海角大神

罢辞诲补测鈥檚 and give me occasion to say 鈥渉ere, here鈥� as well as an excuse to trot out yet again a really old point (or maybe three points) I鈥檝e made over and over again on this blog (but which I personally never tire of as long as it鈥檚 clear most Americans and our policymakers still 诲辞苍鈥檛 get it):

1. We need more tax revenue;
2. the current-law baseline is a good 鈥渞ole model鈥� for the right level of revenue; but鈥�
3. sticking to current-law baseline revenue levels doesn鈥檛 require sticking to current tax law, and doesn鈥檛 even require seeing marginal tax rates go up.

Donald explains 鈥渨hy taxes are [inevitably] going up鈥� (it鈥檚 going to be impossible to flat-line health spending or otherwise reform entitlements fast enough), and he points out that the CBO baseline shows us that taxes are already scheduled to go up according to what鈥檚 already in current tax law:

Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy. The Congressional Budget Office estimates that tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 if current law remains in place鈥�

That rapid growth reflects six factors. First, the economy will recover, lifting revenues from currently depressed levels. Second, the 2001 and 2003 tax cuts will expire, as will tax cuts enacted in the 2009 stimulus. Third, the Alternative Minimum Tax, which is not indexed for inflation, will boost taxes for millions more taxpayers. Fourth, the new taxes that helped pay for the recent health legislation will go into effect. Fifth, retiring baby boomers will make more taxable withdrawals from tax-deferred retirement accounts. Finally, in a phenomenon known as bracket creep, growing incomes will push taxpayers into higher brackets and reduce their eligibility for various credits.

So one way to achieve a more sustainable outlook as far as the revenue side of the budget goes is to just let current tax law happen鈥揳nd avoid passing any new tax legislation, including any extension of any of the Bush tax cuts. But that鈥檚 not the only 飞补测鈥�

Ruth discusses an alternative tax policy strategy made popular by President Obama: raise taxes only on the rich. (You see, the trouble with currently scheduled revenue increases is that much of that revenue would come from the middle class.) It sounds like a great idea, until you realize that relying on such a small fraction of the population for most of the needed tax revenue sets up a really tiny tax base that requires really high marginal tax rates in order to raise the required level of revenue鈥損recisely the economist鈥檚 definition of a highly inefficient tax system. It gets all economists, even those not considered 鈥渟upply-side鈥� economists, nervous. And it sets up a bad political dynamic where people will be encouraged to clamor for more government spending without regard for its cost, when they think that it鈥檒l always be someone else (those ultra-rich people and those evil corporations) who will pay for it.

But we also probably 诲辞苍鈥檛 want to let current tax law totally play out because some of those tax increases Donald lists we really 诲辞苍鈥檛 want to see鈥搒uch as an alternative minimum tax that would extend its reach down to those considered truly 鈥渕iddle class.鈥� And even those tax increases that 诲辞苍鈥檛 seem quite so objectionable鈥搒uch as letting the entirety of the Bush tax cuts expire (at least eventually) and going back to Clinton-era income tax rates across the board鈥搒till raise marginal tax rates in ways that would increase the inefficiency of the federal tax system and could at least partially offset the positive economic effects of deficit reduction.

The that sticking to current-law baseline revenue levels is a good and fairly immediate strategy for fiscal sustainability (where debt/GDP is relatively stable, staying below 80 percent over the next 25 years). In contrast, CBO鈥檚 鈥渁lternative fiscal scenario鈥� assumes the bulk of the Bush tax cuts, the ones President Obama wants to keep, are extended, which leads to debt reaching 185 percent of GDP in 25 years (and continuing to grow exponentially thereafter). as 鈥淭emptation鈥� in his graph above but I think it should be more accurately labeled 鈥淒one Deed鈥�, those being the tax cuts exempted from the statutory pay-as-you-go rule.

But the funny thing is that current tax law is probably not the best way to raise the current-law level of revenues. Put this challenge to any tax economist: how can we raise that given level of revenue most efficiently? 鈥揳nd you will get the answer that we need to find the marginal (new) sources of revenue from the broadest, most neutral/efficient tax bases available to us. There are two main possibilities here, and I think we ought to seize both possibilities:

1. reform the existing federal income tax system to clean up and broaden the income tax base鈥揺.g., close up inefficient tax expenditures that 鈥減oke holes鈥� in the income tax base (the many exclusions/exemptions, deductions, and credits); or
2. add on 鈥渃leaner鈥� (broader, purer, or externality-correcting) new tax bases鈥揺.g., an add-on value-added tax (VAT) or environmentally-motivated taxes such as a carbon tax.

With these sorts of base-broadening strategies to achieve current-law revenue levels, marginal tax rates on productive economic activities 诲辞苍鈥檛 have to come up. Thus there doesn鈥檛 have to be a tradeoff between the positive economic growth effects of deficit reduction and the negative economic growth effects of higher marginal tax rates on income. There doesn鈥檛 have to be a tradeoff at all.

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