November 24, 2014

Do You Believe in Magic -- or Deficit Reduction?

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Elected officials in both parties have made what I call “magical, mystery tax pledges” that are at odds with bipartisan approaches to serious deficit reduction:

  • Republicans: Don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP.
  • Democrats, including President Obama: Don’t raise tax burdens on households making under $250,000 a year.

Some Republicans may not realize how their promise works against not only bipartisan compromise but against their own policy goals. As explained in a recent opinion piece I wrote for Bloomberg Government (subscription-only access here):

“To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with ‘supply-side’ economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy…”

Reducing tax expenditures would actually reduce the government’s role in the economy, a central goal for many Republicans.

Those at the other end of the political spectrum, I pointed out, may be undermining their own goals as well:

“To those on the left who are holding fast to the president’s promise not to raise taxes on households with incomes below $250,000 a year, here’s your paradox: Limiting the pool of households to tap for revenue increases means limiting the revenue-side strategy for deficit reduction.

It’s hard to reconcile wanting a significant portion of deficit reduction to come from higher revenues and wanting to avoid any increase in tax burdens for 98 percent of the population. Exempting that many people means that tax rates on those above the cutoff must be prohibitively high…

This doesn’t mean giving up on progressive policies that would ask the rich to bear a larger relative burden of deficit reduction. Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich.”

On the face of it, the Republican pledge of “no new taxes” (i.e., revenue increases) – of any shape or form, at any time–seems like a much bigger obstacle to deficit reduction than the President’s campaign promise to just shield most of us from higher tax burdens.

But Obama’s position as President and the person who is ultimately “in charge” of our nation’s economic policies make his position on this issue particularly significant.

In addition, some people on both sides are looking for excuses to reject the other side’s ideas so they can avoid walking on common ground and the political risks that would involve.

So both parties need to back away from their magical, mystery tax promises, leaving room for responsible elected officials on both sides to forge a compromise plan to put the country on a more responsible path.