海角大神

During this last week of summer, I am barely keeping up with the August-recess fiscal policy news. Luckily there鈥檚 not much to keep up with. But last week the President鈥檚 Economic Recovery Advisory Board (sometimes affectionately(?) referred to as 鈥減ee-rab鈥� (PERAB)) issued their . I was on a long drive to visit family in Michigan, but fortunately and , two of my favorite experts/commentators on tax policy, got right on the case and blogged on the report, right through their yawns. Both were disappointed as well as bored.

to be a boring disappointment鈥揳 pretty useless rehashing of academically-noncontroversial tax reform ideas that would do little to advance the political debate in the direction it desperately needs to go. That鈥檚 because the effort began with the implicit premise that tax revenues don鈥檛 need to be raised鈥搕hat what we need is revenue-neutral tax reform (raising the same level of revenue but more efficiently), when in fact the fiscal outlook makes it clear that we need revenue-gaining tax reform. Then on top of that, the PERAB was told they not only couldn鈥檛 raise taxes on average, they couldn鈥檛 raise taxes on any households with incomes under $250,000鈥搃.e., of households. This latter restriction makes it hard to do anything to address the major sources of economic inefficiency/distortions in the tax system, because people all over the income distribution currently benefit from the various and very expensive tax expenditures (鈥漢oles鈥� in the tax base) under the current system.

As a result, the PERAB tax reform report is like the tax-side equivalent to a no-pain, 鈥渃ut (only) waste, fraud, and abuse鈥� report. It doesn鈥檛 tell it like it is in terms of what really needs to be done via tax reform to help our nation fiscally and economically. What we need to do isn鈥檛 complicated at all; it鈥檚 just kind of painful to hear. Here鈥檚 my list that is simple if not sweet:

1. Raise More Money. Raise revenues as a share of our economy above its 鈥渉istorical average鈥� of 18 percent. The 18 percent figure is not the 鈥渞ight鈥� number just because it鈥檚 been the average one. In fact, we need to raise it above where current-policy extended would take us (just read the CBO reports to understand why), which means we have to start thinking of tax reform as how to raise more revenue, not just the same amount of revenue, in the most economically efficient and equitable way possible.
2. Even Things Out. Raise revenues more efficiently by broadening and 鈥渓eveling the playing field鈥� called the federal income tax base. Revenue-increasing tax reform necessarily implies the overall, economy-wide average tax rate will go up鈥搉o matter how the reform is structured. But raising revenues by filling in the 鈥渉oles鈥� in the income tax base (reducing tax preferences or 鈥渢ax expenditures鈥�) keeps overall marginal tax rates low by raising marginal rates only on those forms of income that currently face very low or even zero tax rates. Raising effective marginal rates on those forms of income that are currently under-taxed would reduce rather than increase the distortionary effects of the income tax. (There are also fairness concerns that motivate such 鈥渓eveling鈥� of effective tax rates.)
3. Act European. Not in the way conservatives who oppose raising revenues/GDP warn about: those 鈥淓uropean level (marginal) tax rates鈥� necessary to close the fiscal gap using increases in marginal tax rates alone. I mean engage in more 鈥淓uropean-style鈥� taxation by taxing more things that are鈥搃f not more pleasant to tax鈥揳t least less economically harmful to tax than the things we tax now. The two prime examples I鈥檓 thinking of: (i) environmentally-harmful activities (e.g., carbon-based energy via a carbon tax), and (ii) consumption (via a value-added tax). This is really a corollary to the 鈥渆ven things out鈥� directive: by adding tax bases that are more efficient to tax (in addition to broadening our existing income tax base), we can raise more revenue by leveling effective marginal tax rates across different sources and uses of income rather than simply raising marginal tax rates on the types of income or consumption that are already taxed most heavily.

The President鈥檚 tax reform panel was prohibited from uttering any of these three simple truths. I hope the President鈥檚 fiscal commission will be less constrained, because tackling the much broader task of achieving fiscal sustainability makes tax reform according to these truths even more critical to the overall mission.

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