Megan McArdle | Dems want more revenue, but where will they get it?

For starters, there’s a matter of timing.  President Obama just successfully raised taxes on the rich. Is he going to go back and do it again in a few months?  I’m not sure about the optics here: while I think that a tax increase on the rich was popular and inevitable, I don’t think that Democrats will do well to position themselves as the party that does nothing but demand more tax increases, even on rich people.  Moreover, each successive tax increase is likely to be less popular than the last, precisely because the most politically popular increases inevitably get passed first.  A return to the Clinton-era tax levels on people who make more than $450,000 a year is, politically speaking, a no-brainer.  A further hike will peel off a few voters who just wanted the rich to pay their "fair share" and now feel content.  The third hike will be pushing rates close to 50%, if it is to raise any money at all.  That seems to be pushing pretty far past most Americans’ ideas about what tax rates ought to be.

Now consider the potential alternative sources of extra revenue.  Which of these do Democrats actually want to do?

1. Limit personal income tax deductions: In theory they’re totally in favor of getting rid of loopholes.  In practice, they’re maybe willing to attack the carried interest deduction for hedge fund managers, but this raises a trivial amount of actual cash for federal coffers. All the real money is in the the child tax deduction,  various educational deductions and credits, the mortgage interest tax deduction, the charitable deduction, and the deduction for state and local income taxes.  Touching the first is political suicide, and touching the rest is a slightly more exotic form of political suicide.  Ending the state and local income tax deduction would create instant political pressure to shrink blue state government, and also of course be bad for blue-state taxpayers.  The mortgage interest deduction also disproportionately benefits blue-state homeowners whose homes sit on expensive land.  Educational tax credits are also a boon to various Democratic constituencies, including educational workers.  And nonprofits are a very liberal sector that many policymakers and legislators move in and out of.


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