tax policy

My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue.  In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:

If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.

Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall?  I presume the reason is that none of the proponents of this line of argument have any idea what the revenue-maximizing tax rate is.  They only like to assert that we must have been past it because tax revenues eventually went up at some point after the tax rates were cut (ignoring the obvious counterfactual that it was economic growth unrelated to the tax cuts that pushed revenues higher and that they would have been even higher at the higher tax rates). 

So the next question is simply, "What do the experts on your staff tell you that the top marginal tax rate should be in order to maximize tax revenues, leaving everything else about the tax code the same?"  Journalists should relentlessly ask it of the Republican leadership in Congress who continue to make fallacious claims, and the Democratic leadership in Congress ought to ask it politely in a letter to CBO Director Doug Elmendorf. 

From time to time, I have mentioned a "Green Tax Swap" as an appropriate policy to raise the price of carbon emissions while protecting lower-income workers from the higher costs of the carbon-intensive goods and services that they consume.  Gib Metcalf provides a good discussion of implementation and distributional consequences here.  Some new research by Don Fullerton and Holly Monti suggests that it would be more difficult than is presently believed to make the swap distributionally neutral.  Here's the abstract:

I was looking for something clever to post on Tax Day and found it courtesy of Diane Lim Rogers at EconomistMom:

For all the complaining you have done on your Senate campaign trail, and then your presidential campaign trail, and now even as President about how unaffordable and unfair and in general not very smart the Bush tax cuts were, why is it that the centerpiece of your–emphasis on your–tax policy thus far is the deficit-financed extension of the vast majority of these very same (not very smart) tax cuts?

     Here is an article I just published in The Fiscal Times, prompted in part by Leonard Burman's work,  on the staggering size and automatic growth of "tax expenditures" -- tax breaks, for us non-budget mavens.

     Everybody knows that tax breaks -- on everthing from mortgage interest to green-energy projects -- permeate American life and often amount to backdoor government spending.  Republicans love to promote tax cuts, because they seem to strike a blow against Big Government.    Democrats love them because many tax breaks are a way to fund favored social programs.

Greg Mankiw at Harvard has a really smart post, pointed out by Brooks, on what Republicans could be bargaining for if they really wanted to engage in the deficit commission.

     Mankiw, who was chairman of President Bush's Council of Economic Advisers, acknowledges that tax increases would have to be part of the deal -- a view shared by almost every budget analyst in the world but denied by Republican leaders with flat-earth fervor.    

     But Mankiw then outlines what conservatives should demand in exchange if they were willing to compromise on taxes.  And it's a solid list of ideas:

According to The Washington Post, this was the reaction of House leaders to President Obama's proposal to use tax credits to expand employment:

The administration also wants to put an additional $100 billion toward an immediate jobs bill. One of the most significant ideas would award tax credits worth as much as $5,000 per new hire to employers that expand their payrolls this year. By the administration's calculations, the tax credit would create 600,000 jobs at a cost to the government of about $33 billion.

That is my reaction as well.  If the Federal government could administer a problem this intricate, I doubt we would be in the shape we are in.  We are over two years into these discussions of stimulus and bailouts, and it is disappointing to continue to see these gimmicks being discussed.  What are we going to have next, "Cash for Coworkers?"  The basic lesson does not seem to have sunk in -- when you are relatively poor, you must be more careful with your money, not less.  You should be spending your money only on what you need and not spending it on what you don't.

So goes the logic (with only mild exaggeration) of one of the most ridiculous policy proposals I've read in a while -- to make up for falling gas tax revenues with a new tax on miles driven.  Ashley Halsey III is on the case in The Washington Post yesterday. 

The appropriate tax instrument to make up for declining or inadequate gas tax revenues is ... a higher gas tax rate.  Compared to a higher gas tax rate, a tax on miles driven ignores the amount of fuel used to drive those miles.  Highway travel is taxed the same as city travel.  Gas guzzlers are taxed the same as hybrids. Neither change makes any sense from an environmental perspective. 

That’s what former Joint Committee on Taxation Chief of Staff Ed Kleinbard proposed in footnote 111 on page 43 of this draft paper recently. He stated: “It is the author’s view that the CBO [Congressional Budget Office] is better suited to this task [scoring tax bills] than is the JCT Staff, from the perspective of both the relative stature and the independence of the two organizations.” 

First, I worked on the Joint Committee on Taxation from March 1, 1974 until February 1, 1981, and I maintain strong ties there. 

Second, along with other Joint Tax staff, I helped pass the 1974 Congressional Budget and Impoundment Control Act which set up CBO. Ever since, Joint Tax has supported CBO every step of the way, often without getting much credit. I personally pulled a lot of all-nighters to supply CBO with estimates, as have Joint Tax staff ever since. 

Last night, the National Journal Congress Daily reported President Obama is considering extending all tax rates that expire at the end of this year for at least one year and maybe more.  That would keep the top rate on individual income at 35% and the top rate on dividends and capital gains at 15%.   This would give Democrats a tax cut to vote for going into the 2010 election for all Americans.  There are plenty of House Democrats who would object to extending upper income tax cuts, but, if President Obama supported it, enactment would be likely. 

Washington likes quick fixes to big problems.  Unfortunately, quick fixes rarely benefit the economy.  In 1977, in behind-the-scenes discussions with members of Congress, I argued against the New Jobs Tax Credit.  It was obvious that the credit would reward new hires long after the decision to hire had been made for other reasons.  We spent $5.7 billion of taxpayer money on it anyway so political leaders had something to show the voters back home.  No new jobs were created, although proving that is almost impossible.

The White House is considering reviving the New Jobs Tax Credit for to ward off an election debacle 13 months from now.  How much is that worth?  Replicating the New Jobs Tax Credit would cost about $13 billion.  President-elect Obama proposed a smaller, but refundable $3,000 credit in last year's campaign.  Last January, he dropped it from his stimulus proposal under pressure from Democratic congressional leaders.  Now that the unemployment rate is about to top 10%, it's back on the table.