Wednesday, September 26, 2012
Ezra Klein defends an increased capital gains tax as necessary for distributionally neutral base broadening rate lowering tax reform. I support a higher capital gains tax rate (did not have space for that in my comment).
But why do you want base-broadening, rate-lowering tax reform ? The inside the beltway wonk consensus is that this must be good. The claim is that it is more efficient. Surely true if efficiency is measured as dollars raised per page of tax code or dollar of compliance cost. But the argument is that the important advantage is that such reform will reduce distortions due to taxes. Here the implicit arguments are both that high rates cause distortions and that deductions and credits and such allow socially costly tax avoidance. I consider them in turn
1) high rates are bad. There is almost no evidence for this claim. It is an article of faith for Republicans and Democrats have decided that they can get more important changes in exchange for lower rates. But as far as I know (and I've published in the Journal of Public Economics) the claim is not supported by actual evidence.
2) tax expenditures are worse than just giving the money to corporations and rich individuals because they distort decisions. Here I think opposition to tax expenditures in general is like opposition to government'spending in general. No one likes either in the abstract. You wouldn't really argue that way too many Americans had health insurance because employer provided health insurance was not taxed as income. So that is one major bit of base broadening you would have opposed at least pre ACA (except on a the worse it is the better it is Leninist principle). How about the EITC. You know that is one tax expenditure that Republicans want to cut. It is also one of the very best policies there is (one of the key ways US policy is vastly better than European policy along with ... uh give me a minute). How about the charitable gift deduction ? can be abused but seems basically OK to me.
I think a lot of the broad support for base broadening is based on hatred of the mortgage interest deduction. Means huge houses far from work and driving cars and global warming. Diverts saving from productive capital labor productivity and wage increasing capital to houses which just sit there. Suburban and Exurban because that's where the new building is. Also completely totally politically untouchable and you know it. You might as well base your hopes on cutting rates and increasing the tax on gasoline by a dollar a gallon plus imposing a $100 dollar a ton carbon tax. Fine policy, but not a policy proposal of any relevance to the US debate.
The most extreme case is someone (not you a friend of yours) who said we have to radically simplify the corporate tax code so corporations spend money on engineers not lawyers and accountants. That is to increase corporate R and D eliminate the R and D tax credit.
3) not an argument for base broadening and not at all relevant to this blog, but I think every aging Washington wonk's favorite year is 1986. Genuinely bipartisan wonk driven reform. It was great. But what good did it do ?