Tax Promises That Need to Be Broken

In an opinion piece I wrote for Bloomberg Government published last Friday (subscription-only access here), I elaborated on those “magical, mystery tax pledges” of both political parties that are getting in the way of bipartisan approaches to deficit reduction.  A few key passages from my column:

Both parties are stuck in their own tax policy trenches: Republicans in their “don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP” trench; Democrats, including President Barack Obama, in their “raise taxes on households making over $250,000 a year” trench…

To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with “supply-side” economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy…

What’s more, raising revenue by getting rid of costly and ineffective tax breaks and shelters would reduce government’s role in the economy. In other words, while somewhat counterintuitive, higher revenues as a share of GDP can be completely consistent with smaller government…

To those on the left who are holding fast to the president’s promise not to raise taxes on households with incomes below $250,000 a year, here’s your paradox: Limiting the pool of households to tap for revenue increases means limiting the revenue-side strategy for deficit reduction.

It’s hard to reconcile wanting a significant portion of deficit reduction to come from higher revenues and wanting to avoid any increase in tax burdens for 98 percent of the population. Exempting that many people means that tax rates on those above the cutoff must be prohibitively high, with marginal tax rates that would worry even those economists who don’t count themselves as supply-siders…

This doesn’t mean giving up on progressive policies that would ask the rich to bear a larger relative burden of deficit reduction. Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich…

So, Republicans and Democrats, stop hiding in your trenches and firing pot shots at each other for trying to destroy our economy and society. Cast aside your misguided, ideologicallymotivated pledges to limit how much revenue we can raise or from whom we can raise it.

Come out and admit that there’s a lot to a revenue-raising, deficit-reducing, base-broadening tax reform that you could actually live with and might actually like.

Now, I do recognize that on the face of it, the Republican pledge of “no new taxes” (i.e., revenue increases)–of any shape or form, at any time–seems a much bigger obstacle to deficit reduction than the President’s campaign promise to shield (just) most of us from increased tax burdens, which is not a universally-held conviction of the Democrats and is less mathematically-impossible.

But factoring in that: (i) the one Democrat most wedded to that promise is the President of the United States (the one ultimately “in charge” of our nation’s economic policies and the most powerful man in the world), and (ii) both sides are really just looking for excuses to hate and outright reject the other side’s ideas so they don’t have to walk on the common ground, which is still a political landmine of hard choices, I think it is the President’s promise–even if the less ludicrous promise of the two–that’s probably the binding constraint on both sides’ doing the right thing in terms of bipartisan deficit reduction.

So both of these “magical, mystery” tax promises need to be broken.

Read more at Economist Mom