EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

Feldstein and Summers on Tax Reform: A Lot of Common Ground–but Still Some Stumbling Blocks

October 1st, 2012 . by economistmom

Last week as part of the “Strengthening of America-Our Children’s Future” project that the Concord Coalition is a co-sponsor of, a forum was held in New York on the topic of “pro-growth tax reform.” Harvard economics professor and Romney adviser, Martin Feldstein, joined former Treasury secretary and Obama adviser, Lawrence Summers, to discuss what they consider “pro-growth” tax policy.  A preview of their discussion was provided by former Senator Sam Nunn’s co-anchoring of the CNBC “Squawk Box” show earlier that morning; in this segment Feldstein and Nunn discuss the potential for bipartisanship in tax reform, but Feldstein is also asked to react to comments that Summers had made on the show just before.  (This latter issue will be most appreciated by those who have been following the Tax Policy Center’s analysis of the Romney plan and Feldstein’s subsequent critique of the TPC analysis and defense of the Romney tax reform plan.)

At the event, Feldstein and Summers made it clear that when it comes to the notion of what is “pro-growth tax reform,” there is a lot of common ground between economists who favor the Rs and economists who favor the Ds.  Here are what I heard as some of the main points of agreement between Feldstein and Summers (what Summers referred to as the “structure that Marty and I have converged on”):

  1. “Pro-growth tax reform” means structuring the tax system to encourage longer-term expansion in the productive capacity (or “supply side”) of the economy.
  2. This suggests that a broader, more even tax base, which supports relatively low marginal tax rates, is the best way to raise necessary revenue with the least distortion to those supply-side economic decisions (how much to work, how much to save, how much to invest in human or physical capital).
  3. A first priority to follow the “broadening the tax base” strategy is to reduce existing “tax expenditures” that are considered inefficient and/or unfair.  Tax expenditures are economically equivalent to government spending programs and make government bigger than indicated by the levels of direct spending. (Cutting revenues by increasing tax expenditures grows, rather than shrinks, the size of government.)
  4. Tax expenditures could be reduced in a variety of ways that don’t have to target particular sectors of the economy (could be done in across-the-board, broad-brush ways–e.g., Feldstein likes the idea of capping the total amount to a percentage of gross income) and can be done in a progressive manner, where tax burdens are increased relatively more on higher-income households (e.g., the Obama budget proposal to limit itemized deductions and even other tax expenditures to the 28% rate).
  5. Tax reform does need to raise revenue (relative to the policy-extended, “business as usual” baseline, and even before any “dynamic scoring” type effects are accounted for) in order to contribute to deficit reduction and (therefore) be “pro-growth.”
  6. But “pro-growth tax policy” is a longer-term goal focused on mainly the supply side of the economy; we cannot immediately raise tax burdens in ways that would threaten putting our economy back in recession (by reducing demand for goods and services too severely).

But I also heard some remaining sources of disagreement between Feldstein and Summers, which are probably indicative of where “stumbling blocks” to bipartisan tax reform remain:

  1. Beyond decreasing tax expenditures/broadening the income tax base, what are some other features essential to “pro-growth” tax policy? (i) Feldstein seems to favor continued low or even lower effective tax rates on capital income (more consistent with a consumption base), while Summers seems to favor reducing or eliminating the current preferential rates on capital gains and dividends (consistent with reducing tax expenditures under an income base); (ii) Feldstein would favor keeping marginal tax rates low across the income spectrum, including at the very top, while Summers would favor a return to higher rates at the top as necessary to restore fairness (greater progressivity) to the system; (iii) Summers explicitly said that effective (average) corporate income tax rates are too low, not too high, while Feldstein argues for corporate tax reform that is revenue-neutral at best with lower marginal tax rates on profits earned abroad; (iv) Feldstein would probably argue for a lower upper bound on overall revenues/GDP than Summers would, as consistent with the “pro-growth” goal.
  2. Beyond deficit reduction, what is needed to grow the economy’s “supply side?” Feldstein would probably argue for working toward smaller government in scale and scope, while Summers clearly stated that pro-growth tax reform is (necessary but) “not sufficient” to address our nation’s growth needs, because we have “under-invested” in many things.  Beyond raising national saving by reducing the deficit, Summers believes government should more directly help the economy invest more in education, infrastructure, the environment, health care, etc.–the components of the productive capacity of the economy.  He stated that such public investments are a necessary complement to fiscal sustainability in a “pro-growth” fiscal agenda.  (And immediately, Summers emphasized that continued stimulus-type policies, to keep demand for goods and services up, are still necessary–although Feldstein did not disagree with this.)

The conversation between Feldstein and Summers is a good indicator of the potential for achieving bipartisan tax reform consistent with not just “growth” goals but fairness and fiscal responsibility goals as well.  The broad contours of the common ground are indeed well “grounded,” but some of the remaining points of disagreement might be significant-enough stumbling blocks to make meeting halfway still challenging.

3 Responses to “Feldstein and Summers on Tax Reform: A Lot of Common Ground–but Still Some Stumbling Blocks”

  1. comment number 1 by: Marty Sullivan

    Diane - Great post and thanks for the links to a fascinating discussion. It is not surprising to us as economists that Marty Feldstein proposes raising taxes by cutting tax expenditures. But isn’t it striking that he as a Romney advisor recognizes the need tax hikes?

  2. comment number 2 by: Patrick R. Sullivan

    Romney recognizes for need for more tax revenue. He said so last night. He believes the right way to get that revenue is more economic growth, rather than ‘redistribution’.

    I doubt that either Feldstein or Romney are unaware that in 2007 (with the Bush tax cuts in full force) tax revenue was over 18% of GDP.

  3. comment number 3 by: Jim Glass

    on the topic of “pro-growth tax reform”….

    the main points of agreement between Feldstein and Summers (what Summers referred to as the “structure that Marty and I have converged on”):

    a broader, more even tax base, which supports relatively low marginal tax rates, is the best way to raise necessary revenue with the least distortion to those supply-side economic decisions (how much to work, how much to save, how much to invest in human or physical capital).

    what are some other features essential to “pro-growth” tax policy?

    Summers would favor a return to higher rates at the top as necessary to restore fairness (greater progressivity) to the system

    It seems Summers disagrees with Summers. He wants both a broader, more even tax base with lower marginal rates to minimize distortion of economic decision making, and also higher marginal tax rates on those who have the largest impact on economic decision making.

    Which means — do not doubt this — a more uneven, narrower tax base, riddled with “preferences”. For as the deadweight cost of taxes rises not with the tax rate but by the square of the increase in the tax rate, the political pressure to loophole-ize the tax code rises exponentially as marginal tax rates increase at the top.

    In simplest terms, the law of supply & demand applies to tax loopholes just like everything else. Make tax preferences worth millions and billions of dollars, and those to whom they are worth that much will gladly pay that much to politicians to obtain them — and the politicians will gladly collect that payment and provide them, and often enough consciously and overtly set the rules to make sure they do have such loopholes to provide to collect such payment. IOW, make tax preferences valuable and they will come!

    Anyone who doubts this should see (1) the massive tax shelter industry that existed before TRA ‘86 knocked the top marginal rate way down to 28%, (2) the minimal amount of income that was ever actually taxed at those top rates of 50%, 70%, 90% back in the days about which the left has so many nostalgic fantasies.

    Summers surely knows all this, which is why he also wants a broader base with lower marginal rates and fewer preferences. So perhaps he needs to get in better touch with his inner Summers.

    Or, more simply, when the topic is “pro growth tax reform” and Summers starts talking about how he wants higher rates in a much more uneven, loophole-ridden system where how much rich people pay depends on how good their lawyers and CPAs are at gaming the system, to increase the system’s “fairness“, someone should just remind him that the subject is “pro growth tax reform”, not his subjective opinion about what’s fair or not, which has nothing to do with growth. (At least nothing positive.)

    You can’t have it both ways. The choice is between (A) low top marginal rates, broader tax base, fewer tax preferences, equity among taxpayers as like are taxed alike, and lower deadweight cost to the economy; and (B) high top marginal tax rates, a narrowed and riddled tax base, multitudes of tax preferences, inequity among taxpayers as like are taxed according to the loopholes they can whip up, and higher deadweight cost to the economy.

    Pick one.