Posted by Clint Stretch
I am indebted to Stan for much good advice and many kindnesses over a long career and today for chance to express a few thoughts on the tax reform.
In retrospect, I learned a few things about tax reform as a kid in my dad’s workshop that might be good to recall at this point in the debate. I would tend to start something with only a general idea of where I was headed. He’d put a hand on my shoulder and say, “If it’s worth doing, it’s worth doing it right.” With time, I came to realize that those nine words carried many meanings. They came in an encouraging tone while saying --
- Have a clear and realistic goal
- Be careful – don’t hurt yourself or others
- Use the tools properly
- Don’t rush – measure twice; cut once
And, having had kids of my own in the workshop, I know these rules also meant: “Don’t distract me from what really has to get done, if you are just fooling around.”
Most everyone seems to agree that tax reform is worth doing; so do I. Many expect it to happen quickly next year. Despite my interest in reform, I think it worth asking two questions: First, is the current discussion of tax reform a distraction from the real work that needs to be done on the federal budget? And, second can tax reform be done right at this time?
The work that really has to get done in the next Congress is to set the federal budget on a path that will lead to gradual but substantial reductions in our public debt. To do this, we must agree on a path for federal spending – especially on healthcare (including Medicare), Social Security and the defense (including veterans benefits). Taken together, these programs accounted for two-thirds of federal spending in FY2011 and equaled more than 16 percent of GDP – all in a year that does not include the full cost the baby boomers hitting Medicare and Social Security.
Whether your political agenda is to limit taxes to 18 or 18.5 percent of GDP or to protect the current Medicare and Social Security programs, the conversation has to start with the fundamental question of how much we believe the federal government should, or can, spend on healthcare, retirement security and defense. Tax reform will not answer that question. Time spent working on tax reform rather than figuring out what to do with the biggest spending programs is a distraction, or perhaps worse.
Can there be much hope of getting tax reform right if we proceed now without a more substantial agreement on the long-term direction of the budget? Dad’s workshop rules cast some doubt on this.
First, there is no clear long-term goal for meaningful tax reform. The political parties are at least 3 percentage points of GDP apart in their views on the right size of government and therefore the right amount of tax that the federal government should collect – in terms of the FY2011 budget that would have been a $450 billion disagreement. Even in Washington, a goal that has a $450 billion annual potential variation is not a clear goal.
The goals that have been discussed may be unrealistic. To me, realistic goals are sustainable goals. If the question of how much the federal government will spend is unanswered, then any tax reform will necessarily be only a short-term solution. After the Tax Reform Act of 1986, the revenue stream turned out to be too small for the spending commitments made. In part, this was true because the revenue cost of permanently lower tax rates was offset in significant part by revenue increase changes that produced only temporary gains. In part, Congress failed to curtail spending. This resulted in the 1990 tax increases signed by George H. W. Bush and the Clinton-era tax increases. Trading away current tax benefits for lower tax rates could be a short-lived reform victory, if unaddressed spending issues bring a future Congress back to higher tax rates or to a new tax because of continued deficits.
Second, tax reform in 2013 could hurt many people. All else being equal, I believe in the long-term benefits of a fair, lower-rate, broader-based tax system. But, taking away current tax benefits inflicts immediate disruption and pain while lower rates produce positive results more slowly as individuals adjust to the new rules. At this point in our history, the U.S. economy is not in shape to take a lot of disruption and pain.
Third, using procedural tools to achieve a rushed tax reform could produce poor results. As the 113th Congress confronts the possibility of tax reform, it could choose to pick up the tools of budget reconciliation to speed its work on a tax reform and to push it to completion. If it does so, the resultant product will almost certainly not enjoy the overwhelming bi-partisan support that ushered in the 1969, 1976 and 1986 tax reform acts. Instead, it could leave a legacy of division similar to that which the use of these tools left for healthcare reform. The result would be a tax system in continued political turmoil. Politics may compel the use of procedural tools to rush on tax reform, but the cost could be high.
For a goal as worthy as tax reform, slowing down and taking time to do the work the right way is still the same good approach it was in my dad’s basement 50 years ago.
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The problem is that there is
The problem is that there is no dealing with Republicans on this. Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Between 1946 and 1981, income taxes averaged 12%(+/-1%) of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %(and below). However, on budget expenses have remained 12%(+/-1%) of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security trust fund. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt by the time that the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. The failure to do so simply permits the 1% to steal the money contributed by workers for their retirement. Everything about not raising taxes or limiting expenses, is about stealing the 99%'s money. The national debt has been caused primarily by income taxes which were reduced far below their historic 12%(+/-1%), not by on budget expenses, which have remained at their historic 12%(+/-1%) throughout.
Agreed. Wonder what Mitt
Agreed. Wonder what Mitt would have said if one of his wonder boys came in to him and said "I think we need to cut expenses. And I want to do it by reducing sales."
Let me guess. You believe in
Let me guess. You believe in the Confidence Fairy.