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Brooks Wilson's Economics Blog: Signaling and Tax Reform

Wednesday, May 16, 2012

Signaling and Tax Reform

Candidates for elected federal office must run a dangerous political gauntlet that can both wound the candidates’ election prospect as well as their ability to govern if elected.  One tradeoff that they must make is between committing their vote on issues and maintaining neutrality to allow negotiating.  Voters know where a candidate stands when they signal their positions but committed votes on too many issues transforms a congressman or senator into an ineffectual ideologue who is unable to cut deals.  Voters may not know where the pragmatist stands but she can engage in the give and take required to pass legislation in divided government.  A great candidate may be able to convey their ideology without committing their vote.  Most elected candidates are a little above average.

Most republican candidates have committed their votes on tax reform by signing the following pledge

I, _______________, pledge to the taxpayers of the _____ district of the state of__________, and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Democrats have left themselves a little more negotiating room on taxes but have less specifically committed to maintaining current levels of entitlements to be funded by increasing taxes on “millionaires and billionaires.”

Voters seem to prefer ideologues but the intransigence it causes does not bode well for the nation’s fiscal well-being. We face a long period of mounting debt caused mostly by deficits in entitlement programs.  Political stalemate preserves the status quo and will eventually bankrupt entitlement programs causing a fiscal crisis similar to what Greece, Italy, and Spain face today. 

Neither Republicans nor Democrats control a 60 seat majority in the Senate after the election.  The other party will be able to block any legislation from either side that could solve the problem. 

I prefer small government to large, but I would rather have a big government like Germany’s than ineffectual government like Greece’s.  My guess is that most Republicans have the same preference.  Similarly, Democrats who insist that the rich fund a more government expenditures should recall that all countries, even the poorest have wealthy elites.  Only a handful lead by the United States have a health middle class.  Our political and economic institutions have not primarily benefited the 1% but the 99%.  As I prefer Germany to Greece, I believe that most Democrats would likewise prefer the smaller safety net of the Eisenhower administration to that of Greece.  Certainly there is room for compromise.   

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