The New Republic

We should want a tax code where assessment matches ability to pay. It does little good to have someone with expensive in home medical care of $300,000.00 a year to have their medical deduction capped at $50,000.00. Or someone who sued for taxable compensation and has to pay 1/3 of it in attorneys fees, but can't deduct the fees. I'm against a cap on deductions and in favor of getting rid of the capital gains dividend preference because it tilts investment away from small business toward the secondary stock market. And a higher top rate is easier to collect.

- Nusholtz

November 21, 2012 at 7:33am

Galston has a series of posts at the Brookings site over the past two years outlining his approach to tax reform. Here's how he concludes his post on April 23, 2012: "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." Not sure about that. His proposal here, capping personal deductions at $50,000, is different from his proposal at Brookings, which is to cap the tax rate used to calculate personal deductions (such as 15%) not the absolute amount so that each taxpayer, no matter his tax bracket, would derive the same relative benefit. Whatever. In his April 19, 2012, post he makes the case that tax policy does not have an appreciable effect on inequality, citing Noah among others who have studied inequality. Galston's narrow point is that tax reform may have benefits but reducing inequality isn't one of them, so forget about less inequality as a goal of tax reform. Galston's broader but unstated point is that tax policy should be aimed at raising sufficient revenues to pay for the size of government that we want, not to achieve other salutary purposes. In other words, if lower rather than higher marginal income tax rates at the top would raise the required amount of revenues (achieved by lowering tax expenditures), then so be it. Well! I'm not convinced that tax policy has not had an appreciable effect on inequality. In his book, Noah says other factors had a greater effect on inequality, not that tax policy had no effect. Those who have studied the issue often look at primarily at the income tax, in particular the top income earners and top tax brackets. I believe they are looking in the wrong place. It's the enormous increase in payroll taxes, adopted when Reagan was president but phased in over a long period, that has decimated the lower and middle class, leaving them little if any income to save and thereby improve their economic well-being over time. Galston disagrees, and he may be right and I may be wrong. But Galston's recommendations must be considered in the context of his premise. My long-running criticism of the Galston version of tax reform (which is to broaden the base and lower the rates) is its political (not economic) weakness: tax rates, once cut, require an act of God to increase, whereas tax expenditures grow like kudzu. To ignore that political lesson is to ignore history, and to put us on a path of endless deficits and bankruptcy.

- rayward

November 21, 2012 at 7:46am

"But wouldn’t it be better for the President and the country to make real and visible progress toward solving our problems?" True. And going over the fiscal cliff WILL make real and visible progress. Short of that, the Republicans have verbally expressed willingness for all kinds of compromises, which when offered and push comes to shove, they reject. They've rejected it to the point of holding America hostage on no less than three separate occasions to their refusal to raise taxes. That being true, it's really not the President's fault that "real and visible progress" has been impossible until now.

- AllanL5

November 21, 2012 at 9:01am

Galston quit your handwringing and grow a pair - first, irresponsible Bush tax cuts must first meet their demise and then Obama can suggest his own tax cuts.

- NR138704

November 21, 2012 at 12:19pm

People claim that tax reform will create growth. With effective tax rates so low, that's a dubious claim, but let's take it at face value. The argument rests on two ideas: (1) that complexity creates inefficiency and (2) that some deductions/preferences push economic activity in inefficient directions. It seems to me that a cap on deductions isn't a good way to decrease the complexity of the tax code. When force people to do another set of calculations (to determine whether someone had reached the cap), you're not exactly cleaning things up...regardless of whether you end a bunch of deductions....

- Virginia Centrist

November 21, 2012 at 5:35pm

Doesn't work for the deficit, doesn't work for income inequality, doesn't work for growth, has nothing to do one way or the other with the spending issues. Otherwise, it's just great, works for everyone by accomplishing little or nothing. Fundamentally, Galston has drunk the right-wing supply-side Koolaid that the tax system should be less progressive because this would promote growth. He tries to disguise his come-to-Jesus supply-side wackery with muddled centrism of the, "Can't we all just get along?" variety. But, make no mistake, he is pitching supply-side voodoo economics. We really do not have much of a spending problem, or at least not one that can be solved via the federal budget and/or so-called tax reform. Yes, our military spending doubled as a percentage of GDP over the last decade, going from 3% to 6%, and should be reduced. That is not a tax issue. It is addressed by reducing military spending. Yes, entitlements have grown significantly. That is in part due to demographics, the boomer retirement bulge, and in part due to the fact that our health care costs are out of control. We could reduced costs with means-testing. Great. Upper-class tax increase. Nothing to do with the income tax. We could stiff retirees. But why? This country is wealthy and can afford to support retirees at a decent standard of living. Nothing to do with the income tax. Medicare will break us eventually, but that's only because the health care system is breaking us, and will do so with our without Medicare unless we simply deny needed care. We have to control our costs in the same way every other advanced industrial economy does, some form of single-payer. Nothing to with the income tax. Meanwhile, we have a $600 billion annual deficit in the Federal operating budget, just because we don't collect enough in income taxes. Obama's proposed revenue increase of $1.6 trillion over 10 year is only about 1/4 of that. We should both restore the Clinton rates, at all levels, AND limit aggregate deductions and tax expenditures, including limiting capital gains. But that is merely a first step. Overall, the tax system needs to be made more progressive, by raising the zero bracket and increasing the rates at the top. Middle class tax cut, upper class tax increase. Is Galston's compromise a step in that direction? Not really. Supply-side wackos, like Galston, may continue to believe in the face of overwhelming evidence to the contrary that low rates on high incomes promote growth. It is nonsense, however. Voodoo economics. There is no reason to continue to feed the lie as Galston wants us to do. Because he believes the nonsense. All Obama has to do is let the Bush tax cuts expire. If the Republicans will not then agree to a middle class tax cut -- something we don't need and should not do in terms of economics but is necessary because of the anti-tax snake-oil that supply-siders (including Galston) have been selling. But if the supply-siders themselves won't agree to the middle class tax cut, that would be a great outcome. On the spending side, unless we are going to significantly cut military spending, introduce means-testing for entitlements, or adopt a single-payer health care system, we are better off continuing our current spending and raising taxes to pay for it. What Galston and his ilk can never get through their heads is that all of the output represented by government spending is being produced by the economy, without regard to whether it is publicly or privately financed. We can necessarily afford it because we are producing and consuming it. It is therefore necessarily that case that we can have a tax system that raises sufficient revenues, because the output is there already. It is only a matter of who gets what share of it. If the taxes are levied on the investment class that cannot spend its income and doesn't -- lending it to the government to cover the deficit -- a tax system that raises sufficient revenues need not have a significant adverse impact. And for income equality? We need a more progressive system, not a flatter system with lower rates. If we think we should have deficits that decline as a percentage of GDP, all we need to do is raise taxes. If we raise taxes, the only question is, whose taxes? The answer ought to be the taxes of the 20% who now have 60% of GDP as their gross income. Galston's problem is not that he needs to stop his hand-wringing and grow a pair (although both are no doubt true). His problem is that he is nothing but another supply-sider trying his damnedest to appear not to be in the hope that the rest of us will therefore buy into supply-side nuttery wrapped up as compromise. Supply-side nuttery got us into this mess. Abandoning supply-side nuttery is the only way out.

- roidubouloi

November 21, 2012 at 5:42pm

"a tax system that raises sufficient revenues need not have a significant adverse impact on aggregate demand"

- roidubouloi

November 21, 2012 at 5:46pm

What I call the Federal operating budget is the Federal budget exclusive of social security, Medicare, and Medicaid less incomes and excise taxes. Social security, Medicare and Medicaid are the entitlements, funded principally with payroll taxes. We have a $600 billion deficit in the operating budget and more or less the same deficit in entitlements. Our biggest problem is our refusal to fund the ordinary operations of government, not the entitlement deficit. We should be funding the operating budget with sufficient taxes, reducing and eliminating the entitlement deficit by (1) means testing, (2) controlling medical costs through single-payer, and (3) broadening the tax base for entitlements to include all earned income, not just labor income. If Medicaid is counted in the operating budget, as it is a means-tested poverty program and not a "middle-class entitlement." Nearly $300 billion goes to Medicaid and CHIP. If we count those on the operating side, as they should not be funded only by wage-earners, then the operating budget deficit is $900 billion and the entitlement deficit only $400 billion. Entitlements are not the big problem, particularly since they have trust funds and were designed to run surpluses and deficits. The PROBLEM is that we do not fund the operating budget. The Galstonian handwringing over entitlements is just more of the same supply-side scam. If we fully-funded social security and Medicare, either with means-testing or payroll tax increases, we would still have a huge deficit BECAUSE OF SUPPLY-SIDE TAX CUTS! Galston and the rest of the supply-side piranha want to shift more of the tax burden to the middle class even though its share of GDP has shrunk over the past 32 years, since we first made suppy-side nuttery official policy under Reagan. That would not only be devastating to the middle-class but would slow growth further by dampening demand. Stooooooooopid. The sort of thing only an economic ignoramus would want to do. And where would we find someone like that? If tax revenues are needed, they should, both for equity and growth, come from the top tier of earners where most of the income is. Other alternatives? Cut the military budget back down to 3%. That represents half of the Federal operating budget deficit of $900 billion (including Medicaid in operations). If the Bush tax cuts were allowed to expire in their entirety, we would nearly reach balance in the operating budget and would reach balance in a couple of years. The operating deficit is due to Bush's tax cuts, Bush's unfunded wars, now embedded in the military budget, and Bush's recession. Get rid of the tax cuts, restore the military to its Clinton era percentage of GDP, and when we get back to full employment we will not have an operating budget deficit. Galston, as ever, is rowing backwards. Entitlements area being used as an excuse for a more regressive tax system. There is no rational connection, and we need a more progressive system, not a more regressive system, to spur growth. The more I think about it, the worse Galston's compromise appears. He is generally wrong about everything when it comes to economics and finance. No different here.

- roidubouloi

November 21, 2012 at 6:36pm

Roid, so are you trying to say that you don't agree with Galston? Just kidding :-) I do have a serious non-rhetorical economics question if you can spare a moment. In your view, is there a theoretical tax maximum on the say top 1% of earners that would impede growth? Hypothetical example, suppose we were to come up with a tax structure that effectively taxed income above $2 million at 90% and then spent those revenues on social programs. Would that hurt economic growth? Thank you for sharing your knowledge.

- Nicomachus

November 21, 2012 at 10:05pm

Sorry Nichomachus not to have been back here for a while. I don't know of any theoretical basis for establishing how much is too much. There is general agreement that 100% would be too much, in the sense that earners would not bother generating income that is taxed at 100%, but it is not clear that even that would inhibit growth. By limiting the ability of one actor to exploit a given market, it might even enhance growth. Withal, we had a 90% or higher top marginal rate from the beginning of WWII to 1960 or so and a 75% top marginal rate from 1960 to 1980. We also had the highest growth in our history from 1940 to 1980. Thereafter, growth slowed.

- roidubouloi

November 25, 2012 at 12:53am

Every criticism leveled here against Galston is well-earned. Galston's BS is around 50% of why I haven't yet chosen to renew my subscription to TNR. Get rid of the self-righteous, economically ignorant fellow. Everything he says is centrism of the worst sort, and often can be shown to be objectively wrong. Nichomachus, according to Krugman and others, there's a thin consensus (based on some recent research) that the upper limit on income tax rates (after which they become inefficient economically and revenue-wise) is around 65% to 70%. A slight correction to Roid: between 1961 or so and 1979, the top marginal rate was 70%, not 75, though when deductions are counted, the 'practical' top rate was probably closer to 45% during this period (this comes from Robert Reich).

- Curran1

November 25, 2012 at 9:20pm

Thanks, Curran. I was reading from a graph and had to eyeball the 75%. Not sure how Reich came up with that, but the same graph suggested that the average, not the marginal, top rate during the period was in the neighborhood of 45-50%. That implies a higher effective marginal rate. Can you explain the concept of "inefficient" connected to that research pegging 70% as the outer bound? wikipedia has a nice chart, 1940-2011, that shows an unambiguous positive correlation between employment growth and top marginal rates, with the highest growth in employment coming with rates over 75%. The high rates may not cause the growth, but certainly don't seem to inhibit it which is why I raise the question what is meant by "efficiency" in this context.

- roidubouloi

November 25, 2012 at 10:21pm