Republicans are pushing for a cut in spending, to cut the deficit, as part of a package to raise the national debt ceiling. Democrats are countering with a tax increase (along with a smaller spending cut), saying that too would cut the deficit.
I assume that the Democrats’ definition of a tax increase is an increase in tax rates. Well, I would be agreeable to a necessary increase in taxes (to reduce the deficit now and the debt later), but I would define it differently. I wouldn’t define it as an increase in tax rates. I would define it as an increase in the amount of taxes collected.
Over at The New York Times’ Economix blog, Bruce Bartlett complains about that the Republicans are constantly talking about tax cuts:
“Yet if one listens to Republicans, one would think that taxes have never been higher, that an excessive tax burden is the most important constraint holding back economic growth and that a big tax cut is exactly what the economy needs to get growing again. …
One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of G.D.P. in revenue this year, about a third of what it was in the 1950s.
The G.O.P. says global competitiveness requires the United States to reduce its corporate tax rate. But the United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development.
If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate, which is often manipulated to make it appear that rates are much higher than they really are. …
The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low. And they almost never note that the statutory tax rate applies only to the last dollar earned or that the effective tax rate is substantially lower even for the richest taxpayers and largest corporations because of tax exclusions, deductions, credits and the 15 percent top rate on dividends and capital gains.”
Mr. Bartlett is right that the statutory rate (or “marginal rate,” in economic terms) applies to the last dollar earned. But he misses the fact that it is the marginal rate that affects how people react to taxes. Mr. Bartlett also seems to miss the fact that he identified the solution to the problem of raising tax collections without raising marginal tax rates.
The better way to increase tax collections is not to raise tax rates, but to apply taxes to more income. In other words, you don’t have to raise the rates if you broaden the base. In fact, you might be able to even lower corporate tax rates if you broaden the tax base enough. And how do you broaden the base? Get rid of (or at least cut back on) those special exclusions, deductions, credits, etc., that Congress has put into the tax law. If we get rid of enough of these tax loopholes (a/k/a tax earmarks), we can cut corporate tax rates and still collect more taxes.
(Please note that this is not a Laffer Curve argument. I am not saying that you can cut rates and get more money because of increased economic activity, etc. In some cases that is true, but what I am saying here is that, if you get rid of enough of those deductions, credits, etc., the amount of income actually being taxed will increase enough that you can lower the tax rate and still collect more money in taxes. You can make sure this will happen because you won’t decide how much you are going to cut the tax rate until after you have a pretty good idea how much additional taxable income there will be after eliminating or reducing those deductions, credits, etc.)
And when it comes to personal income taxes, we can do much the same thing. For one idea on how this could work for personal income taxes (not one I would necessarily agree with), see this article by Martin Feldstein in The New York Times last month. For another, see here.
My only caveat would be on the capital gains tax. If you want to collect more taxes, I am not sure what to do with the capital gains tax. There have been times in the past when cutting the capital gains tax actually resulted in more taxes being collected. But the capital gains tax was a lot higher then than it is now. It may be that the capital gains tax is so low right now, that you can raise it some and collect more taxes. It’s just that, if your goal is to actually raise more tax money (as opposed to just raising the capital gains tax because things would feel fairer with a higher capital gains tax even if you don’t collect more money), then you need to carefully determine where to set the capital gains tax in order to collect the most taxes. Because, if the idea is to collect more taxes (and thereby reduce the deficit), the answer is not automatically to raise the tax rate.
In other words, a simpler tax system, more tax collections (if needed), and lower marginal rates. That sounds like a win-win-win to me.
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