One way to think about preferences in tax policy is by comparing the preferences to an economically optimal policy. Think about that and the policies your favorite politicians support when you read this post at RealClearPolicy by Jason Fichtner of the Mercatus Center and Jacob Feldman from the Bureau of Labor Statistics:
The most basic goal of tax policy is to raise enough revenue to meet the government’s spending requirements in the way that has the least impact on the economy. Academic research suggests that, to meet this goal, a successful system should be simple, equitable, permanent, and predictable.
The U.S. tax code does not live up to these standards. In fact, while most developed countries have lowered their corporate tax rates and restructured their tax systems to make them simpler, the United States appears to be taking the opposite approach. The current tax code distorts market decisions and hampers job creation, reducing both economic growth and tax revenue.
They argue for a few basic strategies:
- Don’t raise tax rates.
- Bring corporate income tax rates into line with those in other OECD countries.
- Reform the mortgage interest income tax deduction and the “marriage penalty”
- Adopt “full expensing” of capital expenses.
Although I think the issue of increasing tax rates is a bit more complicated than they’re suggesting, I should point out that most of the things they’re talking about doing are measures that regular readers here would recognize. I’ve been arguing for most of them for decades.
There is no mystery here. They aren’t top secret. Most make sense from an economic perspective.
Diverging slightly, I wonder how many people realize how incredibly regressive the home mortgage interest deduction is? Talk about welfare for the rich!
You are so correct about the home mortgage deduction. In my Tea Party discussion group they all develop hives if you even suggest that we should do away with it. “Government and taxes are bad (unless it helps me).” I would also set an upper limit on charitable deductions. Those charities and foundations being set up at the top end are often just carrying out pet causes. We are taking a start on health care, but should carry it further. As to increasing tax rates I am not all that eager to pay more taxes, but we have run up a bunch of debt by lowering taxes while not altering spending. We may need higher rates for a while to catch up.
Steve
I’d cap all of the deductions (“tax expenditures”). Maybe it’s just me.
And there’s a very simple principle that I learned decades ago and which stayed with me. The tax rate isn’t particularly important. How you calculate income is very important.
1. I would lower income taxes, and offset the reduction with elimination or caps on deductions and credits. Whatever that bi-partisan commission recommended 4-5 years ago.
2. Lower corporate taxes to OECD median. Bill Clinton was arguing for this 4-5 years ago, and he was the one who raised them (when raising them was in mean/median).
3. See above on mortgage deduction. But not convinced about the marriage penalty. The marriage penalty takes into consideration ability to pay. Most people in the bottom quintile of income are unmarried and have no job. Most people in the top quintiles, particularly the top 5% are married and have two jobs. Elimination of the marriage penalty would mostly benefit the top two quintiles, and mostly harm those in the middle, who currently receive a marriage bonus.
4. “Full expensing” of capital expenditures. Less certain about. For one thing, I don’t think its likely to get full expensing plus reduced corporate tax rates. For the other, I’d prefer favorable tax treatment for American salaries over foreign goods.
The “marriage penalty” should be eliminated by removing consideration of marital status from the tax code entirely and taxing every worker as an individual. Otherwise, singles will continue to bear an extra tax burden. Now that gays can marry, why are we continuing to tax on the basis of marital status at all?
Another “tax expenditure” ripe for elimination is the favorable tax treatment of employer-provided healthcare benefits.
You don’t have to persuade me on that one. I think that employer-provided healthcare benefits should be treated as income.
“I think that employer-provided healthcare benefits should be treated as income.”
Me too. And for K1 people like me, it is. A partner draw.
Concerning some other comments, once you start down the road of using tax policy for deemed good social goals you will end up with a total mess, like now. I’m not buying Steve’s comment about Tea Partyers. I’m not a “Tea Partyer” but travel in relatively conservative circles. I never, and I mean never, here people claiming the mortgage deduction is an OK exception. Everyone knows it’s regressive. The only problem with its elimination is the sudden shock, and of course the NARealtors. I hear far more bloviating about taxes for thee but not for me out of left leaning types.
As for charitable giving, the government has torn the heart of the charitable system as it is. But I’d rather have charity non-deductible with lower taxes. Then I can decide. OK, I’m hallucinating now….
Might as well contribute my fantasy:
In complete fantasy land where I am dictator I would probably transition to a progressive consumption tax.
In a more believable/realistic fantasy, I’d eliminate corporate taxes completely and tax capital gains as regular income. Basically, since the individual income tax well established as the norm, I would focus tax collection efforts there. Basically, the nexus for tax collection would be when income hits an individual.
I’d eliminate taxes for bringing overseas corporate profits back to the US and place a moderate tax on sending capital overseas to, for example, move production (TBH I’m not quite sure of how that would work in practice, so maybe it would be unworkable).
Essentially, the idea is to encourage capital to flow to the US where it would either be reinvested in the business or be distributed to individual owners, where it would be taxed. With no tax burden businesses would have little reason to park foreign profits overseas and pay for tax lawyers. Instead they could focus on using capital to either grow the business or return profits to owners/shareholders. Given that the latter would be taxed, I think it would encourage them to use profits to grow the business.
To make the system progressive I’d either use a variable tax rate or tax expenditures/deductibles as the mechanism – ideally the former. I’d still allow deductibles for a few things (like charity), but impose a cap. I think eliminating the mortgage deduction is more in the complete fantasy scenario, so more realistically we could maybe put a cap on it.
For health care I’d probably go with a national catastrophic insurance program and let the market decide when it comes to routine care. People could either buy a policy to cover the basics, get it from an employer or pay out of pocket, depending on circumstances. Of course that depends on a lot of other stuff working correctly, so I’m skeptical it could actually work here in the the US.