Monday, April 16, 2012

What is Tax Reform?

I don't have much time to blog tonight---so of course I decide on a topic that could take books to answer.  And I don't have a real answer; what I have is a sense that seems to be different from the sense that drives Paul Ryan and the Tea Party, and the sense that drove the deficit commission report.  To a huge section of the population of the country, and certainly of this city, "tax reform" means---well, let me cite Jared Bernstein's blog:

"What is “tax reform” anyway?  For some it’s having just one rate, for others it’s a national sales tax, and for most it’s trading off lower rates for a broader base.  For all, it’s simplifying the current system (for me, it’s ending favorable treatment of one kind of income over another)."

The emphasis is mine.

Let's be clear: the definition of reform is a change that improves.  There is nothing in the phrase "tax reform" that implies lower taxes, or higher taxes, or anything about the level of taxes.  And there's certainly nothing about that phrase that implies "broadening the tax base"---what does that phrase mean?  In most of the proposals I've seen, what it means is making middle and lower income citizens pay more in taxes so that the wealthy can pay less.  

We can all agree that simpler is better---the tax-legislation version of Occam's Razor.  I think most of us agree that eliminating wasteful tax expenditures is a good goal for tax reform---but agreeing on which tax expenditures are wasteful will be hard, and maybe impossible.  But to argue that lower rates is "reform" presupposes that current rates are too high.  They are not, in my opinion.  They are far too low, in the long run.

Before you all faint, let me reassure you that I don't mean I like paying taxes; I'm not a masochist.  Nobody wants to pay taxes.  But they are a necessary discomfort for any nation that wants to achieve anything substantial, or make any great progress.  National investment in infrastructure, education, defense, research that is too risky or too long run for private industry to undertake, have to be paid for somehow.  Nations that want to prosper invest in these things, and nations that fail to invest in them degrade, and gradually, inexorably, fall behind.  

And in the last thirty years our infrastructure has been doing just that.   In the last thirty years we have been doing that.  Oh, we're still the wealthiest nation on earth, per capita; we're living on centuries of progress and government investment in highway system and bridges and dams and railroads, and research into rockets and radios, satellites and the creation of the internet, and we're living on centuries of privately owned businesses in industries that were spawned by all that research and aided by all that infrastructure.   

Yes, we have a deficit, and in the long run a serious health-care deficit problem.  But there simply is no acceptable way of cutting government spending enough to eliminate it in the long run and still maintain our national wealth.   Because on the important things, on things like infrastructure investment---not just repair of existing infrastructure, but new and visionary infrastructure, as the railroads were in their day, or the interstate highway system, or the internet---or long run research, on these things we are spending far too little as a nation.  

So what is tax reform?  Tastes differ.  To me, simple is good, and fair is good, and elimination of special tax systems that distort private consumption and investment choices is also good.  And to me, setting overall tax rates at a level that will continue to pay for the things we as a nation need to do through our government is good.  

And to me, that means raising the top tax rate---not lowering it---both to achieve fairness and to achieve sufficient revenue to pay for all the things we need to do. And it means using Pigovian taxes to correct or compensate for negative externalities (this is a long topic to be explored another time).  And it means treating all income as income: there is no reason to treat capital gains income differently from wage income, or from the income from revenue derived from the production and sales of real goods or services.  

What the phrase "tax reform" does not mean is blind hunger for lower marginal rates no matter what, or "broadening the tax base" to push the burden of taxes farther down the income scale.

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