What with the President’s deficit reduction plan for the super committee coming out tomorrow, it seems like a fine time to share some random thoughts regarding federal taxation along with a couple of recent articles worth reading.
—Beware of revenue neutrality: the Norquist crowd will fight to the death on any rate increases, but on alternate Wednesdays, they entertain the possibility of raising new revenue through closing loopholes, deductions, credits, etc. Often, however, it’s only under the condition that rates are lowered in exchange. Problem is, if you lower the rates far enough, you completely offset the revenues and you’re back where you started, deficit-reduction wise, with all the weight on spending cuts.
—You can go down, but you can never go up: Do you remember the last time a tax was raised? Yes, there are some new revenues raised to help pay for the health care bill, but they kick in years from now. Though he’s going to present some worthy new revenue ideas tomorrow, thus far President Obama’s been a big tax cutter, not raiser. Such asymmetry makes no sense. There’s a time to cut and a time to raise, the latter being when the economy is heading towards recovery and more revenues are needed to amply fund government functions, including infrastructure investment, retirement security, safety nets, food security, education/training—all parts of advanced economies that markets fail to effectively and consistently reach.
—Spending through the tax code: This piece in the WaPo tells the extremely important story of how we now spend $1 trillion through the tax code on credits and deductions…about the same amount as we collect in income tax. It’s a long piece (with excellent graphics), but the punchline to me is this: there’s no plausible rationale why it’s desirable to cut spending to shrink the deficit but it’s not OK to reduce tax credits. These credits often accomplish the same type of goals as spending programs—providing some extra resources for someone doing something government wants them to do. And in most cases, the spending through the code is less progressive than direct spending (not all cases—the child credit and the earned income credit are progressive tax expenditures—mortgage interest and the employer health exclusion, which cost a whole lot more, are tax expenditures targeted at the middle class on up).
–Marking your territory: The WSJ recently reported that the Obama administration is planning to propose some ideas to reform corporate taxation (not sure if any will be in tomorrow’s deficit plan) including the idea of moving to so called “territorial” taxation. Under this system, foreign earnings by US multinationals are subject to the tax system of country where the income was earned, not to the US. It’s long been at the top of the list of the multinationals who already go through hoops to defer or avoid paying domestic rates on their foreign earnings. The problem is, while you can toughen up a territorial system—e.g., exempt some but not all foreign earnings from domestic taxation—at the end of the day, it makes it easier to export investment and jobs, and I don’t see what we’d want to do that, especially when the corporate sector is the one part of the darn economy that’s actually doing well.
I’ll try to write up what’s in the budget plan tomorrow, but absent specifics, here’s where I think that’s headed.