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The ‘Tastes Great, Less Filling’ Approach to Cutting the Deficit

June 29th, 2011 . by economistmom

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Here’s the column I wrote in last week’s Tax Notes (subscription-only access here) in my “Taxes for a Civilized Society” spot.  I reprint it here courtesy of Tax Analysts.  (By the way, next week I am taking a break from my every-two-weeks Tax Notes publication schedule, so my next column will appear in the July 18th issue and will be a “primer” on tax cuts and the economy.  I am working on a catchier title though…)

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The ‘Tastes Great, Less Filling’ Approach to Cutting the Deficit

Tax Notes, June 20, 2011

In my work I’ve often remarked that fiscal responsibility seems like a great idea — until you get right down to it. While policymakers are quick to promote themselves as fiscally responsible in the abstract, they loathe having to talk about the specific policies and hard choices that would actually reduce the deficit. Discussion of the particular solutions, like painful tax increases and spending cuts, calls attention to the mutual-sacrifice costs more than the common-good benefits. And tax increases are seen as directly contrary to the Republican antitax, free-market orthodoxy, just as spending cuts go against the Democratic ideal of a proactive and progressive government.

That is, unless the tax increases are really spending cuts, and unless the spending cuts aren’t the usual kind of spending cuts.

I refer to the tax increases and spending cuts that would result from reducing tax expenditures — the subsidies that are run through the tax code via exemptions, deductions, credits, and preferential tax rates. Reducing tax expenditures is a strategy that I believe is an essential component of any bipartisan solution to the deficit problem.

Make a Venn diagram of all the specific proposals that the various deficit reduction commissions, study groups, and task forces came up with, regardless of their political leanings, and what does the intersection of the proposals look like? It’s big, fundamental, and worth lots of money. That intersection is the proposal to raise more revenue by broadening the tax base.1 Of all the ways to significantly reduce the budget deficit, base-broadening tax reform has the qualities most likely to appeal to Democrats and Republicans alike.

Reducing tax expenditures is like the fiscal policy version of the old Miller Lite beer commercial: It tastes great and it’s less filling. Here’s why:

Spending-side blame shouldn’t rule out tax-side solutions. Although the largest projected changes to the federal budget come from rapidly increasing spending on federal entitlement programs, once we consider the reasons for that increase it’s unreasonable to think the solution is to just stop it. Given the demographic pressures of an aging population (which we cannot change) and rising per capita healthcare costs (which we don’t yet fully understand how to change), a spending-side-only strategy would mean drastic cuts in real, per capita benefits, which I don’t believe either political party really wants. Given the level of real entitlement benefits that our society wants to maintain, the problem is as much that revenues can’t keep up as it is that spending is growing too fast. That means our historical experience with the level of revenues as a share of our economy (averaging 18 to 19 percent of GDP) is not a guide for what we will need in the future, especially considering that those past levels of revenues haven’t even proved adequate to cover spending and have recently sunk to historic lows of just 15 percent of GDP.

Raising revenue by reducing tax expenditures would shrink, not expand, government. The Republican pledge on taxes has always been touted as a small-government stance. But some of the most fiscally conservative members of the Republican Party — such as Sen. Tom Coburn of Oklahoma, formerly a member of the bipartisan “Gang of Six” — now recognize that there’s no simple correlation between the level of revenues and the size and reach of government, given the prevalence of tax expenditures. Tax expenditures amount to approximately $1 trillion annually — as much as all discretionary spending combined. While it’s not realistic to imagine eliminating all tax expenditures — or raising that $1 trillion even if we could because of behavioral responses and the likelihood we’d see some eliminated tax expenditures appear on the direct spending side of the budget — the potential to cut significant levels of subsidies on the tax side of the budget is still huge. President Obama’s fiscal commission made that point when it proposed a “modified zero” approach to deficit-reducing tax reform, illustrating the trade-off between a broader tax base (the broadest of which would zero out all tax expenditures) and the marginal tax rates needed to achieve a specified level of deficit reduction.2

Reducing Tax Expenditures Both:
“Tastes Great” (Democrats like) and “Less Filling” (Republicans like) because it…
Reduces deficit on tax side and Cuts government subsidies/”tax entitlements”
Raises revenue and Reduces size of government
Enhances progressivity and Increases economic efficiency
Avoids cuts in high bang-per-buck, short-term stimulus spending and Reduces longer-term deficit to encourage higher savings and economic growth

And tax expenditures don’t just imply larger government because of the higher tax rates required to finance the rest of government; they expand government’s influence on the economy. Tax expenditures subsidize some economic activities over others. In recasting those tax subsidies in terms of what they would look like if they were run through the spending side of the budget, Donald Marron and Eric Toder of the Tax Policy Center (TPC) estimate that the implied level of government spending rises from roughly 18 percent of GDP to 24 percent.3 Republicans who continue to claim that any type of revenue increase would expand government are obviously missing this point.

Reducing tax expenditures is a progressive solution that defies the equity-efficiency trade-off. Raising taxes progressively (a Democratic priority) does not have to mean raising marginal tax rates on the rich and increasing the distortionary effects of taxes on economic decisions (a Republican concern). A TPC analysis has shown that raising the needed additional revenues to achieve fiscal sustainability from only the top 2 to 3 percent of the population, without any base broadening, would mean that increases in the top federal income tax rates would have to be prohibitively large — getting to Laffer curve levels in excess of 75 percent.4

Because tax expenditures poke holes in a progressively structured income tax system (with graduated marginal tax rates), filling in at least a portion of those holes would raise revenue (and cut subsidies) progressively, while smoothing out, instead of exacerbating, the dips and bumps in the tax policy playing field. By reducing tax expenditures, we can achieve a progressive change in tax policy that would avoid the trade-off with economic incentives and growth. Moreover, the progressive rate structure that causes tax expenditures to disproportionately benefit the rich also explains why these tax-side subsidies will grow dramatically in real costs over time as real incomes grow. Just as real bracket creep pushes more and more income into higher marginal tax brackets over time, it will push more and more economic activity into more-tax-preferred status. The single largest tax expenditure in the federal budget, the exclusion of employer-provided healthcare, will grow especially dramatically in cost over time — and the benefits will get more skewed toward higher-income households — as its value rises with the rise in per-capita healthcare costs as well as the growth in real incomes.

Reducing tax expenditures is an inherently progressive policy strategy and can be made as progressive as we want it to be through the use of caps and phaseouts, such as in Obama’s proposal to limit the value of itemized deductions to a maximum 28 percent rate. That makes it clear that reductions in tax expenditures are more easily tailored to the progressivity goal if they are modified via the personal income tax, a direct tax on households based on their directly observable levels of income. The healthcare reform bill’s approach to paring back the tax expenditure subsidizing employer-provided healthcare — by imposing an excise tax on high-end insurance plans to be paid by the insurance companies (but whose ultimate burden will be felt by households that purchase expensive insurance plans regardless of their income level) — is a prime example of how political concerns can turn good intentions into suboptimal policy.

Reducing tax expenditures would address both near- and longer-term economic concerns. There are two sides to achieving fiscal sustainability: the ways we spend, and the means to pay for it. Just mechanically reducing the deficit by cutting spending or raising taxes in any old way is not enough. The policies that reduce the deficit must be thoughtfully crafted to promote a strong economy, both in the short term as we continue to need demand-side stimulus to speed the recovery from an unusually severe recession, and over the longer term, when we should focus on increasing our productive capacity, or the “supply side” of our economy.

It’s difficult to find a deficit reduction strategy better suited to addressing both types of economic concerns than reducing tax expenditures. Because tax expenditures disproportionately benefit higher-income households, who are much less constrained and save large fractions of their income, paring back those benefits would be far less damaging to the short-term demand for goods and services than cutting other forms of government spending, which disproportionately benefit lower-income households. And because of the efficiency gains and reduced distortions that come from a broader tax base, reducing tax expenditures is a far better way to raise revenue and reduce the budget deficit (increasing public saving) while minimizing any adverse effects on private sector economic activity (which could come from the alternative of raising marginal tax rates). A base-broadening, tax-rate-leveling, revenue-raising tax reform is a sure thing in terms of boosting national saving and longer-term economic growth through increases in both public and private saving.

Cutting tax expenditures is the ‘tastes great and less filling’ approach to solving our fiscal problems. Even though achieving deficit reduction is naturally unpleasant business, there’s something for both sides of the aisle to like about doing it by cutting tax expenditures. Bottoms up!

FOOTNOTES

1 Even economic plans by Paul Ryan and Tim Pawlenty contain proposals to reduce tax expenditures; it’s just that their tax plans also reduce marginal tax rates. Those components of their plans ought to be evaluated on their own merits. But more on the issue of the costs versus benefits of marginal tax rate reductions will come in future columns.

2 For the plan, see Doc 2010-25486 or 2010 TNT 231-35 2010 TNT 231-35: White House News. I might disagree with the commission’s chosen tax rate ceiling and the extent to which it allows base broadening to go toward deficit reduction, but its report nonetheless demonstrates the trade-offs in making that policy choice.

3 For the study, see Doc 2011-12908 .

4 For the study, see Doc 2010-1009 or 2010 TNT 11-96 2010 TNT 11-96: Washington Roundup.

END OF FOOTNOTES

How to Achieve a Sustainable Budget Deficit

June 28th, 2011 . by economistmom

My latest column for the Christian Science Monitor emphasizes that it can’t just be about brute-force cutting the budget; those spending cuts or tax increases have to make sense for the economy, too:

The United States budget deficit has become a crucial issue lately, and not just because it’s about to put us over the debt limit. The concern is not so much that the deficit is unusually large right now, as we’re still recovering from an unusually bad recession. The problem is that over the next several decades, even if the economy moves back to full employment, the fiscal outlook looks unsustainable.

What does an unsustainable budget look like?

Imagine that Uncle Sam takes out a loan (the national debt) to buy an investment (the US economy). As long as the economy grows faster than the debt, everything’s great. Even when Uncle Sam falls short on his monthly payments and borrows even more to make up the difference (the federal deficit), lenders aren’t going to panic as long as the economy keeps growing faster than the debt.

Everyone knows Uncle Sam is getting richer, so he can afford the bigger debt.

Here’s the problem: Over the past few years, federal budget deficits have been equivalent to about 9 to 10 percent of the size of our economy (as measured by gross domestic product). That means each year America’s total debt has grown by a commensurate amount. Even when the recession ends and those deficits are projected to come down to 6 or 7 percent of GDP over the next decade under current policies, that implied growth rate of the debt will still far exceed the expected 2 to 2.5 percent annual growth in the economy over the same period.

That’s the definition of economically unsustainable: when an economic obligation rises faster than the means to pay for it.

President Obama’s fiscal commission set a goal of getting deficits down to about 3 percent of GDP within five years – 3 percent being the average annual growth rate of the US economy since World War II. But the magic number might not be 3 percent, if, for example, the economy doesn’t turn out to grow at 3 percent on average in the future.

It’s important for us to recognize that there are two sides to this “sustainability equation”: the spending side – i.e., the deficits – and the income side – which, in this case, is represented by a growing economy. Crucially, the choices we make about the first part – through the economic effects of those spending policies and not just the cost of them – affect the second part, economic growth.

That’s why we can’t just mechanically reduce the deficit as naive accountants might. Instead, we need to artfully reduce the deficit as smart economists should. After all, what would you say about a family that decides to trim expenses to a “sustainable” budget by cutting spending on its most productive household investments, such as education and preventive health care, but does nothing about its most frivolous and least-productive spending for, say, lavish parties or flat-screen TVs? Such poor choices made in the name of frugality just end up hurting the family’s future income (their “human capital”) and the level of future spending such income could support.

The same concept applies to the government’s budget. Whether it’s getting the most economic “bang per buck” out of deficit-financed policies designed to stimulate short-term demand, or reducing the longer-term deficit with policies that minimize disincentives to work or save, getting our deficits down to “sustainable” levels requires paying attention to both sides of the sustainability equation: future income as well as spending.

Republicans Say “Screw You, CBO (Baseline)”

June 24th, 2011 . by economistmom

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Graph above is Figure 1-2 from CBO’s long-term budget outlook, showing debt held by the public as percent of GDP under two scenarios.

The Congressional Budget Office released its long-term budget outlook this week.  There wasn’t really any new news in it, but it did serve as a reminder that the fiscal policy choices available to us can make a huge difference–from the wildly unsustainable path implied by CBO’s “alternative fiscal scenario” to the much-closer-to-sustainable (at least over the next 25 years) “extended-baseline scenario.”

Most of the difference between these two paths is explained by what happens to the Bush/Obama tax cuts.  Under the CBO’s baseline conventions, revenue levels are based on current tax law as written, expiration dates and all.  That means the baseline assumes that the entirety of the Bush/Obama tax cuts–those to the rich as well as those to the rest of us (98 percent of us or so) that make up the big group now known as “middle class”–go away as (now) scheduled at the end of 2012.  Under the “alternative fiscal scenario” (considered a “policy extended” scenario), expiring tax cuts are assumed to be permanently extended.  (Technically, the cost of extension is estimated through the next decade, and beyond that, revenues as a share of GDP are assumed to remain constant.)

This demonstrates that our choice about what to do with the Bush/Obama tax cuts at the end of 2012–whether we let them expire or we extend them (yet again)–could be the difference between a sustainable versus an unsustainable fiscal outlook.  It’s somewhat comforting that this is at least still a fairly easy policy option available to us–to just let current tax law play out.

Except politically, revenue-side options to reduce the deficit seem impossible, with the latest news about how the Republicans have pulled out of the so-called “Biden talks” over the impasse on whether revenue increases–of any sort–are even on the negotiating table.

Lately I’ve been emphasizing that not all revenue increases are created equal and hence are not all equally deserving of scorn from “no new taxes”-type Republicans.  Revenue increases that come from broadening the tax base and reducing “tax expenditures” make the tax system more efficient (by distorting economic choices less) while at the same time shrinking the size and scope of government (by reducing subsidies).  And if you raise revenue in that base-broadening way, you can afford to reduce the deficit and maybe even have some left over for marginal tax rate reduction, as was suggested by both the President’s (Simpson-Bowles) fiscal commission and the Bipartisan Policy Center’s (Rivlin-Domenici) deficit reduction task force.

So this seems a good opportunity to repeat my explanation of revenue baselines.  In all my years (during the George W. Bush Administration) working on the Democratic staffs of various committees on the Hill, the number one concept I was asked to explain was how sticking to the “current-law baseline”–which meant letting the Bush tax cuts expire as scheduled–would not be the “largest tax increase in American history.”  The short answer was because we’d already passed that tax increase; the expiration of the tax cuts to take place at the end of 2010 had been passed into law way back in 2001.  (No vote was needed to let the tax cuts expire–only to let them continue.)  The longer, more complicated answer was that sticking to current-law baseline revenue levels (as had been proposed in many of the Democratic budget resolutions throughout the GW Bush Administration) did not necessarily mean sticking to current law.  It could mean literally sticking to current law and literally letting the tax cuts expire so that we’d go back to pre-2001 (Clinton-era) tax law, but it could also mean that we might pick and choose what portion of the Bush tax cuts to extend and pay for the cost of extension by raising a perfectly-offsetting amount of revenue elsewhere.  In other words, a current-law revenue baseline is consistent with either literal current law or modifications of current law that are fully paid for (i.e., that comply with “real”, no-exceptions, pay-as-you-go rules).

Why is this distinction important to emphasize today?  Because the Biden talks have fallen apart because Republicans can’t agree to revenue increases being part of a “bipartisan” solution.  To those Republicans, it doesn’t matter that all the bipartisan fiscal commissions, task forces, and study groups have said (very clearly) that revenue increases–in addition to direct spending cuts–have to be part of any bipartisan solution.  To those Republicans, all revenue increases are created equal, and they all fit their neat little stereotype of expanding the size of government and being bad for the economy.  They don’t want to listen to the expert commissions, because they don’t want to come around to favor some types of revenue increases over others, because even if they “get it,” they don’t believe that their most influential of constituents (such as the Tea Party Movement) would understand.

And with the CBO report reminding us that revenue policy is actually the biggest fiscal policy lever we have right now–big enough to make the difference between economically sustainable and not–we might consider taking the approaches of the fiscal commissions as great examples of how any particular level of revenue can be achieved by a number of different tax policies.  We could achieve an economically sustainable level of deficits by sticking to current-law revenue levels.  But that doesn’t mean we have to let all the Bush/Obama tax cuts outright expire.  It could mean, for example, choosing to keep the lower tax rates of the Bush/Obama tax cuts but paying for the cost of those lower rates by reducing some tax expenditures to broaden the tax base.  Or it could even mean choosing to lower tax rates even below those under the Bush/Obama tax cuts but paying for that by broadening the base still further.

The CBO report shows us that the revenue side of the budget is too important to ignore in the goal of achieving fiscal sustainability.  But in highlighting the current-law baseline as one way of getting there, it emphasizes current law (with its expiring tax cuts) and probably perpetuates the “largest tax increase in American history” mentality–the fear on the part of Democrats and the vitriol on the part of Republicans.  If we could soft-focus our view of the “current-law baseline” as a goal for a fiscally-sustainable level of revenues that doesn’t have to mean raising tax rates at all, we’d more likely achieve some real bipartisanship on putting revenue policy squarely on the deficit-reduction table.

By rejecting revenue increases of any kind, the Republicans have implicitly branded the CBO current-law baseline as pure fantasy.  But they should reconsider with the recognition that current-law revenue levels don’t have to come from current law.

Do Tax Cuts Pay for Themselves? Sorry, No.

June 21st, 2011 . by economistmom

Visit msnbc.com for breaking news, world news, and news about the economy

Here’s a really nice video interview of Bruce Bartlett on the issue. Don’t let the fact that it’s MSNBC lead you to automatically dismiss the story as hyper-partisan hogwash. It actually quotes a lot of Republican experts. The basic point is that certain tax cuts can do a decent job stimulating demand for goods and services in a recessionary economy, and certain tax cuts (usually other kinds) can do a decent job encouraging the supply of productive resources (labor supply and saving) in a full(er)-employment economy. But neither type of tax cut is likely to generate so much demand or so much supply that they pay for themselves (a la Laffer), even over the longer run. And once you get long enough into the longer run, chances are any credit you are giving to the tax cut itself is misplaced.

More of my way of explaining this to come in future Tax Notes columns.

Well, Good for You, AARP!

June 17th, 2011 . by economistmom

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So I might just be proud to become a card-carrying member of the AARP…  (There’s the card they sent me, although I’ve got a few months before I turn 50.)

This is a big, huge deal.  For months, Alan Simpson, one of the co-chairs of the President’s fiscal commission, has been lashing out at AARP and Grover Norquist in the same breath.  (Having a hard time finding a video clip on it now, but I’ve heard Simpson’s AARP-Norquist rant live at the Peter G. Peterson Foundation’s fiscal summit and at the Committee for a Responsible Federal Budget’s annual dinner most recently.)  But today the Wall Street Journal’s Laura Meckler reports:

WASHINGTON—AARP, the powerful lobbying group for older Americans, is dropping its longstanding opposition to cutting Social Security benefits, a move that could rock Washington’s debate over how to revamp the nation’s entitlement programs.

The decision, which AARP hasn’t discussed publicly, came after a wrenching debate inside the organization. In 2005, the last time Social Security was debated, AARP led the effort to kill President George W. Bush’s plan for partial privatization. AARP now has concluded that change is inevitable, and it wants to be at the table to try to minimize the pain.

“The ship was sailing. I wanted to be at the wheel when that happens,” said John Rother, AARP’s long-time policy chief and a prime mover behind its change of heart…

In an early sign of its new approach, AARP declined to join a coalition of about 300 unions, women’s groups and liberal advocacy organizations created to fight Social Security benefit cuts. “The coalition’s role was to kind of anchor the left, and our role is going to be to actually get something done,” said Mr. Rother.

So good for you, AARP, and in particular, good for you, John Rother.  I know it’s hard for many of these same Social Security advocates to understand that some of us who support voluntary, well-considered reform of Social Security–as an alternative to risking its demise from not-so-benign neglect–are actually advocates for Social Security, too.   But AARP understands now.  AARP’s decision is a prime example of the very tough choices that have to be made, weighing policy wisdom against political pressure, when it comes to fiscal responsibility.

At Last, A Little Bipartisan Deficit Reduction

June 17th, 2011 . by economistmom

The Senate voted to repeal the ethanol tax credit on Thursday.  The significance of this wasn’t in the size of this particular tax expenditure (about $1 billion/year in forgone excise tax receipts, according to footnote 4 in this JCT publication), but in the fact that the proposal to end the credit and actually raise revenue from it actually received bipartisan support.

Here is the roll call vote.  The yeas and nays are nearly perfectly evenly divided among Ds and Rs, with the nays easily explained by geography (corn-producing states).  Some of those who voted no, like Senate Budget Committee chair Kent Conrad (one of the Democratic members of the Gang of Six-now-Five), no doubt would have favored a more sweeping reduction of tax expenditures–but would argue (I’m pretty sure) that picking on the ethanol tax subsidy alone and thus their particular (agricultural) part of the country is unfair.

I think this is a really good sign.  (And I have more good news to share in my very next post…)

A First Crack in the GOP’s “No New Taxes” Armor?

June 15th, 2011 . by economistmom

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[UPDATE and CORRECTION (strikeouts shown and inserts noted with italics), 2:15 pm Thursday.  Regarding the vote tally, I got it backwards!  The 40-59 vote was 40 votes in favor, 59 opposed.  More on what seems like the irony that most Democrats actually voted against this idea they supposedly support (of raising revenue by reducing tax expenditures or "loopholes"), later.]

Tuesday’s vote in the Senate on Tom Coburn’s proposal to end the ethanol tax credit was significant even though it failed to get the filibuster-proof 60 votes.  It just barely fell short, receiving 59 votes. And as the Washington Post’s Lori Montgomery explains, what’s significant is the fact that it got 59 votes means that at least some Republicans supported the revenue-gaining measure:

The measure, offered by Sen. Tom Coburn (R-Okla.), fell short of the 60 votes needed to overcome a filibuster threat. But it had the support of 34 of 47 Republicans, most of whom have signed an anti-tax pledge that specifically prohibits raising taxes by any means but economic growth.

Coburn has argued forcefully that Republicans must abandon that pledge if they are serious about tackling the spiraling national debt. Though the Senate turned back his measure, he said the vote nonetheless marks the beginning of the end of GOP tolerance for wasteful giveaways through the tax code.

“You’ve got 34 Republicans that say they’re willing to end this, regardless of what Grover says,” Coburn said, referring to pledge creator Grover G. Norquist, the founder of Americans for Tax Reform. “That’s 34 Republicans that say this is more important than a signed pledge to ATR.”

Lori suggests that cutting the ethanol tax credit–along with other tax expenditures, perhaps–might actually become part of the bipartisan deficit-reduction deal that would come out of the “Biden talks.”  But some key Republican leaders still seem to be “hypnotized and mesmerized” by the Norquist mindset (emphasis added):

It was unclear Tuesday whether the ethanol vote has any direct implications for the Biden talks. Though he was among the 34 Republicans who voted to advance the measure, Senate Minority Leader Mitch McConnell (R-Ky.) told reporters that ending tax breaks is “the kind of thing you would typically do in a broad tax reform bill,” not in debt-reduction talks.

For his part, Norquist claimed victory, saying he had prevented Coburn from tricking his colleagues into voting for a tax increase. At a Capitol Hill meeting Tuesday morning with more than 100 GOP staffers, Norquist said he authorized senators to advance the Coburn measure so long as they also supported a bill by Sen. Jim DeMint (R-S.C.) to cut the estate tax.

This strategy, Norquist said, “robbed” Coburn of the opportunity to persuade his Senate colleagues to vote for higher taxes.

“We won, he lost; he can try again, but he’s not going to get his tax increase,” Norquist said. “Because the House won’t let him have his tax increase, even if he thinks he can get it through the Senate.”

McConnell actually has it backwards, by the way.  Ending tax breaks in a way that raises revenue is not typically what you’d do in a pure “tax reform” bill with a primary goal of simply improving the efficiency and fairness of the tax system; you’d typically look at reforming the tax system to collect the same amount of revenue more efficiently and fairly.  It’s precisely because we are in fact trying to reduce the deficit by cutting spending and/or raising revenue that policymakers like Coburn are proposing to cut tax expenditures and actually raise revenue.   It’s precisely what makes cutting tax expenditures such the perfect policy for deficit reduction–because it actually reduces spending and raises revenue at the same time.

[***UPDATE, 11 pm Thursday:  This evening the Senate passed the proposal to end the ethanol tax credit, 73-27, apparently having fixed any "procedural" concerns of the Democrats.  Here's the AP story.  I do think this is major progress in terms of Republicans being open to deficit-reducing revenue increases if they come from base-broadening rather than from increases in tax rates.]

Being Civilized About Taxes

June 13th, 2011 . by economistmom

civilized-on-irs-building

Here’s my inaugural column for Tax Notes, as reprinted on the Concord Coalition’s website today.  Note that the title of the regular column is “Taxes for a Civilized Society,” but the specific title of the inaugural column is (the very slightly different) “Being Civilized About Taxes.”  At any rate, you can find the whole text of the column (originally published on 6/6/11 in Tax Notes) here (on Concord’s site) without a Tax Notes subscription, and here (on the Tax Notes site) with one.  Next week’s column, scheduled to come out in Tax Notes on 6/20, is all about how reducing tax expenditures is like the “tastes great and less filling” approach to cutting the deficit.  (Learn more about Tax Notes here.)

My New Column for Tax Geeks

June 10th, 2011 . by economistmom

On Monday I launched my new column in Tax Notes, a specialized publication that only geeks and politicos who live and breathe tax policy would find appealing and worth the price of the subscription.  I, of course, love Tax Notes and have missed having access to it since my days on Capitol Hill.  Now I can read it again, by writing for it!

My column will appear in Tax Notes (which is published every Monday) about once every two weeks on a fairly regular basis.  I’ve dubbed it “Taxes for a Civilized Society” and will occasionally share pieces of my column here–with some lag to honor my agreement with the publisher (Tax Analysts).  I’ll reproduce my inaugural column here next week.  For those of you who are already subscribers to Tax Notes, you can find that column (right now) here.

Here’s Tax Analysts’ public access press release on this new collaboration, with this explanation of what my Tax Notes “shtick” will be:

FALLS CHURCH, VA — Tax Analysts, the nonprofit provider of federal, state, and international tax news and analysis, announced its launch today of a new column, Taxes for a Civilized Society, written by new contributor Diane Lim Rogers.

The column, appearing in Monday’s issue of Tax Notes, the weekly magazine on federal tax policy and administration, will focus on the intersection of budget and tax policy and the essential role the tax system will have to play in any successful effort at deficit reduction. Drawing on her expertise in tax policy and her experience working with the federal budget, Rogers will emphasize revenue-gaining reforms that would fulfill bipartisan and broader societal goals for public policy, while improving the nation’s fiscal outlook and contributing to a stronger economy. The column will also appear in Tax Notes Today, Tax Analysts’ federal daily online publication.

In her inaugural column, the author explains that “being civilized” about taxes means recognizing tax policy’s contribution to the federal budget outlook as a whole and the broader role of government in our society; working to improve our tax system so we can collect the revenue we need in as efficient and equitable a manner as possible; and encouraging our policymakers to find areas of agreement on policies that would promote the common good.

I hope some of you who follow my blog will try to follow my Tax Notes columns, too.  How big of a tax geek are you?!!

Who Needs a Nobel Laureate When We Have Google?

June 7th, 2011 . by economistmom

google-government-logo

I was debating on what to write about tonight–either the update on Nobel Prize winner Peter Diamond’s failed nomination to the Federal Reserve Board (with his very public withdrawal as shared via the New York Times), or Minnesota governor (and Republican presidential candidate) Tim Pawlenty’s speech on his “economic plan” (text of speech here via the Wall Street Journal’s Washington Wire blog).  I decided I could do both in one post, because both Peter Diamond (in his NYTimes column) and Tim Pawlenty (in his economic policy speech) talk about how they would approach improving the role and quality of government in our lives.

By the way, the Diamond nomination appeared doomed back in October of last year when Diamond had just won the Nobel Prize–as I wrote about at the time, here.  The updated story on the “why” (from Diamond’s new column) isn’t really any different from the story last October.

As Diamond explains:

Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?

The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy…

[U]nderstanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.

In my Nobel acceptance speech in December, I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy — a policy of keeping short-term interest rates exceptionally low and buying Treasury securities to keep long-term rates down. Analysis of the labor market is in fact central to monetary policy.

And what could a Nobel laureate economist bring to the question: what makes for better government?  Towards the end of his column, Diamond suggests this:

To the public, the Washington debate is often about more versus less — in both spending and regulation. There is too little public awareness of the real consequences of some of these decisions. In reality, we need more spending on some programs and less spending on others, and we need more good regulations and fewer bad ones.

Analytical expertise is needed to accomplish this, to make government more effective and efficient. Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views that more is always better or less is always better. I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.

Enter Tim Pawlenty and his speech today, where he laid out his plan, summarized by:  “Let’s grow the economy by 5%” (per year).  His primary means of getting us there:  revenue-losing-that-will-grow-the-economy-so-much-that-they’ll-become-revenue-gaining tax cuts.  I’ll have much more to say about his tax reform plan later (and probably right up through the election).  But besides cutting taxes, Pawlenty would cut spending–by what sounds like a lot.  How would he figure out what to cut?  He explains:

There’s some obvious targets. We can start by applying what I call “The Google Test.” 

If you can find a good or service on the Internet.     Then the federal government probably doesn’t need to be doing it.

So there’s Pawlenty’s answer (and the “connection” in this blog post).  He’s basically saying: Who needs a Nobel laureate economist waxing philosophically and analytically on the spending we need more of versus the spending we need less of, when we could just “Google it.”

Huh?

If it’s not already obvious from my tone, I don’t like the “Google Test.”  There are many things that the private sector cannot be expected to do well on its own, especially when an important “public good” is to provide a “safety net” for people who cannot fend for themselves.  Or whenever any market participant faced with their own self-interest (to maximize their own individual utility or profit) would fail to account for the social costs or social benefits of his or her actions/decisions.  The free market can only “optimize” based on market values; market forces (the “invisible hand”) can’t lead us to allocations that maximize social welfare where market prices don’t correlate well with social values.

I’ll be doing a Minnesota public radio interview on the Pawlenty speech tomorrow (Wednesday) morning, and if there’s anything to share afterward, I will post it.

**UPDATE (12:30 Wednesday):  Here’s a link to the audio of my MN public radio interview, which focused mainly on the tax policy part of the Pawlenty plan.  More on this in future post(s).

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