted on this CNN video) and then we’ll dissect it.



Okay, you’re back. Hume started with a simple question: “The budget plan that you’re now supporting would get to balance when?”



Now, for context, recall that in the last era of epic budget smackdowns, 1995 and 1996, Newt Gingrich would have had an equally simple answer: in seven years. President Bill Clinton’s failure to embrace the goal of a balanced budget at all was a major political liability that Clinton finally (and shrewdly) erased when he came out with his own 10-year plan in mid-1995. (It’s worth underscoring that a 10-year path to balance was viewed then as the outer limit of credibility — pledging to end the red ink any further than a decade out didn’t pass the laugh test.)



Since Ryan knows that Romney’s bare sketch of a plan never reaches balance, he stumbles momentarily before trying to move the conversation to his comfortable talking points about Romney’s goal of reducing spending to historic norms as a share of gross domestic product.



But Hume grows quietly impatient. He practically cuts Ryan off.



“I get that,” Hume says. “But what about balance?”



You can see Ryan flinch. He doesn’t know, he says. Why not? “I don’t want to get wonky on you,” he says, recovering, “because we haven’t run the numbers on that specific plan.” But that’s not “getting wonky” at all. As common sense (and the Gingrich/Clinton approach) suggests, there’s nothing arcane about this subject. You decide on a sensible path to balance as a goal and come up with policies that achieve it. All this means is that Romney hasn’t done what a fiscally conservative leader would do. Trying to evade this as a matter of not “getting wonky” is Ryan’s tell. He’s betting Hume is too dumb, uninterested or short on time to press the point.



Ryan then adds that “the plan that we’ve offered in the House balances the budget.” But he immediately stops short of saying when — you see his eyes dart to the right at that moment, his next tell — because that would mean admitting it reaches balance in the 2030s. And Ryan wants to get through this interview without saying that, because he knows it doesn’t sound good. After all, what kind of “fiscal conservative” has a 25-year plan to balance the budget? Instead, in a practiced maneuver signaled by his telltale sideways glance, he moves to a contrast with President Obama, who he says has never offered a budget that ever reaches balance.



This is true — but is a plan to balance the budget when Ryan is nearly 70 really different enough to make Ryan the “deficit hawk”? Please.



Meanwhile, Hume’s quiet baritone presses on.



“Your own budget . . . when does that contemplate reaching balance?” Hume asks.



There’s no exit. Not until the 2030s, Ryan finally admits, looking uncomfortable — but then he quickly adds, making a face, that’s only under the Congressional Budget Office’s scoring rules, implying that they’re silly constraints every Fox News viewer would agree are ridiculous (instead of sensible rules meant to credit politicians only for policy proposals that are real). Ryan adds that “we believe” if we get the economy growing, “it would balance in 10 years.” But that’s supply-side faith-based budgeting again — exactly what we ran an empirical test on in the 1980s. (And the truth is, if Ryan’s big tax cuts were properly accounted for, his plan’s real date of balance would push well beyond 2040).



Why am I harping on this? Because it’s impossible to overstate how central the unjustified label of “fiscal conservative” is to the Ryan brand and the GOP’s strategy. As Clinton understood in the 1990s, “fiscal responsibility” is a values issue important to the voters who decide modern presidential elections.



The point: Democrats can’t afford to let Ryan/Romney’s phony image as superior fiscal stewards survive. And Hume’s interview shows how swiftly this charade can be exposed if Democrats and the press zero in on simple questions like Hume’s. If the press is primed to cover this more intelligently, such queries will also expose the big Republican lie — the idea that you can balance the budget as the baby boomers age without taxes rising.



Let me be clear. The most important issue facing the country isn’t when we’re going to balance the budget. It’s how to get growth and jobs reignited in the near term and how to renew the country’s promise and competitiveness after that (an agenda in which long-term budget sanity is just the ante). But if Democrats spend all their energy on Medicare — and don’t knock out the GOP ticket’s undeserved reputation for fiscal responsibility — they’ll find themselves in unexpected peril as the race heads to the fall.

February 7, 2012

The Zuckerberg Tax By DAVID S. MILLER

WHEN Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth. The $5 billion he will receive upon exercising those options will be treated as salary, and Mr. Zuckerberg will have a tax bill of more than $2 billion, quite possibly making him the largest taxpayer in history. He is expected to sell enough stock to pay his tax.

But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.

If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.

Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.

Now compare Mr. Zuckerberg with Lady Gaga. Last year she told Ellen DeGeneres that she had to get “completely wasted” to sign her tax returns because she owed so much. Lady Gaga reportedly earned $90 million in 2010. Because she earns fees and royalties, she’s subject to the highest income-tax rate. So, assuming she’s just as successful this year, she will certainly pay more than $30 million in taxes and probably more than $45 million, which is infinitely more tax than Mr. Zuckerberg will pay on the $23 billion of Facebook stock he now holds.

Why is this?

Our tax system is based on the concept of “realization.” Individuals are not taxed until they actually sell property and realize their gains. But this system makes less sense for the publicly traded stocks of the superwealthy. A drastic change is necessary to fix this fundamental flaw in our tax system and finally require people like Warren E. Buffett, Mr. Ellison and others to pay at least a little income tax on their unsold shares. The fix is called mark-to-market taxation.

For individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities (representing the top 0.1 percent of families), the appreciation in their publicly traded stock and securities would be “marked to market” and taxed annually as if they had sold their positions at year’s end, regardless of whether the securities were actually sold. The tax could be imposed at long-term capital gains rates so tax rates would stay as they were.

We could call this tax the “Zuckerberg tax.” Under it, Mr. Zuckerberg would owe an additional $3.45 billion when Facebook went public (that’s 15 percent of the value of the roughly $23 billion of stock he owns). He could sell some shares to pay the tax (and would be left with over $20 billion of Facebook stock after tax), or borrow to pay the tax.

If his Facebook shares decline in value next year, he’d get a refund.

President Obama has proposed a “Buffett rule” that would require millionaires to pay tax at a 30 percent effective minimum rate. Under the rule, Mr. Buffett’s taxes might have doubled to $12 million in 2010, but this would represent only a trivial amount of additional tax for him. If the Buffett rule applied in 2010, Mr. Buffett’s effective tax rate would be only about 2/100 of 1 percent on the $8 billion in appreciation of his holdings. A Zuckerberg tax would be far better: under it Mr. Buffett would have paid $1.2 billion in tax in 2010.

A mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years. The new revenue could be used to lower payroll taxes, extend the George W. Bush tax cuts, repeal the alternative minimum tax, reduce the budget deficit, prevent military cuts or a combination of all of these.

This tax would not affect the middle class, or even most wealthy Americans. Nor would it affect small-business owners. It would affect only individuals who were undeniably, extraordinarily rich. Only publicly traded stock would be marked to market.

Some would argue that it is inherently unfair to tax “paper gains” before they are realized — Mr. Zuckerberg won’t receive $28 billion in cash; he holds only paper. Moreover, markets are inherently volatile; one year’s paper gains is another’s real losses. However, these arguments are far less credible when paper losses give rise to real tax refunds. Moreover, in a downturn, the mark-to-market tax would act as a fiscal stimulus — the cash refunds would offset a declining stock market.

This proposal follows the Ronald Reagan model by broadening the “base” of tax without increasing rates. In fact, Reagan was responsible for the last major reform of our antiquated realization system when he signed a law requiring taxpayers to pay a tax on interest that accrued on bonds but was not paid.

The most profound effect of a mark-to-market tax would be to level the playing field between wage earners, on one hand, and founders and investors on the other. Superwealthy holders of publicly traded securities could no longer escape tax on their vast wealth.

David S. Miller is a tax lawyer.

February 3, 2012

At 102%, His Tax Rate Takes the Cake By JAMES B. STEWART

Meet Mr. 102%.

James Ross, 58, is a founder and managing member of Rossrock, a Manhattan-based private investment firm that focuses on commercial real estate and distressed commercial mortgages. “I realize I am very fortunate, and in fact I am a member of the 1 percent,” Mr. Ross wrote in an e-mail. His résumé is studded with elite institutions: Yale, Columbia Law School and stints at the law firms Cravath, Swaine & Moore in New York and Holland & Hart in Denver. Since his company fits the category of private equity, he even has carried interest, the kind of incentive compensation that enabled Mitt Romney to pay such a low tax rate.

Yet Mr. Ross told me that he paid 102 percent of his taxable income in federal, state and local taxes for 2010. “My entire taxable income, plus some, went to the payment of taxes,” Mr. Ross said. “This does not include real estate taxes, sales taxes and other taxes I paid for 2010.” When he told friends and family, they were “astounded,” he said.

In the midst of a national debate over tax rates and policy, I lifted the veil last week on my income tax rates for 2010, a year in which I paid 37 percent of my adjusted gross income (total income minus things like retirement contributions) in federal, state and city income taxes and 74 percent of my taxable income (after deductions like state and local taxes).

I was dismayed by the comparison to Mr. Romney — who paid 13.9 percent of his adjusted gross income of $21.7 million and 17.5 percent of his taxable income of $17.1 million — as well as by the possibility that I paid a higher tax rate than just about anyone. So I invited readers to send me e-mails disclosing their tax rates and circumstances.

I was deluged with submissions, including many people who pay a higher rate than I do. But at 102 percent, Mr. Ross was in a category of his own.

That doesn’t mean Mr. Ross pays more in taxes than he earns. His total tax as a percentage of his adjusted gross income was 20 percent, which is much lower than mine.

That’s because Mr. Ross has so many itemized deductions. Since taxable income is what’s left after itemized deductions like mortgage interest, charitable contributions, and state and local taxes are subtracted, it will nearly always be smaller than adjusted gross income and demonstrates how someone can pay more than 100 percent of taxable income in tax. Mr. Ross must hope that his interest expense will pay off down the road and generate some capital gains.

Still, all of Mr. Ross’s itemized deductions are money out of his pocket, which is why he’s had to draw on his savings to pay his taxes. Robert Willens, a tax expert and New York attorney, made the argument that taxable income, therefore, may be a better basis for measuring the tax burden.

In any event, by either measure Mr. Ross pays a higher rate than Mr. Romney.

“I had no idea I was paying such a high rate,” he told me when we spoke this week. “I had trouble believing this was possible. I called my accountant, and I said, ‘Do you realize I’m paying every penny I have in taxable income? I’m dipping into savings to pay my income tax.’ He said, ‘It’s unfortunate, but at your income level’ ” — with high earned income and large itemized deductions that Mr. Ross can’t take advantage of — “ ‘that’s just the way it is.’ ”

Mr. Ross’s plight illustrates something that came through in nearly every response and cuts across nearly all income levels: the disparities of the tax code don’t just pit rich against poor or middle class. It taxes people within the same income brackets at grossly unequal rates. “I cannot help but reflect on the unfairness of the current tax regime,” Mr. Ross wrote. “Why should I pay 102 percent of my taxable income in taxes when others, with far greater wealth than mine, pay a fraction of that?”

I asked Mr. Willens if such a thing were possible, and he said it was. “It’s entirely within the realm of possibility,” he said. “I can’t recall any clients quite that high, but I’ve had people come close.”

How could Mr. Ross pay so much? I thought I was the victim of a perfect storm of punitive tax policies, but Mr. Ross’s situation is worse.

Like me, he lives and works in New York City, which all but guarantees a high tax rate. Nearly all of his income is earned income and thus fully taxable at top rates. (He said that’s not always the case, but given the recent dire condition of real estate, in 2010 he had few capital gains and his carried interest didn’t yield any income.) Unlike me, he can’t make any itemized deductions, which means his adjusted gross income exceeds $1 million, the level at which New York State eliminates all itemized deductions, except for 50 percent of the value of charitable contributions. Mr. Ross said he gave 11 percent of his adjusted gross income to charity.

That means Mr. Ross can’t deduct any interest expense on the money he borrows to finance his real estate investments, which is substantial, nor can he deduct any other expenses or other itemized deductions except for part of his charitable contributions. This means he pays an enormous amount in state and local taxes. Since those are among the deductions that are disallowed when computing the federal alternative minimum tax, Mr. Ross is in turn especially hard hit by the A.M.T.

Mr. Ross said he asked his accountant what he could do. “He said, ‘Fire everyone here and move to Florida,’ ” according to Mr. Ross. He employs 10 people in his New York office.

Mr. Ross may be a member of the 1 percent, but many people who responded and said they paid high tax rates weren’t. Eliana S. Rivero is a professor emeritus at the University of Arizona who told me she gets by on Social Security, a TIAA-CREF pension fund and a small amount of royalty income. She said she paid just over 26 percent of her adjusted gross income in income taxes.

“I reacted the way you did when Romney’s tax status was revealed: I went to my calculator,” Dr. Rivero wrote.  “Much to my dismay and, yes, outrage, I pay almost double the tax rate he does. And I promise you, I am very far from the 1 percent crowd!!!

“I worked for 45 years in my chosen profession, helped educate quite a few of the present-generation college faculty, received several teaching and scholarly awards, and yet my government taxes me right and left for the moderate wages I earned but lets the wealthy get away with paying proportionately less than I do. I truly wouldn’t mind it so much if my taxes went to pay for schools and bridges and roads but when they go to wars and loopholes for the mega-rich, I see red!”

A disproportionate number of high-rate taxpayers appear to be self-employed and many are professionals, such as lawyers, doctors, dentists and architects with mostly earned income rather than dividends and capital gains. Some are in the upper 1 percent, but most aren’t. Architects, who as a group may be the most underpaid profession relative to their education, talent and responsibility, seem especially disadvantaged by the current tax code.

Daniel Kelley is an architect who wrote from Philadelphia. “My wife and I have a 20-year-old architecture firm employing 20 to 30 full-time professional people,” Mr. Kelley said. “In 2010, we paid 31.3 percent federal taxes on our adjusted gross income. We paid 37.5 percent federal, state, local taxes on our adjusted gross income. If our practice was in New York, I imagine the latter would approach 45 percent. Instead of tax breaks for people who make a living from their money, perhaps there should be reduced taxes for those of us who have small businesses and employ Americans. I don’t necessarily mind the very rich making money, but if they don’t pay a fair tax, then they are stealing from the rest of us.”

Journalists and authors were also well represented. Jeffrey Bennett, author of “Math for Life” and numerous other books, reported that he paid 26.8 percent of his adjusted gross income in federal taxes, topping my 24 percent rate, but because he lives in Colorado, his total federal and state burden is lower than mine though still far higher than Mr. Romney’s. Ironically, a chapter in Mr. Bennett’s book discusses the “insanity of our current tax policies,” he said. “And despite our high rate, you can mark us down in the category of people who believe our rate should be increased. After all, it’s either us paying it or our children, and it’s not right to pass it on down the line.”

And for those of you who questioned how I could be a business columnist and yet be such a sap, James Cramer, the host of “Mad Money” on CNBC and founder of the financial Web site TheStreet.com, disclosed that he paid a higher rate than I do. He forwarded an e-mail from his accountant estimating that he paid 45 to 50 percent of his adjusted gross income in income taxes in 2010. Mr. Cramer’s taxes are especially high — and complicated — because he lives in New Jersey and works in New York and New Jersey, so he pays income taxes in both high-tax states (and gets a credit on his New Jersey return for his New York taxes). Most of Mr. Cramer’s income is earned, and thus is fully taxed. Although he had capital gains, they were offset by losses. “The best way to have everyone pay their fair share is to tax all income (whether earned or unearned) at the same rates,” his accountant, Jeffrey Rosenthal, said.

One thing that emerged loud and clear is that a large swath of hard-working people are paying a high rate and are furious about it — not because they object to paying taxes, even high taxes, but because so many people, even billionaires, pay at a much lower rate than they do.

The tax code, Dr. Rivero wrote, “is written to favor the rich, who have not created all those jobs they were supposed to generate.”

The rich themselves are some of the most distressed. “None of the dialogue about taxes has anything to do with fairness,” Mr. Ross lamented. “Certain rich people are paying way more than their fair share and other rich people are paying a lot less. I’d like to see a conversation take place along nonideological lines where everyone is asked to pay their fair share, where everyone makes some payment, even if it’s one dollar. Everyone I know is so disgusted. People aren’t stupid. They know what’s going on. At the end of the day, the system is broken.”

The GOP’s fuzzy math By Matt Miller

The GOP’s fuzzy math By Matt Miller, Wednesday, July 20, 8:40 AM

It’s one thing for a political party to lose its moral bearings – after all, community values evolve, and large swaths of people and their elected representatives can end up on the wrong side of history on such questions as slavery, suffrage, and civil rights. But when a party loses its mathematical bearings – well, that’s a little shocking.



Yet that’s what’s happened to the Republican Party. The debt ceiling endgame has exposed the denial gripping the GOP in the face of the inevitable loss of “lower taxes” as the core of the party’s identity. You can feel the Republicans’ pain; tax cuts have been the party’s defining issue since Ronald Reagan rode them to power in 1980. But in an aging America, the numbers no longer work, and Republicans have failed to develop a new conservative vision to replace their fading mantra.



The “cap, cut and balance” plan passed by the House Tuesday night captures Republican denial perfectly. The plan would cap federal spending at 19.9 percent of GDP by 2018, with the goal of lowering it to18 percent over time. Similar caps have been endorsed by most of the GOP’s presidential candidates.



You’d never know from listening to Republicans that these goals are mathematically and politically unattainable.



But they are. Why? If there’s one fact you need to emblazon in your mind to make sense of the current debate, it is that Ronald Reagan ran the federal government at 22 percent of GDP back when our population was much younger. (Under President Obama, the extraordinary measures enacted to fight the recession – plus a collapse in the denominator, GDP -- have boosted spending to around 24 percent, while revenue has dropped to 15 percent from its 18-19 percent longtime average).



It is simply not plausible to argue that as we double the number of seniors on Social Security and Medicare, Uncle Sam will be able to operate at spending levels 10 to 20 percent below those over which America’s modern conservative icon presided. (Though, as my colleague Dana Milbank notes, Reagan agreed to raise taxes 11 times.) Today there’s no question: Taxes must rise.



Republican “thinking” about these facts is telling. According to the Wall Street Journal, House leaders picked 19.9 percent as their cap “because it is in line with the average spending level over the last thirty years.”



Well, sorry, GOP: The average spending levels of the last 30 years are irrelevant because we weren’t retiring 76 million baby boomers over the last 30 years. And decades ago per capita health costs for seniors were far smaller than they are today.



Let me pause so there’s no caricaturing of these views as belonging to some “tax and spend liberal.” I’ve advocated more “conservative” changes to Social Security than Paul Ryan did in his budget or his prior “roadmap.” I’ve urged progressives to realize that if we don’t slow Medicare’s outsized growth, there will be no money left for poor children, infrastructure, or R&D. And I’ve said we need to learn from countries like Singapore that get outstanding results in health care while spending a fraction of what we spend. So count me as a longtime entitlement reformer who has the arrows from my friends on the left to prove it.



Here’s the point: Even if we enacted the platonic ideal of sane entitlement reform, and trimmed defense (as we need to), Republican budget math still doesn’t come close to adding up. Instead, as my colleagues at the Center for American Progress have shown, shrinking spending to sub-Reagan levels while retiring the boomers would involve dramatic cuts in everything else Americans think of as government – from national parks to NASA to the FBI to cancer research to student loans.



So why does the GOP pretend otherwise? Because acknowledging mathematical reality is too politically painful. Because uttering this simple phrase – “to accommodate the retirement of the baby boomers, taxes will need to rise” – is forbidden by official Republican doctrine.



Because official Republican doctrine has banned honest math.



Aversion to honest math explains why the Ryan budget embraced by the GOP doesn’t balance the budget — even after Medicare changes that may prove fatal to the party -- until the 2030s and racks up at least $14 trillion in debt between now and then.



That’s because the Ryan budget cuts taxes. Balanced budget math in an aging America doesn’t work without higher taxes.



This doesn’t mean we shouldn’t cut taxes in the near-term to goose the economy. But when it comes to a long-term fiscal fix, the GOP’s math anxiety has produced months of debt ceiling charades instead of framing the debate we really need, which is this: Once the economy has more fully recovered, how do we lift taxes to fund the boomers’ retirement in ways least harmful to economic growth?



My own view is that this means slashing payroll taxes and corporate income taxes, while more than offsetting those tax cuts with higher taxes on consumption and dirty energy. But we can’t even get to this conversation until Republicans relinquish the fantasy that we can keep cutting overall taxes as America ages.



At bottom, this fantasy masks fear. Republicans’ refusal to let go of the old time religion shows how little work the party has done to craft an agenda equal to America’s current challenges. The party has abandoned problem-solving for brand preservation. If tax cuts aren’t our defining issue, Republican pols ask themselves, what distinguishes us from Democrats? Why should voters choose us?



Maybe the Gang of Six can end the GOP’s war on math, but I’m skeptical. For now, if it’s a choice between defying math and staring into this policy and political abyss, Republicans choose defiance.

July 4, 2011

The Mother of All No-Brainers By DAVID BROOKS

The Republicans have changed American politics since they took control of the House of Representatives. They have put spending restraint and debt reduction at the top of the national agenda. They have sparked a discussion on entitlement reform. They have turned a bill to raise the debt limit into an opportunity to put the U.S. on a stable fiscal course.
Republican leaders have also proved to be effective negotiators. They have been tough and inflexible and forced the Democrats to come to them. The Democrats have agreed to tie budget cuts to the debt ceiling bill. They have agreed not to raise tax rates. They have agreed to a roughly 3-to-1 rate of spending cuts to revenue increases, an astonishing concession.
Moreover, many important Democrats are open to a truly large budget deal. President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way. There are Democrats in the White House and elsewhere who would be willing to accept Medicare cuts if the Republicans would be willing to increase revenues.
If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases.
A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.
The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.
This, as I say, is the mother of all no-brainers.
But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.
The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.
The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it.
The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation’s honor.
The members of this movement have no economic theory worthy of the name. Economists have identified many factors that contribute to economic growth, ranging from the productivity of the work force to the share of private savings that is available for private investment. Tax levels matter, but they are far from the only or even the most important factor.
But to members of this movement, tax levels are everything. Members of this tendency have taken a small piece of economic policy and turned it into a sacred fixation. They are willing to cut education and research to preserve tax expenditures. Manufacturing employment is cratering even as output rises, but members of this movement somehow believe such problems can be addressed so long as they continue to worship their idol.
Over the past week, Democrats have stopped making concessions. They are coming to the conclusion that if the Republicans are fanatics then they better be fanatics, too.
The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.
If the debt ceiling talks fail, independent voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern.
And they will be right.
This article has been revised to reflect the following correction:
Correction: July 5, 2011

What Your Taxes Do (and Don’t) Buy for You By BRUCE BARTLETT

June 7, 2011, 6:00 am


What Your Taxes Do (and Don’t) Buy for You  By BRUCE BARTLETT

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

Last week I showed that total taxes at the federal level — individual and corporate income taxes, payroll taxes and so on — are at a 60-year low as a share of the broadest measure of income, the gross domestic product.
Some readers took issue with my failure to include state and local taxes in the calculation. I have now done that, using data from the Organization for Economic Cooperation and Development, which represents the major developed countries. Among its most important responsibilities is the collection of internationally comparable data on a wide variety of topics, including taxes and health care spending.
The table below shows total taxes, including state and local government taxes, as a share of G.D.P. in 2008, the latest year for which there is complete data. The table makes clear that the United States has very low taxes by international standards.

Organization for Economic Cooperation and Development

When Americans see these data they are usually incredulous that Europeans submit to such seemingly oppressive tax levels. Conservatives, in particular, tend to view freedom as a fixed sum: the bigger government is as a share of G.D.P., the less freedom there is for the people (if government consumes, say, 40 percent of G.D.P., then people are only 60 percent free).
The late Milton Friedman popularized this idea, but even he thought that freedom would not be seriously threatened in Western democracies until government spending reached 60 percent of G.D.P. We are far away from that “tipping point,” as he called it; in 2010, total federal, state and local government spending amounted to 36 percent of G.D.P.
American conservatives tend to ignore the composition of spending; to them, just about all spending is equally bad. Europeans don’t have this attitude because their governments provide them with benefits from which all residents gain.
First is cash allowances that almost all families with children receive. We have something similar, the earned-income tax credit. Because it is part of the tax code, it reduces the tax burden; in Europe such programs are part of the budget and thus raise spending. Moreover, the earned-income tax credit benefits only low-income workers; in Europe, family allowances benefit virtually all families with children.
The impact on the tax burden can be dramatic if one views family allowances as negative taxes. For example, in Luxembourg, an average married worker with two children pays a nominal income tax rate of 16.5 percent (including state and local income taxes), while an American in the same situation would pay 5.2 percent. But once family allowances are subtracted from the Luxembourg worker’s income-tax payment, the effective tax rate falls to just nine-tenths of 1 percent.
More importantly, almost every other country has some form of national health insurance that covers, on average, 72 percent of all health costs. The comparable figure in the United States is 46.5 percent, and almost all of that is accounted for by Medicare and Medicaid, which largely benefit the elderly and the poor.
Average American workers must pay for health care out of their pockets, or through their employers in the form of lower wages. Europeans prefer to pay higher taxes and get government health care for every resident in return.
Conservatives universally believe that whenever the government provides a service it will be vastly more costly than if the private sector does so. This is why they support the plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, to essentially privatize Medicare. Conservatives believe competition will drive down health costs for the elderly.
But O.E.C.D. data show that Americans pay vastly more for health care than the residents of any other major country. In 2008, we paid 16 percent of G.D.P. in total health care costs, public and private combined. The people with the next heaviest health care burden were the French, who paid 11.2 percent of G.D.P. Indeed, at 7.4 percent of G.D.P., the governmental share of health spending in the United States is about the same as total health care costs in many other countries, including (as a percentage of G.D.P.) Luxembourg (6.8 percent), Israel (7.8 percent), Japan (8.1 percent), Britain (8.4 percent) and Norway (8.5 percent).
In other words, if we had a health care system like those in most developed countries, we could, in effect, give every American an increase in their disposable income of 8 percent of G.D.P. – about what they pay in federal income taxes – and have health care no worse than they have in Britain or Japan. It would be like abolishing the federal income tax in terms of allowing people to spend more of their income on something other than health care.
Because most people have little more choice about medical spending than they do about the taxes they pay, one can think of the two as being similar in nature. In the table below, I have added private health care spending as a share of G.D.P. to the tax data in the table above. This puts the United States and other countries on the same footing, by accounting for the fact that they get health care mostly through government while Americans mostly pay for it themselves.

Organization for Economic Cooperation and Development

As one can see, the burden of taxes plus private health care spending substantially equalizes the loss of disposable income in the United States and other countries, because we pay 8.6 percent of G.D.P. for health care over and above what the government pays, whereas those in other major countries pay an average of just 2.3 percent of G.D.P. out of their pockets.

Looking at taxes alone, the burden in the United States is 25 percent below the O.E.C.D. average, but including the additional health costs Americans pay, the United States is just 4.7 percent below average.

In short, a substantial portion of the higher tax burden that Europeans pay is really illusory. They are really just paying their health insurance premiums through their taxes rather than through lower wages, as we do.

Middle-class Europeans also get cash benefits from government that offset much of the tax burden in a way that the United States offers only for the poor. There may be reasons why it is better not to subsidize every family with children and not provide government health insurance for every citizen. But the idea that Europeans are enslaved by high taxes, as most American conservatives believe, is just nonsense.

Another Deficit Plan Targets Taxes By DAMIAN PALETTA

Another Deficit Plan Targets Taxes By DAMIAN PALETTA

A panel of Democrats, Republicans, economists and other experts said Wednesday that a complete overhaul of the U.S. tax code is the best way to address the nation's fiscal problems—a new and likely controversial idea aimed at tackling the growing deficit.

John Bussey discusses a new plan to reduce the deficit from a group led by Democrat Alice Rivlin and Republican Pete Domenici. The group envisions a complete overhaul of the U.S. tax code.
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The report, co-authored by Democratic budget veteran Alice Rivlin and former Sen. Pete Domenici (R., N.M.), follows a separate proposal last week by the two chairmen of President Barack Obama's deficit commission. The many similarities between the two offer a window into the types of proposals that might win backing as Washington launches into what is likely to be a protracted debate on deficit cutting.

The most recent report, put together by a group called the Bipartisan Policy Center, calls for a one-year payroll-tax holiday in 2011 that it says will create between 2.5 million and 7 million jobs.

The plan would lower income and corporate tax rates and offset them with a 6.5% national sales, or "consumption," tax as well as an excise tax on sugar drinks like soda.

The Bipartisan Policy Center was created in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell with the aim of finding solutions to major national issues.

Last week's proposal, from Democrat Erskine Bowles and Republican former Sen. Alan Simpson, also called for an overhaul of tax and spending programs. Other similarities include:

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Alice Rivlin and Pete Domenici in January speaking about the U.S. debt.
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• Changing the formula for social-security taxes so that they are levied against 90% of all wages, compared with the current system, which caps the tax at a certain income level.

• Major cuts in discretionary spending. Both singled out a government policy that allows military retirees to collect full benefits after 20 years.

• Cuts to farm subsidies and either eliminating or limiting certain politically popular tax breaks, such as the mortgage-interest tax deduction.

Democrats and Republicans are largely in agreement that the U.S. debt is on an unsustainable path, and ideas are pouring in from both sides. Rep. Jan Schakowsky (D., Ill.), a member of Mr. Obama's commission, offered her own proposal Tuesday, calling for $110.7 billion in defense spending cuts in 2015 and raising $132.2 billion in revenue by closing certain tax loopholes for companies that she said ship jobs overseas.
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Mr. Domenici, in an interview, said, "In some ways, [the debt] is a silent killer, eating away at our future,"

Because the proposals touch so many key parts of the economy, from taxes to spending, they have triggered opposition. The latest came Tuesday, when Defense Secretary Robert Gates said the proposal by Messrs. Bowles and Simpson to cut $100 billion from defense spending would have a "catastrophic" impact on national security.

Those cuts are "math, not strategy," he said at The Wall Street Journal's CEO Council in Washington.

Mr. Domenici, who spent 36 years in the Senate, called for a four-year freeze on defense spending as part of his report and said Pentagon officials should be less resistant. "Everybody must sacrifice, and our military leaders...must bear their share to get [the debt] under control," he said.

The Rivlin/Domenici proposal is likely to attract the most attention for its proposed 6.5% Debt Reduction Sales Tax, which some will liken to a value-added tax that exists in some parts of Europe.

Rep. Eric Cantor (R., Va.), who is likely to become House majority leader in January, said Tuesday that many lawmakers wouldn't support VAT-type tax because its ties to Europe might make it politically poisonous in Washington.

"I don't think any of us want us to go the direction of the social welfare states around the world," Mr. Cantor said at the CEO Council.
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* discuss

“ Changing the tax structure without controlling federal spending first is a waste of time. ”

—Edward Neis

Ms. Rivlin said the national sales tax was necessary to bring in revenue lost by cutting income and corporate tax rates and putting in the one-year payroll-tax holiday. A "consumption tax was a good way to go rather than try to put more burden on an income tax," she said.

Another change in the proposal would affect health-care costs. The proposal would, starting in 2018, encourage people to purchase private insurance plans by charging higher premiums for Medicare if costs rise faster than certain limits.

Treasury Secretary Timothy Geithner said at the CEO Council Tuesday that the administration was waiting to see what the specific proposals looked like before it weighs in on specifics. He said the ideal situation would combine short-term fiscal policies that help sustain growth with medium and long-term policies that cut the debt.

Write to Damian Paletta at damian.paletta@wsj.com

Editorial Some Fiscal Reality

November 10, 2010 Editorial Some Fiscal Reality
The draft proposal by the chairmen of President Obama’s deficit-reduction commission was a welcome antidote to the low-minded debate that dominated the midterm elections, in which politicians all vowed to reduce the deficit but offered no credible plans.

The proposal, released Wednesday, comes from Erskine Bowles, formerly the chief of staff for President Bill Clinton, and Alan Simpson, the former Republican senator from Wyoming. It frankly acknowledges what most politicians are too cowardly to admit — that deficit reduction will require shared sacrifice.

It lays out sensible principles, prominent among them that deficit reduction should start gradually, beginning in 2012, to avoid disrupting the fragile economic recovery. It also affirms the need to protect the most vulnerable Americans and to invest in education, infrastructure and research and development.

Then it does what any successful deficit reduction plan must do: It puts everything on the table, including tax reform to raise revenue and cuts in spending on health care and defense. It even dares to mention the need to find significant savings in Social Security, Medicare and other mandatory programs.

In a misguided provision, it assumes that spending and revenues should not exceed 21 percent of gross domestic product — a numeric limit that could make it impossible to meet future national needs. In all, however, the proposal is both broad and deep.

It is not clear what the commission’s final report will say. It is even doubtful that this plan would garner the 14 votes from the 18-member commission that are required to send the package to Congress for a vote in December.

At a time when good ideas are depressingly scarce in the political and economic debate, and bipartisan agreement even scarcer, this is a commendable start.

Some first impressions:

TAXES The proposal includes three options for tax reform, two of which would simplify the code by reducing income tax rates while modifying or repealing many tax deductions and other tax breaks. The third calls on Congress to undertake tax reform, while putting in place automatic tax increases if it fails to act by 2013.

The sensible aim is to raise more money — roughly $1 trillion over 10 years — than under the current system. We wish the co-chairmen had come right out and said directly that the country needs to raise taxes. Instead, the proposal says coyly that the tax changes would “reduce the deficit.”

Tax simplification is a benefit in itself. A tax code that is easier to understand is also one that is more likely to be perceived as fair, without which it would be impossible to get public support for reform.

The reforms should go farther. Raising enough revenue in a global economy driven by trade, finance, services and spending will require new sources, such as energy taxes, a financial transactions tax or a value-added tax. A value-added tax that doesn’t fall most heavily on lower-income Americans could be a significant spur to growth, because it doesn’t tax savings.

THE MILITARY The Pentagon, which accounts for half of all discretionary spending, got virtually all it wanted after 9/11. Since the recession, Defense Secretary Robert Gates has cut back several dozen unneeded weapons programs for a long-term savings of $330 billion. He has called for $100 billion in administrative cuts and efficiencies over five years. But he would plow the savings into troops and weapons modernization, maintaining modest growth in overall spending.

The new proposal would go far beyond that, anticipating $100 billion in military budget cuts in 2015 alone — and would put the savings into deficit reduction.

It calls for freezing salaries and bonuses for the Pentagon’s civilian work force and noncombat military pay, cutting weapons procurement by 15 percent and slashing military personnel at bases in Europe and Asia by one-third. All ideas well worth debating.

The most politically volatile suggestion may be to tackle military health care costs, which rose from $19 billion to an unsustainable $50 billion over the last decade. The commission blueprint would raise premiums and co-payments on military retirees who now pay no premiums and very low deductibles. Many of these retirees work in the private sector but opt for much cheaper government health insurance. Their employers would be required to reimburse the government for the employer share of the retiree’s health cost, eliminating what the chairmen say is a government subsidy for a normal business expense.

SOCIAL SECURITY To ensure the system’s solvency over 75 years, the proposal would reduce benefits to most future retirees. It would also subject higher levels of income to the payroll taxes that support the program, while building in safeguards for both low-income and long-lived beneficiaries.

The cuts to middle-class benefits are too large — a function of the fact that the proposal tilts too heavily toward cuts in benefits rather than increases in revenue.

What is important is that the proposal preserves the system’s basic character and successful design: the young support the old via payroll taxes and the rich help the poor via a benefits formula that favors the neediest.

HEALTH CARE The proposals for reducing federal health care costs include some worthy ideas that are usually ducked or weakened because of political or interest-group opposition.

In some cases, the chairmen would go beyond the new health care reform law by strengthening some of the most important cost-cutting provisions that were watered down in the struggle to pass the legislation. It would strengthen a Medicare payment advisory board and cap tax exclusions for employer-sponsored plans at a lower level than the law does.

The chairmen would spread the pain in both ideological directions. They propose caps on malpractice awards that can drive up costs, which is anathema to Democratic-leaning trial lawyers, and, if costs rise faster than targets, they back the introduction of a public plan on the new insurance exchanges, which is anathema to Republicans. All of this is described so sketchily that it is hard to predict the impact.

As we read the chairmen’s proposal, we had one very strong reaction: We hoped the Republicans would pause long enough in their gleeful planning of President Obama’s final defeat, and the Democrats would stop wringing their hands, long enough to read this important document — and then act on it.

Saving Energy, and Its Cost By DAVID LEONHARDT

June 15, 2010
Saving Energy, and Its Cost By DAVID LEONHARDT
There once was a time when the government relied on a very blunt way of regulating the economy. It told companies and individuals what they could do and what they could not do. These were the days of command-and-control regulation.

But then came the market revolution of the last three decades. With the Soviet empire collapsing, the United States economy growing more rapidly than Europe’s, and newly market-friendly China and India booming, people saw the drawbacks of command and control. Governments were usually better off avoiding outright bans and instead giving people incentives to behave in productive ways.

The classic example was environmental policy.

Most famously, a 1990 bill signed by the first President Bush forced coal plants to buy permits if they were going to emit the sulfur dioxide that caused acid rain. With the price of emissions suddenly higher, the plants looked for innovative ways to reduce pollution — and succeeded more rapidly and cheaply than experts had predicted.

This history is the basic argument for putting a price on carbon today, and the next several weeks are likely to determine whether that happens. The chances of Congress’s passing a permit — or cap-and-trade — system that applies to the whole economy are low. But it could still create a version that covered power plants, if not factories and transportation. That would be no small thing.

“There is a little bit of a window,” says Jason Grumet, an energy expert and the head of the Bipartisan Policy Center in Washington. The BP spill has focused attention on energy policy, and Congress still has seven weeks before its August recess. “Setting a price on carbon in the power sector,” Mr. Grumet added, “is the most significant opportunity we have to achieve domestic greenhouse gas reductions.”

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Unfortunately, the great economic strength of market systems like cap and trade also happens to be their political weakness. They set prices and allow people to react. In the process, market systems acknowledge that reducing pollution may actually cost a little bit of money.

Politicians don’t like to admit this, because voters don’t like it. Accepting higher costs is especially hard when the economy is weak. So Congressional Democrats have been repackaging their energy bills to make them look less and less market-oriented. Senator John McCain, who supported a permit system for carbon as the Republican presidential nominee, no longer does. Senator Lindsey Graham, the South Carolina Republican, has reversed his position as well.

What does Mr. Graham now favor? A series of command-and-control regulations. He has introduced a bill with Senator Richard Lugar, an Indiana Republican, that would mandate specific standards for cars, trucks, homes and offices. It would also give the energy secretary the power to award loans to companies he thought could do a good job of setting up programs to retrofit buildings. State officials would do the same for factories. The bill, in short, puts more faith in government than the market.

This approach can certainly reduce the carbon emissions causing climate change. Fuel economy rules have cut per-mile gasoline use by 40 percent since 1975. As a result, vehicles have made more progress on energy efficiency than office buildings, houses and apartments. That’s one reason a cap-and-trade system for power plants — which provide energy to offices and homes — has such potential to reduce carbon emissions.

The Lugar-Graham bill focuses on offices and homes, too, and would make a difference. But it wouldn’t make as much of a difference, and it also has other drawbacks.

In a market system, businesses and consumers have a clear incentive to reduce their carbon use, and they can choose the cheapest way to do so. Some would decide to retrofit current buildings and homes to make them more energy-efficient. Some would buy new, more efficient machinery or appliances. Some would switch to alternative energy and, in the process, create a much bigger market for it.

“Instead of leaving it up to the government to identify the solution and tell people what to do, you are leaving that decision to the people who know best,” says Nathaniel Keohane of the Environmental Defense Fund. “A bureaucrat would never have enough information to do as good a job.”

Under a command-and-control system, businesses and consumers have to focus not just on carbon use but also on the details of the government’s rules: the intricacies of vehicle and building standards, the types of appliances that qualify for subsidies, the fine print of the Energy Department’s loan applications. Each bit of compliance brings costs.

It’s just that those costs are hidden in a thicket of bureaucracy. The fuel economy rules, for example, have raised the price of minivans, pickup trucks and S.U.V.’s by limiting how many can be sold. But the price increase has not been obvious, as it would be with a gas tax. We can pretend prices are no higher than they otherwise would have been.

In some ways, it is not fair to pick on Mr. Lugar, Mr. Graham and the other senators, both Democratic and Republican, who support the command-and-control approach. It is far better than nothing. The ideal energy policy, in fact, would include some ironclad rules and regulations, because people do not always respond rationally to prices. Consultants at McKinsey & Company argue that many families and businesses could already save money by taking simple energy-saving steps, yet they don’t do so. Building standards could overcome their inertia.

But relying only on rules, regulations, standards, loan programs and research financing seems inadequate to the task we’re facing. The last 12 months have been the warmest 12-month period on record, NASA says. Nine of the 10 warmest calendar years occurred in the last decade.

The market is the most powerful tool available for dealing with the costs and risks of a hotter planet. Given how loudly politicians like to proclaim their belief in the market, it sure would be nice if they could figure out a way to make it part of the solution.

E-mail: leonhardt@nytimes.com

Wake-Up Time for a Dream By JOE NOCERA

Wake-Up Time for a Dream By JOE NOCERA

Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.

Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.

“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.

She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.

She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.

She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.

The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.

Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.

•

The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.

And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.

Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”

But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.

Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.

But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!

Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.

The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.

“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”

Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.

Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.

Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”

Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.

Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.

Is that really what we want?