We’ve talked a lot about the dismal state of American political leadership, and the despair it has brought us. And even those of us who take heart in the flashes of strong leadership President Obama showed earlier in his first term, and see his potential and promise, feel that too often he has lacked boldness and strength. But this is his time, if there is truly to be one. The opportunity, the necessity, is a bi-partisan deal to avoid the “fiscal cliff” and set in place the first substantial step to a plan that will wisely and effectively reduce our gaping budget deficit, but without throwing us back into recession. And just as important, we’ll need the same brand of leadership from Speaker Boehner. It is his time, too.
We know from the debt ceiling debacle that Mr. Boehner can be worked with and can be reasonable. And now he is as empowered as he will ever be to bring his party to the table. The nation demands it. And I believe he will. But the President has to be open to the Speaker’s opening bid of tax reform as a way to raise tax revenue from the financially well off. And I believe he will be. I’m sure Mr. Obama is well briefed on the long-term benefit and rightness of tax reform that would jettison a lot of inefficient, wasteful tax benefits (deductions, credits and exemptions) for various industries and well-off individuals.
Just as much revenue could be raised in that manner, and it leaves us with a stronger tax structure in the end. Yes, it would be good “liberal” politics to raise the rates on high-income folks, and it could contribute to the deal, but it would be more progressive in fact to reform the tax code—and have the Republicans taking or sharing the lead on it. That way, you get revenue and reform. Better, much better. (And by the way, some or all of those individual deductions—the home mortgage interest deduction, for example—could and likely would be means-tested or capped so as to still be available for lower- and middle-income families.)
A few issues ago, The Economist presented its well-researched, thorough and even-handed treatment of economic inequality and the implications for economic growth. A notable element of their prescription for needed change in the U.S. was tax reform. In the more recent November 17 edition, they follow up on that prescription with a “Leaders” editorial and a complementary article in the “United States” section. From the Leaders piece:
Setting a cap on deductions is a better starting point than raising tax rates.
[…] Mr Obama has long argued that repairing America’s finances will require raising more tax as well as cutting spending. Influential Republicans, most importantly including John Boehner, the Speaker of the House, now appear to agree. This comes not a moment too soon. In less than two months America will reach a “fiscal cliff”, when George W. Bush’s tax cuts will expire and automatic spending cuts will take effect (see article). The economy could suffer a fiscal tightening of as much as 5% of GDP over a full year, easily enough to bring on recession.
Before any deal to avoid this can be struck, though, big issues must be resolved. What categories of spending are to be cut? And, on the revenue side, which taxes should go up? Ever since taking office, Mr Obama has pressed to make Mr Bush’s tax cuts permanent for 98% of households while ensuring that the wealthiest 2% pay more. Mr Boehner says that tax rates should not go up for anyone; but he is open to raising revenue by eliminating tax breaks. The good news is that there may be a deal to be had that meets both objectives.
Returning the two top marginal rates to 36% and 39.6% from their current 33% and 35% would hardly capsize the economy, but it is not the most efficient way to raise revenue. At the margin, higher rates discourage work and investment and encourage tax avoidance. It would be better to revamp the tax code, starting out by leaving marginal rates alone and instead raising revenue by curbing the deductions and exemptions that pockmark the system and cost the Treasury as much as $1 trillion a year in forgone revenue. These “tax expenditures” are camouflaged government subsidies and create damaging distortions: the mortgage-interest deduction, for instance, encourages supersized houses and debts to match; the charitable deduction forces taxpayers to subsidise everyone else’s pet cause, whether that be Planned Parenthood or the George W. Bush presidential library; and the tax break for employer-provided health insurance helps fuel the relentless rise in health-care costs.
[…] Cap in hand
There are many routes to reforming these exemptions. One would be to single out particular tax breaks for elimination. But the likelihood is that the process would crumple under the onslaught of lobbyists who defend every loophole, resulting in too many exceptions and too little revenue. An easier first step would be to cap all deductions, an approach advanced by none other than Mitt Romney. Set at $50,000 such a cap would raise some $750 billion over ten years, estimates the Tax Policy Centre, a think-tank—more than would be obtained by restoring the top two rates to pre-2001 levels. The cap would barely touch the bottom 60% of taxpayers while only slightly hurting the upper-middle class. Most of the money would come from the top 1%.
At the cost of some redundancy, let’s look at the second article, which explores the contours and possibilities of a political deal, and also shares the estimated budget impact of various reforms or changes to the tax code. From the article:
Barack Obama and Republicans grope towards common ground on taxes
THE election dust had barely settled when Barack Obama and his Republican adversaries returned to their traditional rhetoric over taxes… Optimists, however, took note of what the men did not say: Mr Boehner did not rule out raising tax revenues. Mr Obama did not explicitly insist that the two top income tax rates, now 33% and 35%, return to 35% and 39.6%, as they are scheduled to do when George W. Bush’s tax cuts expire at the end of this year.
This has aroused hopes that the two men can find common ground on tax reform that leaves marginal tax rates where they are while raising new revenue by curbing credits, deductions and exemptions (collectively called tax expenditures), which distort economic activity. Numerous such proposals have been aired in recent years, some of which Republicans hated because they raised new revenue; others Democrats rejected because they gave a windfall to the wealthy.
One way this could be done is to target deductions that primarily benefit the rich. During the election campaign, Mitt Romney proposed paying for big marginal rate cuts by setting a cap on total deductions. The Tax Policy Centre, a think-tank, reckons a cap of $50,000 would raise $749 billion over ten years, comparable to the $800 billion that Mr Boehner entertained during failed negotiations with Mr Obama in 2011. Importantly, this fix would make the tax system much more progressive: 80% of the additional money would come from the top 1% of earners. This has helped draw interest from some Democrats.
A slightly different proposal by Martin Feldstein, a prominent Republican economist, and Maya MacGuineas of the Committee for a Responsible Federal Budget, a think-tank, would cap the tax benefit of itemised deductions at 2% of income for all households. Mr Feldstein reckons that would raise more than $2 trillion over ten years, although almost all families would pay more tax, not just the rich.
As it happens, Mr Obama has already proposed curbing tax breaks for the wealthy (see table). His budget would restore the limits on their exemptions and deductions that Mr Bush’s tax cuts eliminated. A separate proposal would limit the tax benefit of deductions for mortgage interest, charitable contributions, municipal bond interest, employer-provided health care, and individual retirement plans to 28%, even for taxpayers paying a 35% or 39.6% marginal rate.
Despite their superficial appeal, such proposals face daunting obstacles. Foremost is that they may not raise enough revenue to satisfy Mr Obama. In the run-up to formal negotiations due to begin on November 16th, Mr Obama signalled he would begin by asking for $1.6 trillion in revenue over the coming decade, as his latest budget does. At a press conference on November 14th, he said “it’s very difficult to see how you make up” the revenue lost from failing to restore the higher rates just by closing deductions: “The math tends not to work.” But, he added, “I’m not going to just slam the door” on alternatives that accomplish what he wants.
The second obstacle is the calendar. Politicians are racing against a year-end deadline when Mr. Bush's tax cuts are triggered. The collective fiscal tightening, if sustained, could push the economy into recession. Even if the two sides agreed that tax reform would be the main vehicle for raising more revenue, the task would be too complex to accomplish by year-end. A smaller deal would be needed to avert the cliff, leaving bigger tax and entitlement changes for next year. The challenge then would be to bind the hands of both parties to consummating a big deal next year.
For all the appeal of curbing loopholes, each has vocal and influential defenders. When the Obama administration first proposed its 28% cap on tax expenditures, “we got killed,” Peter Orszag, Mr Obama’s first budget director, recalls, in particular by charities and non-profit groups. For Mr Obama and Mr Boehner, finding agreement with each other may very well prove to be the easy part.
---“Opening bids,” The Economist, United States section (11.17.2012)A form of capping or means-testing along those lines, or for some of those items, is likely what Mr. Obama has to be ready to work with if he is going to have credibility and success at the bargaining table. But if lobbying and politics deny the deal sufficient revenue from tax reform, then Mr. Boehner and the Republicans will have to show flexibility on increasing tax rates for high-income individuals to some material extent. Both the Dems and the GOP must engage and partner responsibly to get something useful and lasting done. Courage and flexibility in leadership must in fact to be present and on display by both sides. It’s about successfully restoring and strengthening the country—not party or ideology, not selfishness or political victory. Let’s hope that sentiment is sufficiently shared to carry the day.
No comments:
Post a Comment