If you want to hear some really compelling thinking on the issue of tax reform, check out what Larry Summers had to say at a recent Brookings conference. Larry debated Marty Feldstein last week at a Brookings Hamilton Project event—here’s the transcript of the whole event but Larry’s comments start on page 28. Better yet, do what I did and download the mp3 of the event from iTunes—search on “Hamilton Project”—and go running while you listen to it. Why not burn some calories while getting straight on tax reform?
But allow me to hit you with some highlights.
First, I very much appreciate where Larry starts out:
I would just begin by saying that while it’s not our subject today, whether we get this expansion to a sustained reasonable growth rate that is consistent with a return to full employment is the single most important economic issue facing the United States. And we will not achieve any other objective, whether it is sustained fiscal help, the ability to combat poverty, the ability to be strong in the world if we do not achieve that and, therefore, maintain the momentum.
True dat. Which is why I think we in Washington way overweight the importance of tax reform relative to income growth, inequality, poverty, and enough decent jobs for people. I understand that the tax structure is related to these real variables, but not nearly as much as you’d think, listening to the intensity of the tax debate. We could get taxes “right”—i.e., raise the revenues we need through a simpler, less distortionary tax code—and still suffer from persistent problems in all these other areas.
Larry stresses the importance of revenues (which, as far as I can tell, was a point of consensus at the event, including by conservatives), progressivity, and the kind of “small responder” arguments I make here (though, to be fair, he frames this difference more in terms of current weak demand conditions than I do, suggesting that responsiveness could increase in a less slack economy; sure, but not that much). But I thought some of his most important comments were in regard to simplicity.
A lot of people in the tax reform debate get away with a fair bit of mythology regarding how simple the code would be if we just closed loopholes and lost a bunch of deductions. Surely there’s some truth to that, but it’s just as likely to go the other way. Larry’s example of all the computations invoked if you had to pay capital gains on the sale of your house (you currently do not have to do so as long as the gain is less than $500K) struck me as exactly right. Same with the VAT or flat tax, once you start exempting necessities or protecting favored groups, like the poor, from first dollar taxation.
Does that mean greater simplicity is unachievable? No, but it’s harder than people tend to make it sound. That said, if we were simply to disallow ways in which taxes are sheltered and avoided, I maintain we could achieve considerable simplicity, and raise more revenues to boot. For example, ending the deferral of foreign earnings, or the tax preferences for one income type over another. Those kinds of changes, it seems to me, would obviate a lot of current and complicated efforts to exploit the code.
So, check it out, preferably while you’re exercising!