Is it time to rethink the scale and progressivity of the tax system?
Is the US tax code both too small and too progressive? That鈥檚聽聽of Alan Viard and Sita Nataraj Slavov of the American Enterprise Institute. If they are right, Donald Trump, Hillary Clinton, and most politicians of both political parties are looking at tax policy exactly backwards. They should be thinking about a tax system that is both raises more money and is less progressive.
The US tax code is among the most progressive of all Organisation for Economic Cooperation and Development (OECD) countries. That聽level of progressivity鈥攚here high-income households pay a larger share of their income in taxes than lower-income households--has been a bedrock goal of Democrats for decades. And it has the potential to reduce income inequality.
However, Viard and Slavov argue that in reality the US tax code does relatively little to reduce inequality because it collects so little in taxes, or in their words, because it is so small. They note that, despite frequent rhetoric to the contrary, the US tax burden is among the lowest of all developed countries. All taxes in the US take about 25 percent of Gross Domestic Product, far less than the OECD average of about 34 percent. That design has been a bedrock goal of Republicans for decades.
In an effort to satisfy the ideological demands of both parties, the US political system has thus created a tax code that is progressive as Democrats demand but also one that raises too little money to pay for the government that most Americans seem to want, as Republicans insist. To take two examples, Viard and Slavov note that tax revenues are insufficient to support Medicare and Social Security, programs that the public strongly supports but lawmakers have been unwilling to fully fund.
You hear this paradox in the rhetoric of both Trump and Clinton.聽聽massive tax cuts for all鈥攎aking the revenue code even smaller鈥攖o boost economic growth. His tax cuts, aimed at the highest income households, would make the revenue code less progressive, and thus by themselves make the code less redistributive. But without spending cuts to finance his tax reductions, he鈥檚 proposed a plan that will fail to boost the economy as he promises. 聽
By contrast,聽聽new spending and tax subsidies for low- and middle-income families financed by raising taxes only on the rich. She鈥檇 make the code more progressive but she鈥檇 also raise such a small amount of money that any additional聽redistribution would be modest. Thus, she sounds like she is using the tax code to redistribute income, but she鈥檚 not really doing much because the scale of her changes is so small. 聽
Viard and Slavov suggest a solution: Make the tax code bigger, but less progressive. In other words, raise taxes on middle-income households (where the bulk of the money is) to fund government programs that benefit middle- and low-income people聽without impeding economic growth.
This would require the political parties to flip their rhetoric: No longer would pols like Clinton and President Obama vow to protect households making less than $250,000 from tax increases. Nor would Republicans continue to insist on lower taxes and less spending in the face of demographic changes that make their promise of smaller government unrealistic.
It is hard to imagine this happening any time soon. And Viard and Slavov might have focused more on the tax code as a mechanism to provide cash transfers to low-income households through programs such as the Earned Income Tax Credit, one reason tax revenues are relatively low in the US. Still, they provide a useful perspective for thinking about tax policy in the next administration. 聽
This story originally appeared on .听听
