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The Congressional Budget Office has just released an excellent analysis prepared by CBO economist Ben Page on the “Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013″ (in typically dry CBO-speak).  I prefer to think of it as an economics version of the story “The Little Engine That Could.”  You see, the “engine” is the U.S. economy, and this so-called “fiscal cliff” is, rather than something we are in danger of falling off of, something we are about to ram straight into–like a huge wall just ahead on the tracks, at January 2013.  When economists and policymakers fret about this fiscal cliff, it’s not the usual worrying about the unsustainable deficits we are projected to run over the next several decades; it’s concern that our economy, still in “recovery,” can’t handle the amount of deficit reduction that is scheduled to be forced upon us in just a matter of months.

The CBO analysis validates this worry, first defining the scale of the cliff as $607 billion worth of deficit reduction in one year (or $560 billion net of economic feedback, cutting the deficit nearly in half between fiscal years 2012 and 2013), then explaining that letting our economy run head onto this cliff will in fact, slow it down and perhaps even cause the “double-dip recession” economists have been fearing.  From the summary (emphasis added):

Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.

So CBO then looks at the question: what if we could avoid the cliff entirely–by sort of going around it?  Well, going around it would indeed keep us going in 2013:

CBO analyzed what would happen if lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013. In that case, CBO estimates, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, well above the 0.5 percent projected for 2013 under current law.

So that sounds, good: if we can’t go through the fiscal cliff, just go around it (or just say “poof” and imagine it away).  OK, I’ll take that ticket… Except, as CBO next explains, then the inevitable (real) “cliffs” ahead just get taller and steeper:

However, eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. If all current policies were extended for a prolonged period, federal debt held by the public—currently about 70 percent of GDP, its highest mark since 1950—would continue to rise much faster than GDP.

Such a path for federal debt could not be sustained indefinitely, and policy changes would be required at some point. The more that debt increased before policies were changed, the greater would be the negative consequences—for the nation’s future output and income, for the burden imposed by interest payments on the federal debt, for policymakers’ ability to use tax and spending policies to respond to unexpected challenges, and for the likelihood of a sudden fiscal crisis. And the longer the necessary adjustments in policies were delayed, the more uncertain individuals and businesses would be about future government policies, and the more drastic the ultimate changes in policy would need to be.

You see, even over the longer term, the “fiscal cliff” is more like one we will have to climb rather than one we’re in danger of falling off of.  And the higher the cliff gets, the harder it will be in the future to ignore it or continue to go around it, or actually get up it.  So going around and avoiding the cliff entirely isn’t a long-term option, nor necessarily the best option even now.  CBO explains the policy options, which I’m labeling as different strategies for driving the train called the U.S. economy toward the 2013 fiscal train stop.  The CBO concludes that there are three basic options (my labels and emphasis added):

What Might Policymakers Do Under These Circumstances?

[1: "Going Around the Cliff, For Now"]  They could address the short-term economic challenge by eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years—but that would have substantial economic costs over the longer run.

[2: "Running Head-On Into the Cliff"]  Alternatively, they could move rapidly to address the longer-run budgetary problem by allowing the full measure of fiscal restraint now embodied in current law to take effect next year—but that would have substantial economic costs in the short run. Or,

[3: "Grading the Cliff Into a Climbable Hill"]  if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.

In other words, the U.S. economy does face an “uphill battle” in terms of the fiscal outlook; heading to higher ground (meaning lower deficits), eventually, is unavoidable.  But to quote from a particularly wise engine, “I think [we] can” do it.  The 2013 fiscal cliff is at least an opportunity to take a constructive attitude toward climbing that hill, and hopefully our policymakers, after the election, might have the wisdom and courage and work ethic needed to start turning that fiscal cliff into something our economy can more easily and successfully climb.

Very interesting poll results reported in today’s Washington Post.  A snip of the graphic is posted above.  Note that President Obama continues to reign in the overall inspirational category:  if the question is how excited one gets about supporting the candidate and knowing that the candidate will support and understand you (and your economic problems and concerns), Obama wins hands down.  But if the question is how well the candidate has actually done or is expected to do on objective, measurable economic goals, Obama and Romney look virtually the same.  If the President actually wins reelection, this suggests that he could and probably should go bolder in his second term to put the money where the confidence in him is–to come up with and follow through on the policies that are consistent with all of his inspirational talk.  If Romney wins, or maybe rather, in order for him to win, the poll suggests he has a lot of PR and perhaps substantive policy work to do to convince Americans that his economic policies will be good not just for this abstract concept of “the economy” or other people’s “jobs,” but good for Americans very broadly as well.

This is an old theme  here, but the issue and the confusion persists, as I have just come from attending the Peter G. Peterson Foundation’s fiscal summit today, complete with a protest/press conference  on the front steps of the summit venue, with the protesters arguing against the “austerity” measures they think the summit participants and attendees advocate.

Just coincidentally, here is a blog post I wrote on Concord’s blog today.  In it, I say deficits can sometimes be good, and deficits can sometimes be bad, depending on the condition of the economy (emphasis added):

In a recovering economy still below “full employment” level, the binding constraint is lack of demand for goods and services. Increasing the supply of productive resources won’t increase GDP if there is already excess supply, or idle capacity, in the economy. It will only increase unemployment. In such an economy, fiscal policy can increase GDP by stimulating consumption — either through the government’s direct purchases of goods and services, or through tax cuts or transfer payments that indirectly increase private spending. Deficit spending can be effective at increasing demand and GDP immediately; how effective it is depends on how well targeted the policies are toward households and businesses most likely to spend additional funds on goods and services, and on how much the industries that produce those goods and services respond by hiring additional workers.

Sudden fiscal consolidation or deficit reduction, on the other hand, can jeopardize an economic recovery if it substantially reduces the net incomes of households that spend most of their income. (Such “austerity” measures can also spur a political backlash, as we are seeing now in Greece and France.)

In contrast, in a fully-recovered, full-employment economy, the size of the economy is limited by the level of productive capacity, or the aggregate “supply side” of the economy. Increasing demand without increasing supply only creates inflationary pressures. Under these conditions, higher private and/or public saving will most effectively expand the economy.

Deficits harm economic growth by reducing national saving (public plus private saving), which reduces the capital stock, labor productivity and household incomes. So deficit financing of tax cuts or spending designed to encourage the supply of productive resources handicaps the likely payoff. If policies can be structured to preserve the positive incentive effects on the supply of labor and capital while avoiding deficit financing, then those policies are much more likely to increase GDP.

As the economy gets closer to full employment and there is less need to stimulate demand, fiscal policy should transition from deficit-financed policies that encourage consumption, to paid-for policies that increase national saving.

And just because deficit spending in general can be helpful in a recession and recovery and harmful in general in a recovered economy, doesn’t mean all deficit spending is equally good in a recession and recovery, or all deficit spending is equally bad in a full-employment economy.  There are benefits and costs in either situation that should be evaluated as thoughtfully as possible in order to maximize the net benefits of the policy.

So I don’t support “austere” fiscal policy, but I do keep hoping for “smarter” and (net) beneficial fiscal policy.  It is not at all hard to do in economic theory.  The difficulty lies mostly in political practice.  I’ll explain more on that soon when I write more about what happened at today’s fiscal summit.

My final column with Tax Notes as a regular contributor came out today, available here if you are a subscriber.  If not, you will have to wait until next week when I will reprint the column in full here.  The title is “Making the Best of the Bush Tax Cuts,” and the main point I make is that of all the possible economic effects of the Bush tax cuts, and all the arguments made about the cuts (for or against them), by far the most significant, most noted, most praised or most maligned characteristic has been their size (or revenue loss).  Even supply-side proponents of the Bush tax cuts hardly ever talk about the supply-side effects of the tax cuts in truly supply-side terms; i.e., they don’t try to argue that the incentive effects of lower marginal tax rates on labor supply or private saving have been huge.  They just talk about how the tax cuts have been huge, and so wouldn’t it be bad if they went away?  Liberals have argued that the tax cuts have been costly and have disproportionately benefited the rich, meaning the government has given away a huge amount of money to the rich, so wouldn’t it be good if they went away?  So the bottom line is that for all the talk of all the promising, bipartisan ideas for tax reform that would reduce the deficit, there is still huge disagreement about what to do with the huge thing known as the Bush tax cuts.

But it’s a good thing that we still are debating this topic, because it means we still have some choices to make over a huge pot of money.  In my column, I try to pitch this optimistic view:

Instead of complaining about the size of the Bush tax cuts and not doing anything constructive about it, policymakers ought to commit to using that size in a positive way. The fact that we have a valuable policy lever available to us is fortunate.

It is obvious by now, after all these years of arguing about the Bush tax cuts but continuing to keep them just as they are, that the disagreement is not over the shape of tax reform we’d all like to see (broader base, fewer tax expenditures that upside-down subsidize the rich, low marginal tax rates), but rather over the size of the revenue stream we should be collecting under this beautifully bipartisan (but still hypothetical) tax reform.  That’s why it surprised me when at last week’s tax reform event hosted by the Brookings Institution’s Hamilton Project, none of the experts emphasized a point that I do in my final Tax Notes column:  that this is more a disagreement over budget policy than tax policy, which means that the budget process and budget rules will be unusually important to the success of any deficit-reducing tax reform effort in the next few months and years–which means that, oddly enough, the budget committees may be more important players in achieving tax reform than even the tax-writing committees.  While the budget committees have not had much say on the issue of the Bush tax cuts up until now, in my column I offer up several reasons to be more optimistic about the future, including the possibility of better dealing with the “turkey” (aka the Bush tax cuts) in the “lame duck” session:

All these ways of making the best of the Bush tax cuts are not precluded by the fact that this is a presidential as well as congressional election year. If we consider the many ways in which policymakers have failed over the years regarding decisions about what to do about the Bush tax cuts, it’s clear we can’t blame just the budget committees for not putting their foot down about the current-law baseline and pay-go. When Obama and Republicans want to keep extending and deficit-financing them, we can understand why Congress on its own was unable to get its bipartisan act together and behave better. Doing the right thing by the Bush tax cuts requires strong leadership unencumbered by unrealistic campaign promises.

There are several reasons to be optimistic about doing better once we get past the next election. The near-term economy is not as fragile as it was two years ago, the last time the Bush tax cuts were about to expire, making the idea of letting go, even gradually, more palatable. At the same time, the various debt crises in Europe serve as a warning about the unsustainability of the U.S. fiscal outlook and its implications for the economy in terms of longer-term growth and shorter-term stability.

Finally, after this November’s election, no matter who is elected president, we are likely to have a president who is less tied to a campaign promise that commits him to keeping the Bush tax cuts and who was voted into office by a public that is now far less enamored of the Bush tax cuts than it has ever been.

I’ll repost the column in full here next Monday.  (PS: Like any commentary on the Bush tax cuts, it seems, the cartoon above is old yet still timely; I have used it on my blog before.)

My son Johnny and I were guests on “The Sports Docket” (an online radio show focused on NY sports) last night, talking about Jeremy Lin and the whole “Linsanity” thing and how inspiring he is to kids like Johnny who want to do well academically and otherwise.  Johnny was the first kid to ever be a guest on the show.  I had hardly anything to say since it was, well, a sports talk show.  (I was invited because of the Christian Science Monitor column I had written about Linsanity and Asian American stereotypes.)  But I enjoyed learning about some of the economics of professional sports, such as the influence of salary caps on ticket prices, from the other guest, Allen St. John.  I am hoping that Jeremy Lin himself finds out about Johnny’s interview and invites him to a Knicks game or just over to his house sometime soon! 

Video streaming by Ustream

As we arrive at the federal tax filing deadline (this year on Tuesday, 4/17), it just so happens that Congress and the Administration have been thinking of different ways to raise tax burdens on the rich.  Last week I participated in a “Tax Day” event at the Tax Policy Center called “Should the Rich Pay Higher Taxes?” as one of the “four Ds” panel which also included TPC’s director Donald Marron, former CBO director and former McCain adviser Doug Holtz-Eakin (now president of American Action Forum), and economist rich guy (and a member of the “Responsible Wealth” coalition) David Levine.  The TPC has our handouts and a video of the event posted here.  (The video is also embedded above.)

TPC’s Howard Gleckman moderated the event (and blogged about it afterward, here) and at one point asked each of us “who is rich?”  I at first didn’t know how to answer that; “rich” is a relative concept that depends on one’s personal “baseline,” of course!  But then I circled back to the focus of the event–what the tax burdens of “the rich” should be–and I realized that in that context, all federal income taxpayers should be considered “rich,” in that we are all, all combined at least, paying too little in taxes.  Revenues as a share of GDP are far lower right now than the 18 percent historical average over the past several decades, which is too little anyway to produce economically sustainable budget deficits now and going forward (let alone enough to cover spending fully).  And although a lot of that currently-below-average level is because of the short-term but stubbornly persistent weakness in the economy (a cyclical phenomenon), projections show that even when the economy gets back to “full employment” and even when revenues/GDP recover back to and above the historical average (even under the policy-extended baseline, by the way), revenues are still not going to be enough to keep up with the growth in government spending–even if health reform (already in place and to come) successfully reduces the growth in Medicare spending.

So if “the rich” are defined as those who can afford and ought to be expected to pay higher income taxes, then “the rich” really has to be much more broadly defined than “people like David Levine” (who are multi-millionaires).  And if you watch the video of the TPC event, we all pretty much agreed on the premises that: (i) we need more federal revenue; (ii) “the rich” can manage higher tax burdens the best (and should be asked first); and (iii) David definitely qualifies as “rich.”  We had more differences in opinion over: (i) how much more revenue we need (and implicitly, what the right size of government is); (ii) how that revenue should be raised in terms of base-broadening vs. rate-raising reforms; (iii) what the right basis of taxation is–income or consumption; (iv) if David’s wealth comes more from his high productivity and hard work, or more from good luck; and (v) if raising tax rates on people like David will cause them to not work so hard, or if it just means they will not be as “lucky” in terms of their tax burdens.

David is practically begging to make him, and other millionaires like him, pay higher taxes, and feels the best (maybe easiest) way to do so is in the latest legislative version of the “Buffett Rule”–which basically imposes another “alternative minimum tax” to brute-force effective tax rates on the incomes of the rich to be at least 30 percent, without changing (improving) the definition of taxable income.  I and Donald agreed that David can afford to face a much larger tax bill, but that it would be better (more economically efficient and better for supply-side incentives) if his burden were raised by paring back the tax subsidies David receives via, for example, itemized deductions and the preferential tax rates on capital gains and dividend income.  Doug also agreed that the best way to raise tax burdens on the rich is to reduce tax expenditures rather than raise marginal tax rates, but he did not count the preferential rates on capital income as a tax expenditure (because he advocates consumption as the right basis of taxation), and also probably would not agree with me and Donald on how much revenues/GDP need to rise.  And all of us, being economists, agree that in theory and all else constant, higher marginal tax rates can discourage the incentives to increase the supply of productive resources (via working and saving) to the economy.  But if there’s one thing that economist and rich guy David made clear in telling of his own personal experience with wealth and taxes, it’s that even for really rich people, the economist-labeled “income effects” of taxes–the effects of having more or less after-tax income–are typically far bigger than the economist-labeled “substitution effects” of taxes–the effects of marginal tax rates on relative prices which cause people to substitute away from taxed or higher-taxed activities and into untaxed or lower-taxed ones.  I feel that conservatives (like Doug) who want lower marginal tax rates tend to over-sell the empirical significance of those substitution effects, yes, but liberals (even rich ones like David) tend to forget that as long as some substitution effects exist, it’s better to raise tax burdens by broadening the tax base (in a progressive manner) than by raising the top marginal tax rate.

So, the TPC event made clear that “yes, the rich should pay higher taxes.”  But it also highlighted where the challenges to achieving fundamental tax reform will be, in coming to agreement about who exactly is “rich,” and how exactly they will be made to pay more in taxes. We have far more work to do regarding federal tax policy than what is currently being debated–in a very narrow sense–about the “Buffett Rule.”

My latest (and last, btw!) column in the print Christian Science Monitor, which was belatedly posted on their website last week.  Let me know what you think–especially if you are an Asian American who is the child of immigrant parents or if you are otherwise in a family still grappling with the cultural differences between Asia and America.  My own take on it was (L)inspired by my 13-year-old, bball-playing son Johnny’s new-found (half-)”Asian pride”–as he himself labeled it.  The CSM editor had to revise the opening sentence between the print and online versions, to account for Lin’s season-ending injury.  Here’s that latest version, reprinted in full:

It says something about the improbable season of Jeremy Lin that in two months he has gone from bench warmer to injured NBA star whose injury and six-week absence might keep the New York Knicks from making the playoffs.

Then again, everything about Lin has been improbable since he stepped onto a basketball court Feb. 4 and led the woeful and depleted Knicks to the first game of a seven-game winning streak. An Asian-American Harvard graduate – with a degree in economics to boot – was suddenly outscoring NBA stars. Commentators quickly dubbed it “Linsanity” – noting how odd it seemed that an Asian-American was the hottest thing in pro sports.

As an Asian-American, I have another word for his rocket-fueled season: inspirational. The bucking of the Asian-American stereotype is likely to have a positive effect, not only on the attitudes of non-Asians toward Asians but also on the aspirations of Asian-Americans themselves.

Many ethnic groups are stuck with worse stereotypes in America, but even the generally positive bias surrounding Asians can operate as a straitjacket. Asian-American kids are expected to be good at academics, especially math and science, and to excel at rote assignments, carrying them out obediently, politely, and responsibly. People believe we excel in our quantitative precision more than through any creativity or social skills – certainly not by dribbling a basketball!

These messages don’t come just from American society. They often come from our parents, especially immigrant parents. They raise us to be very motivated in school and steer us away from social, athletic, or most artistic pursuits because such activities are typically viewed as detracting from, rather than complementary to, the main goal of academic excellence.

It’s understandable why Asian immigrant parents (and immigrant parents generally) might raise their born-in-America kids that way. It’s a safe way to help one’s children integrate into and succeed within American society, since these precisely defined goals in academic subjects are less culturally and socially dependent. Someone who can solve math problems in Asia can solve them in America, too.

My own parents (my dad from South Korea, my Chinese mom from the Philippines, and both PhD chemists) raised me that way, and, like many Asian parents who hold their kids to very high standards, they meant well. But I would have never become an economist were it not for the distributional requirements in college that required me to take at least some social science classes – those subjects my parents somewhat dispara­gingly labeled “soft” (not “hard”) sciences.

No matter what one’s cultural background, branching out beyond our stereotypes and “comfort zones” can be good for us. As The New York Times’s David Brooks has explained in his book “The Social Animal,” developing our “human capital” as fully as possible depends on nurturing qualities that go far beyond our ability to score high on standardized tests.

Children are more likely to grow up to be successful adults the more opportunities they have to try different things – even things that parents might not expect their kids to be that good at. I tell my own children that if they do what they truly love, the money will follow – simply because loving what you do is the best way to do it really well.

Yes, Asian-American parents might have a harder time than other parents in “thinking outside the box” and allowing, and even encouraging, their kids to expand their horizons beyond the math-and-science-type academics. But that’s why Lin’s breakthrough is more than just “Linsanity.” His success – in the NBA of all places – is potentially a game changer for Asian-Americans.

[***REVISED 2 pm, to make correction noting that the CRS study does not assume the top 20 tax expenditures are completely "untouchable" but just that they would not likely be substantially reduced.]

The Congressional Research Service has released a new report by Jane Gravelle and Thomas Hungerford called “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening.”  In a nutshell, the report could be called “Base Broadening Is Hard to Do.”  The Washington Post’s Lori Montgomery summarized it nicely on Friday, including getting this Republican staffer’s reaction to it:

Republican tax aides dismissed the report as unhelpful.

“Reports suggesting tax reform isn’t easy are greatly appreciated. We look forward to future reports on water being wet,” said Sage Eastman, a senior aide to House Ways and Means Committee Chairman Dave Camp (R-Mich.), whose panel drafted the principles for tax reform laid out in the Ryan budget.

The CRS report emphasizes that although the 200+ tax expenditures under the federal income tax are worth over $1 trillion per year, the largest 20 of them represent 90 percent of that revenue loss.  When you look closely at that “top 20″ list, copied above from the table in the CRS report, it is easy to get discouraged about the prospects for substantial tax base broadening.  As I explained last November in Tax Notes (subscription-only access here), the largest tax expenditures look a lot more like “entitlements” than “loopholes”:

Consider the biggest of the big tax expenditures: the exclusion for employer-provided healthcare and itemized deductions. Economically, there is little rationale for subsidizing those particular activities, especially for handing out the largest subsidies to people with the highest incomes. But politically they are untouchable. They clearly benefit real people, not just individuals or corporations of questionable reputation, and they are far from “loopholes” that are easy to cut.

Those individual income tax expenditures sound a lot like entitlement spending, defined by Merriam-Webster’s Dictionary of Law as “a government program that provides benefits to members of a group that has a statutory entitlement.” Those groups are employees with health insurance, households with mortgages, people who donate to charities, and so on.

And that’s why the CRS authors conclude that “It appears unlikely that a significant fraction of this potential revenue could be realized.” Instead of the more than $1 trillion that could be gained if all tax expenditures were eliminated–which would support substantial marginal tax rate reductions including getting the top rate down from 39.6% to 23%–they believe “it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.”

I think I’m slightly more optimistic than CRS, because their conclusion assumes we can’t do much to change–at least in any substantial sense–those top 20 tax expenditures.  I think we could actually do better.  For example, in his latest budget the President himself has proposed to scale back a lot of these largest tax expenditures by limiting the benefit of those tax expenditures to the richest households to the levels of benefits that would be obtained at lower marginal tax rate brackets.  It’s an ambitious amount of base broadening, although only for a narrow group of taxpayers (the familiar households with incomes above $250,000).  (The limit of the broadening to that small group results in a revenue gain of $584 billion over ten years–which is like broadening the tax base by about 1/20th the total value of tax expenditures.)  But my point is there are ways to substantially reduce the cost of the most expensive tax expenditures to both make the proposals more palatable and to raise enough revenue to support a decent amount of rate reduction or at least “rate preservation.”  It still isn’t easy to do, but that’s still mostly a political obstacle rather than an economic or administrative one.

My latest Tax Notes column which came out today (subscription-only access here) is basically a recap of my testimony on March 1st before the Senate Budget Committee.  It’s a written version of the script I used for my oral remarks, plus a chance to report (or vent) about the line of questioning that came from one of the Republican senators that day.

About the basic premise of the hearing, which was called “”Tax Reform to Encourage Growth, Reduce the Deficit, and Promote Fairness,” I explain that:

I recently heard the three tax reform goals listed in the hearing’s title referred to as a “fiscal trilemma,” suggesting it might not be possible to achieve them all.² Equating the three with a dilemma suggests that working toward them will be a negative experience. Indeed, many policymakers are caught speaking of at least one of the goals with partisan disdain: “encouraging growth” (a popular Republican goal) might be labeled by some Democrats as “pandering to the rich”; “reducing the deficit” by including at least some new revenue (a popular centrist goal) might be labeled by some on both sides as “killing jobs”; and “promoting fairness” (a popular Democratic goal) might be called “class warfare” by some Republicans.

Nonpartisan economists would respond that all three goals will benefit the economy. And the good news is that it really is possible to find tax policy changes that would help achieve all three goals — and possibly help achieve simplicity. That good news is doubled by the recognition that different policymakers actually like all the goals more than they’ll admit in public, but they assign different implicit weights to the different goals — suggesting that the only way to ensure bipartisan agreement is to make sure a proposal helps achieve all three goals.

I then explain the problem with the tax policy “fairy tale” that sounds so happy and easy:

[M]any so-called tax policy experts spin a simple fairy tale when they talk about how to reform the tax system. They say that we just need to cut tax rates, which will expand the economy, which in turn will reduce the deficit. But unfortunately, in the real world, we face real budget constraints and a real scarcity of resources. Real economists know that optimizing means not just maximizing benefits but weighing benefits against costs so that benefits net of costs are maximized. In the context of the real world and our experiences with the economic effects of different tax policies, cutting tax rates to achieve all of our goals is pure fantasy.

I made three main points in my testimony regarding the goals of encouraging growth, reducing the deficit, and promoting fairness:

1. It is impossible to expand the supply side of the economy through continued, seemingly easy, deficit-financed tax cuts.2. It is impossible to reduce the deficit without allowing, and even seeking, higher revenues as a share of our economy.

3. It is impossible to promote fairness in the tax system without raising tax burdens on the rich.

And the only part of the Q and A where I have to admit I felt a bit “bullied” was this:

One of the more hostile exchanges at the hearing was when Sen. Ron Johnson, R-Wis., questioned what we thought the maximum marginal tax rate should be. Each time [Len] Burman [of Syracuse, the other witness invited by Chairman Conrad] and I tried to respond that it depends on the breadth of and distortions within the existing tax base, Johnson interrupted and insisted on our providing a specific number without any qualifications. It was obviously a setup, as [Dan] Mitchell [the Republican witness from the Cato Institute] described in a blog post. Although I reluctantly gave a specific answer of 70 to 80 percent, I wasn’t advocating a marginal tax rate that high but only responding that a total marginal tax rate — combining taxes at all levels of government — any higher than that would be a bad idea. I tried to point out that the maximum marginal tax rate could mean the rate on the richest person in the country’s last dollar earned. I believe 70 to 80 percent is around Laffer curve levels — the highest rate possible before revenue is lost. [In the Tax Notes column I cited this NBER paper by Christina and David Romer.]

That maximum marginal tax rate is totally different, however, from the survey results Mitchell cites that show people not wanting anyone to be taxed at more than 30 percent. Mitchell understandably likes the interpretation that ordinary Americans are referring to the maximum top marginal tax rate bracket. But I really doubt that most Americans understand the difference between marginal and average tax rates, or if they do, that they are inclined to automatically think top marginal rate (on the last dollar earned) when asked about the maximum tax rate that top earners should pay. When thinking about what’s fair, I think most people have in mind the common-sense statistic of taxes paid relative to income, or the average tax rate.

In fact, if the very richest people in America faced a marginal tax rate on their millionth-plus dollar earned of 70 to 80 percent, their average tax rate would still very likely be close to 30 percent. We might contemplate such high marginal rates at the top if we had failed to achieve the best solution of broadening the tax base and we were trying to make the tax system more progressive (while raising revenue for deficit reduction) by only raising — or creating new — top marginal tax rate brackets.

[But] Let’s be clear that I spent the whole hearing advocating for base broadening that would keep rates low. But I was asked what the maximum top marginal tax rate could be that the economy could handle, regardless of how successful or not we might be with base broadening efforts…

I encourage EconomistMom readers to view the hearing video and judge for yourself whether Senator Johnson was playing nicely or not.  Either way, I don’t think his or Dan Mitchell’s view that marginal tax rates on the rich are already high enough to be worrisome has much basis in reality.  (Nor did the story that came out the very day of the hearing (March 1) about Dan Mitchell’s organization, the Cato Institute, and how much it is influenced by the Koch brothers, help Mitchell’s credibility as an objective and fact-based economist.)

Even so, I still would prefer we raise revenue by not raising marginal tax rates further and instead broadening the tax base (reducing tax expenditures) in (very easily) progressive ways.  The “trilemma” of tax reform is entirely possible to achieve and is actually the best way to succeed, politically and economically, in doing good tax reform.

I’ve been busy getting ready for my testimony before the Senate Budget Committee this morning, on the topic of tax reform in the broader fiscal and economic context. The question they ask via their hearing’s title: can we reform the tax system in such a way that we encourage economic growth, reduce the deficit, and promote fairness–all at the same time? My quick answer is “yes, but it won’t be easy.” The hard part is far more political than economic.

Through the Committee’s website, you might be able to catch a live stream, but if not, there will be a video up later, I’m sure.  I will be posting a post-mortem afterward (not sure how quickly).