Wednesday, September 13, 2017


Political Mayhem Wednesday: Tax "Reform"

Those of you who have been reading this blog for a while know where I come down on tax policy. I'm against "reforms" that reduce taxes because those reforms are almost always regressive and they very often drive budget deficits. If there is real reform where people end up paying more in taxes, that would be a good thing... but we all know that we are not going to see that kind of reform.

At some point, we have to pay down the national debt. We can do that in part through printing money (an option the feds have that the states do not), but that risks creating inflation. Right now, we are in a position where we cannot cut the budget very much. Why? Well, consider the following:

-- We have to pay for the recovery from two major storms
-- For the first time since the end of the Cold War, a foreign power threatens the US mainland
-- It does not appear that changes in health care policy are going to produce savings

That-- along with many other factors-- means that expenses are going up. So, if we lower our income, the deficit will rise.

Sure, some claim that reducing taxes creates growth that in the end increases revenues. That did not happen in the Bush years. In fact, growth has been strongest under Democratic presidents, overall, in the last 40 years (we have covered that here in the past).

Deficits matter, or at least they should. I have said that during Democratic administrations, and I will say it now, too.

Last time I checked it was only Wednesday but this topic might require several days of discussion.
Completely agree. There are all kinds of corporate tax loopholes and "incentives."

The BIG reform, which they won't make, is to treat ALL income the same. Right now investment income, "capital gains," is taxed at a lower rate than labor based income. This was due to bipartisan legislation pushed by Bush 41 and passed by a Democratic Congress in 1989 or 1990. And ever since the income equality gap has grown.

This Tax cut was NOT what lead to prosperity in the 90's, it was the budget deal pushed by OMB Director Darman and the Democrats in Congress, along with developments in Tech. The deal cost GHWB Republican support, lead to Ross Perot's candidacy and the election of Bill Clinton. But it was the "prudent" thing to do.
So many problems in modern American life boil down to the fact that we are incapable--whether out of fear, lack of will, prosperity-born sloth, greed, envy, or something dumber--of honestly confronting hard problems. This isn't a partisan issue. It's not specific to public policy. It's an all-encompassing, paralyzing problem that presents a huge threat to our future.

Where taxes are concerned, isolated tax cuts are obviously not a meaningful solution to our national woes. Neither, by the way, is simply raising taxes on those pesky corporations and one-percenters. And policy makers of all stripes, at least the serious ones, know this. But instead of debating real solutions, we debate whether your dollar (never my dollar) should be taxed at 20% or 22%. Sometimes we talk about the externality that is the vastly complex tax code, every now and then we muse about the virtue of government lever-pulling, you'll even here the occasional tête-à-tête on the relationship between taxes and spending, but when that gets hard we always retreat to our nitwit default positions: cut taxes; tax the rich!

Here are two realities: (1) in the face of mounting obstacles, we must ensure continued economic growth; (2) in the face of mounting obstacles, we must rein in federal spending to sustainable levels. Taxes play a role in both. Reducing taxes may not usher in a golden era, but raising them (in the broad sense) is certainly not a recipe for growth. At the same time, what we can spend (or borrow) sustainably is largely a function of tax revenue.

I wont pretend to have all the answers, but I'd prefer to talk about these issues honestly. I'd like to talk about how we can increase equity and efficiency in tax policy. I'd like to talk about the fact that 65% of federal spending is non-discretionary, and that most of this spending goes to fiscally unsound entitlement programs.

To my mind, an honest conversation would yield some uncomfortable facts. But there are solutions.

Perhaps we should stop using tax policy as a tool of economic and social engineering. Under that umbrella I include the tawdry web of credits and deductions that constitute our corporate welfare system. I also include personal deductions, like the one for mortgage interest. You have to at least talk about earned income credits, too. Maybe we need them, maybe we don't, but we should call a welfare program what it is and stop pretending it derives from tax policy. And, as IPLawguy suggests, maybe we should stop dividing "income" into ever-expanding categories, each with its own tax implications.

Perhaps, too, we should take serious step to reduce out of control spending (or at least reduce the rate of spending growth). That can't happen unless we enact real entitlement reform. I understand that folks have paid into these systems their whole lives--they are rightly "entitled" them--but the programs are broken. Defense spending is another fiscal monster. We can choose to keep it up, but we'll have to give up something else. Healthcare spending probably deserves its own category, but both public and private spending on healthcare is skyrocketing, driven in large part by entitlements and government spending.

Unfortunately, if the last presidential election is any indicator, honesty in debate is very near the bottom of the American political priority list, and falling.
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