Tax Reform Tidbits

Tue, 24 Aug 2010 15:39:40 +0000

Say the word "tax" to me and I'll pitch you higher carbon taxes, sometimes paired with lower payroll taxes in the form of a green tax swap.  That's what I said to Chris Farrell, who wonders what else we might do to improve the tax code while everyone fights over whether the tax cuts from 2001 and 2003 should be extended.  Jim Poterba and Joel Slemrod are also quoted in the article, pointing out the virtues of capping deductions in the current income tax system -- broaden the base so that marginal rates can stay low.

I think tax reform, fundamental tax reform, and the debate over the extension of these tax cuts are a distraction.  Our big problem is that we don't raise enough revenue, not the particular forms in which we choose (not) to raise it.  I think the right policy on the "Bush tax cuts" is to let them expire.  <!--break-->That is, after all, what the letter of the law intends.  If those who passed them years ago had wanted for them to be permanent, then they should have legislated them in that fashion.  They couldn't achieve that objective, so they took half a loaf.  They have no particular claim to the other half unless that's good policy now.  It isn't -- the government needs to have in place enough revenue sources so that it is running a surplus at the next business cycle peak.  If there is concern about weak aggregate demand in the near term, as there very well should be, then there is always a better way to deal with downturns.  We are over two and a half years late in getting started, but it is better late than never.