POLITICS APRIL 23, 2012
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If I were forced to choose after the election between extending the Bush tax cuts in total and letting them all lapse, I would join Tim Noah in opting for the latter. But I'm reluctant to assume that's the best we can do. Indeed, as frustrating as the gridlock in Washington is, we should use it as an opportunity to strip down the tax debate to its basics, and reflect on where we want to go. Then we can determine the path that gets us closest to our goal.
In my judgment, the tax code we should aim for should have four key features. It should promote growth, or at least not obstruct growth by diverting resources from productive uses. It should be fair: It should treat taxpayers at similar income levels similarly, and it should tax individuals and families in accordance with their ability to pay. It should minimize complexity, to reduce both compliance costs and opportunities for manipulation. And it should raise enough revenue to pay for the government the American people want. Tax experts tell us that these features are in tension with one another, which means that policy makers must try to strike a reasonable balance among them.
Simply allowing the Bush tax cuts to expire on December 31 would fall afoul of at least three of these principles, and probably all four. It would pour a lot of new wine into the same old bottle—a tax code not notable for simplicity, fairness, or its propensity to promote growth. And while phasing in a tax increase would raise significant revenues, a large all-at-once hit to a still-fragile economy could end up reducing a growth rate that was already far from robust, cutting revenues down the road.
Instead, we need to focus on broadening the base of our tax system, in two ways. First, we need to reduce tax expenditures—the many deductions that currently riddle the tax code, most of which violate all four of my principles. I agree with those who argue that proceeding line by line isn’t likely to succeed, as each deduction has backers who would jealously guard it. Instead, we should adopt what might be termed a Comprehensive Flat Tax Deduction. Taxpayers would simply add up all their current deductions, multiply them by a rate that would be the same for all taxpayers (but lower than the top marginal rate), and deduct the result from their taxable income. This simple change would reduce the extent to which deductions now narrow the base of our revenue system. (CBO estimates that setting the rate at 15 percent would raise $1.2 trillion over the next decade; a 28 percent rate would raise less than half that amount.) It would also reduce the massively regressive impact of current tax expenditures, by making deductions less valuable for those at the top and more valuable for those at or near the bottom.
The second strategy for broadening the base of our code should be to look beyond income. No other advanced democracy focuses on income—individual or corporate—to the extent that we do. We should follow other countries' lead in taxing consumption as well. My preference would be a carbon tax, which would both raise money and reduce greenhouse gas emissions. But a Value Added Tax on goods would also be acceptable. We could consider doing some of each. Introducing such alternatives could allow us to further lower marginal rates on income, consistent with our overall revenue requirements. There’s something in this strategy for everyone, including environmentalists, businesses that export, and conservative supply-siders.
But all of this will remain abstract and formulaic until we can agree on the size of the government we want our revenue system to finance. Along with most Democrats, I reject the proposition that historical averages offer a sound guide to the future. Demographic changes over the next three decades mean that even with significant reforms to the major entitlement programs, the federal government will consume a somewhat larger share of GDP than it did during most of the post-war period. It is difficult to believe that we’ll be able to make do with a revenue system that raises less than 20 to 21 percent of GDP on a sustained basis.
Most Republicans would choose a substantially lower number, and there’s no hope of resolving this dispute until the public weighs in. That’s why both sides should be willing to wage the 2012 election on the most fundamental domestic questions we confront: How much government do we want, and how will we pay for it? Paul Ryan’s budget, which Mitt Romney has endorsed, clarifies the consequences of holding revenues to post-war averages over the next generation. Discretionary spending would be slashed to levels not seen in generations, while rising health care costs would be shifted to Medicare beneficiaries and state governments. President Obama should hammer these choices home—relentlessly, day by day, speech by speech, between now and the election. If he prevails, he will have created a political predicate on which to build his second term.
That doesn’t mean that we’ll be able to agree on comprehensive tax reform during the post-election lame duck session in which the fate of the Bush tax cuts—and perhaps a larger tax deal—will be determined. The President may be forced to allow the Bush tax cuts to expire without any alternative in sight. But Democrats shouldn't mistake that eventuality for some sort of grand political victory. We would be better off hoping that the threat of a tax hike that no one really wants will finally force Republicans to agree to a fairer, simpler, pro-growth code, one that yields the revenue that the country needs.
William Galston is a senior fellow at the Brookings Institution and a contributing editor for The New Republic.
10 comments
I'm dead set against a VAT because I just can't imagine having to collect that on top of state sales taxes . I think a cap and trade scheme would be a good idea but what it could do to already very high gasoline taxes is troubling . In this current political climate , even assuming as good a result as we could realistically expect this November , step at a time tax changes leading toward sanity would be great work. Getting rid of the worst of tax expenditures seems to be the most plausible and achievable path . At least on our side there is a good deal of agreement on alot of changes . The top earners have to kick in more . The AMT just has to be gotten rid of in its current form and replaced with a Buffett rule or something like that. Some changes in the differential between the current treatment of capital and wages would be a must . The " carried interest " rules and such. I'd like a transaction tax on trades too . Galston's idea of simplifying and broadening the base with a deduction % has some appeal but I think that alot of the particular tax expenditures we now have are bad enough to have some ugly political fights to get get rid of them.
- alanwilkov
April 23, 2012 at 12:53am
We need an efficient system that collects the most revenue with the least damage to the economy and that is a progressive system with higher top rates. A secondary measure of less importance but consistent, is to minimize the need for the exertion of government power and tax litigation, including criminal cases. When you leave large pools of money untaxed, the balance of the country struggles harder to make up the deficiency and that type of system is what we have currently, and it is not what I am talking about.
- Nusholtz
April 23, 2012 at 7:49am
Galston being an expert on politics, I assume he is offering political advice to Obama rather than tax advice. I have a few quibbles with the politics. First, about the optimal size of the federal government, ask the recipients of social security and Medicare if they are part of the 20%-21%, and they will say absolutely not. No, it's the malingerers who are. Second, about those tax expenditures, Obama starts talking about taking away the mortgage interest deduction and group health insruance exclusion and he might as well call Mayflower. Third, about that VAT, Obama isn't satisfied with just taxing income, now he wants to tax consumption as well! Some of Galston's suggestions may be good policy, but the politics are dreadful. For Obama, anyway.
- rayward
April 23, 2012 at 8:02am
Let me save you some time and call you on the BS straight-away: we can't solve our problems with the debt, the deficit, our revenue shortfall, our antiquated tax system, or the inelegant composition of different tax streams unless we first solve the problem of the Republican Party uniformly deciding that the best government is one so starved of revenue that it must cease to function. We're not dealing with a Republican Party that has much buy-in to what the government does. At least Southern Democrats, racists though they remained throughout the 1970s and 1980s, evinced some concern towards defending policy achievements of the Democratic Party. Republicans only support Medicare because old people vote Republican out of short-term class interests. Norquist delenda est. If you can open up half of the Congress to mathematical freedom and gave them the ability to walk the halls of Washington without fearing that putting the country first would lead to close battles with extremist minorities, I can begin to care about any of the pre-packaged compromises that 2011 taught Democrats were just actively harmful wastes of time.
- chaitless
April 23, 2012 at 8:28am
Bottom line: letting the Bush tax cuts expire is a better policy than renewing the cuts. It's also politically easy to do. Even for vthe middle class, US tax rates are lower than most other developed countries. As to how letting the cuts expire would affect the overall economy-- including unemployment and growth, that actually a very tough call--- and depends on how the extra income is "spent".
- drofnats1
April 23, 2012 at 9:05am
is Galston going to write his picks in his fantasy football league next because that will have just about the same kind of impact. A VAT? There is a snowballs chance in hell of that happening so why bring that up? I am sorry but we have to talk small bore for a second Obama term, let the tax cuts expire and then Obama can come up with his own tax cut in exchange for reforms raising the debt limit. What I find more likely is that Obama will tackle entitlements instead and pull a Ryan as well by having all the reforms phase in after he is out of office. Ultimately I think Obama cares about one thing only for his second term, and that is to get unemployment under 6% so any revenue increases during his own term you can forget about.
- blackton
April 23, 2012 at 9:22am
"Norquist delenda est". Very clever, Chaitless. You do not fail to impress.
- Tristan
April 23, 2012 at 10:58am
The first article today -- The Operator -- focuses quite a bit on the NIMBY problem. We all want hazardous radioactive waste stored somewhere -- but not in our backyard. So why not Texas? Couldn't happen to a nicer, more deserving state. Or at least to the oligarchs who control and own it. This article focuses on the "no free lunch" problem. We (except for a few billionaires) want the benefits of government service -- Social Security, medical care, assistance for deserving poor and unfortunate, protection against natural disasters and our enemies. That's why we have taxes. And we all want somebody else to pay taxes, and at the very least, a homeowners' deduction on our taxes. After reading both articles I conclude that Harold Simmons should be required to live in and care for the Texas toxic waste dumb and he should have all but $100,000 or so of his personal wealth confiscated to pay my taxes and your taxes. Two problems solved with one swat of the flyswatter. If Harold is reading this -- just kidding, bro.
- skahn
April 23, 2012 at 5:02pm
alanwilkov you don't need to worry about it being put on top of the state sales tax system. States will almost immediately switch to a VAT if it is put in place at the federal level. It would increase their revenue and be easier to collect. States like to follow federal tax reforms so their tax codes match the federal tax code. It just makes things much easier for them. After 1986, states across the country re-wrote their tax codes to be in better harmony with the federal system, and they'll do it again for a VAT. That said a VAT is not a great solution. If we are going to put in a VAT, we should at least use it to take away some of the payroll tax. In fact, it is not out of the question that a VAT could raise enough money to completely eliminate the payroll tax. I think that's something that could win some political support. You'd have to bar the old people who'd go apoplectic if that happened from voting, but I still think it's possible
- Hasdrubal
April 23, 2012 at 10:24pm
Eliminating the cap on income subject to the Social Security tax would extend the solvency of the Social Security Trust Fund till 2083. A financial transactions tax of 0.1% would raise about 100 billion a year which is about how much additional revenue we need to fund our national infrastructure. The re-clogging of the tax code with tax expenditures since the 1986 Tax Reform Act points to a different approach to tax reform. The best tax reform would eliminate all deductions, exemptions, credits and loopholes in the tax code. All tax brackets would be replaced with a sliding scale percentage that incrementally increases as income increases. Income from investment and wages from work would be taxed exactly the same. The hidden government programs concealed in the tax code that have merit should be re-written as stand-alone spending programs. The brilliant spotlight directed towards discretionary spending will separate the wheat from the chaff. Mr. Galston misses the most important point about Republicans and tax reform, they want it revenue neutral. Revenue as a percentage of GDP was 15.4% in 2011. Even the Ryan budget couldn't live with that and has magically projected that revenue as a percentage of GDP will rise to 18% by 2014 while not raising taxes. I wish Mr. Galston would ask Representative Ryan how that's possible.
- rsalzberg
April 24, 2012 at 4:33pm