Tag: national academy of sciences

WaPo’s Fiscal Truths

A Washington Post editorial today discusses the National Academy of Sciences “Fiscal Future” study. The NAS report modeled four possible tax and spending paths for the nation over the next 70 years.  I was one of the NAS report’s co-authors.

The Post focuses on the “low spending and revenue” path, which would keep federal revenues below about 19 percent GDP and keep spending below about 21 percent of GDP. The Post argues that both tax hikes and spending cuts will be needed to fix the government’s budget problem because the “pain and sacrifice” would be too large if we just cut spending, as under this “low” path. But the Post’s conclusion is based on faulty one-sided accounting, only considering the recipients of government largesse.

The reality is that every dollar the government spends imposes ”pain and sacrifice” on current or future taxpayers. Thus, spending cuts may impose temporary pain on people whose benefits are withdrawn, but they create equal or greater pain on the taxpayers who foot the bill. Indeed, standard economic theory suggests that the economy gets a “free lunch” when spending and taxes are reduced in tandem because the deadweight losses caused by government coercive actions are reduced.

Note that I say “temporary” pain because to a substantial degree, benefit recipients will adjust their lives as subsidies are withdrawn, and most people will prosper without government help, as we saw following welfare reform in 1996.  Misguided government spending programs–like welfare–cause damage to society and the economy, so that reducing spending doesn’t increase pain, it ultimately reduces it. Consider how government housing subsidies ended up causing widespread damage, including for many people who initially benefited. For a guide to damaging federal programs, see www.downsizinggovernment.org.

The Post is right that the NAS study’s “low spending” path would require “broad areas” of federal spending to be cut, such as K-12 school subsidies and other state aid programs. But that would be a good thing for citizens, the economy, and for responsible government. Federal spending on properly state and local activities has been a giant failure, and it should be ended whether or not there is a budget deficit. 

The Post is on sounder footing with its observation that many Republicans do not seem to grasp the magnitude of spending reforms that are needed in the years ahead. The GOP does need to “get specific” and push for particular cuts. Let’s have national debates on federal involvement in K-12 schools, raising the Social Security retirement age, and cutting the corporate welfare programs mentioned by the Post. Let’s start that “adult conversation” right now, because as the NAS report warns, the longer we wait, the more the federal debt monster grows.

For the record, the NAS report did not endorse tax hikes or any other particular fiscal solution. It simply provided four possible combos of future tax and spending levels as starting points for discussion. It also usefully described how to overhaul the income tax and replace it with a much simpler and flatter tax system, as I’ve described here.

Wyden-Gregg Tax Plan

Senators Ron Wyden and Judd Gregg recently introduced the “Bipartisan Tax Fairness and Simplification Act.” There is a lot of interest in this plan, so I’ve put together some “pros” and “cons” from my small-government, flat-tax perspective.

INDIVIDUAL TAX CHANGES - PRO

  • Scraps the alternative minimum tax.
  • Cuts the number of rates from six to three.
  • Reduces the tax subsidy for municipal bonds.
  • Creates Lifetime Savings Accounts (LSAs)–like Roths IRAs except better because all withdrawals are tax-free. This is a very important reform, and by the way, one that Canada has enacted already. See here.

INDIVIDUAL TAX CHANGES - CON

  • Keeps the top tax rate at 35 percent, which is quite a bit higher than the 28 percent acheived by the Tax Reform Act of 1986.
  • Increases the top capital gains and dividend tax rate from 15 percent to 23 percent.
  • Triples the standard deduction, which would likely take more people at the bottom end off the income tax rolls. That would simplify the code, but at the expense of increasing the demand for big government.
  • Repeals the exclusion on income earned abroad by U.S. citizens, which would likely damage the operations of U.S. multinational companies.
  • Retains all the most distortionary tax breaks under the individual code, including the mortgage interest deduction.

CORPORATE TAX CHANGES - PRO

  • Cuts the top corporate tax rate to 24 percent. This is a crucial reform.
  • Cuts corporate welfare spending, which Wyden-Gregg notes is about $90 billion a year, based on a Cato Institute analysis.

CORPORATE TAX CHANGES - CON

  • Subjects the foreign income of U.S. multinational companies to immediate taxation. That tax approach is not followed by any major advanced economy, and it would put U.S. firms at a disadvantage in global markets.
  • Broadens the business tax base in other ways that move in the wrong direction, such as repealing the expensing of energy exploration and development costs. Note that some of the plan’s corporate base broadening ideas make sense–such as reducing the value of interest deductions–but only if the revenue raised is used to reduce the statutory rate (which it does seem to be here).

Overall, I would take the Wyden-Gregg plan over the current code. But Wyden-Gregg is a very limited reform compared to the Paul Ryan two-rate individual tax or the recent National Academy of Sciences tax plan, which features individual rates of 10 and 25 percent and a corporate rate of 25 percent.

Wyden-Gregg is a start, but it hardly simplifies the tax code at all and it doesn’t reduce individual rates. However, it does cut the corporate rate and it includes LSAs, which would revolutionize personal savings. So we can take heart that supply side tax policies still garner some support on Capitol Hill.

For more on tax reform, see here.