Tax Policy Center Director Lays Out Revenue Raising Options
Today, Urban-Brookings Tax Policy Center Director Donald Marron told the National Economists Club that additional revenues are bound to be needed to avoid a federal debt explosion over the next decade. Plenty of spending cuts could be made too, but they're unlikely to be enough. Starting with that premise, he outlined four options for raising revenue:
1. Increase economic growth. Each percentage point of addition growth would add approximately $2.5 trillion to federal revenues over the next decade. That's real growth. A point of additional inflation raises revenues by a similar amount, but federal spending would rise about $3.0 trillion, so that doesn't work. Americans may work longer. We could allow more immigration, particularly of better educated immigrants, because they tend to pay more taxes than they consume benefits.
2. Cut tax expenditures. Many spending programs masquerade as tax incentives, often with perverse effects. For example, the home mortgage deduction rewards high income taxpayers, who would own a home anyway, for taking on more debt. Better to convert it to a credit so those on the cusp of owning a home would get more help.
3. Enact environmental taxes such as a carbon tax. It would have the double advantage of raising revenue and reducing pollution and global warming. Pigovian taxes that recoup the cost of externalities, such as pollution, make a lot of sense. They are unpopular, which is why the House adopted a carbon cap and trade bill late last year. It's essentially a tax with so many exemptions that it wasn't clear it would ever raise any revenue.
4. If the above are insufficient, as seems likely, then adopt a Value Added Tax (VAT). Those are unpopular too, so call it something else. Canada has a federal system and has done a particularly good job of implementing its Goods and Service Tax (GST). The Tax Policy Center will publish several studies on the VAT.
The NEC will post a summary in a week here.