Friday, April 01, 2011

Letter to Obama, Boehner, Reid, Pelosi, and McConnell

Yesterday's news included reports (such as this one) that "a powerful group of leaders in the business, academic and economic communities sent letters to the White House and Capitol Hill urging policymakers to work together to reduce the deficit by overhauling government retirement programs and an inefficient federal tax code." I was among the signatories, though I don't purport to have been among the "powerful" ones.

Relevant text of the letter included the following:

--"[C]omprehensive deficit reduction measures are imperative, and ... [we] urge you to work together in support of a broad approach to solving the nation's fiscal problems."

--The Bowles-Simpson Fiscal Commission's work, even if one disagrees with various features, "represents an important foundation to achieve meaningful progress on our debt," and also "underscored the scope and breadth of our nation's long-term fiscal challenges."

--"Beyond FY2011 funding decisions, we urge you to engage in a broader discussion about a comprehensive deficit reduction package. Specifically, we hope that the discussion will include discretionary spending cuts, entitlements changes, and tax reform."

I'll admit I was ambivalent about signing the letter. Reservations or qualifications that I felt - though this is not a dodge; I did in fact voluntarily sign the letter - include the following:

1) I support comprehensive deficit reduction measures, but believe they should address future, not current year, deficits given the ongoing down economy. In other words, I would like to enact changes today but generally limit their effect to future years.

2) A solution to our long-term fiscal ills would require the Democrats and Republicans to work together. But I don't think the Republicans are ready to do so in a serious way, and if I were advising the Democrats I'd tell them to keep this in mind. This is particularly relevant to overhauling government retirement programs, where I disagree with those on the left who tend to see no problem that requires retrenchment, but share their tactical concerns about whether, at this point, the Obama Administration ought to contemplate playing a very tricky game on this front.

3) As my forthcoming (I hope) Tax Notes piece about 1986-style tax reform will say, I disagree with the Bowles-Simpson Fiscal Commission Report in a number of fairly significant ways. A case in point is its proposing to hand back, via lower individual rates, a huge preponderance of the revenue gain from repealing tax expenditures. And I don't like the proposed cap on tax revenues relative to GDP. Even if tax revenues can be defined meaningfully (on which see my 2 preceding posts), I'd be more inclined, against the grim fiscal background and the distressing defects in national budgetary politics, to support a revenues-to-GDP floor than a ceiling.

4) Again, I am generally opposed to discretionary spending cuts right now given the state of the economy. In the longer term, there's certainly plenty of garbage there that ought to be cut. I'd start with things such as farm subsidies. More generally, this really isn't where the big money is, though that of course is no reason to exempt it.

5) As my forthcoming piece will say, tax reform is great, but the time has passed for 1986-style tax reform in which the rates are slashed to eliminate revenue gain from base-broadening. That's not the model we should be using any more. Instead, I favor eliminating bad tax expenditures, addressing horrendously structured areas such as corporate and international, in my ideal world converting the income tax into a progressive consumption tax (but that is probably unrealistic), and finding new revenue sources such as a VAT, carbon tax, and/or a financial activities tax (addressing the egregious heads-we-win, tails-the-taxpayers-lose incentive structure of the financial sector).

All things considered, and in particular given the extreme dangers posed by our long-term fiscal problems, I agreed to sign the letter as my little drop in the ocean towards trying to enhance pressures to move in the right direction. I also think the Fiscal Commission Report has fared a bit worse in public discourse (especially on the left) than it deserved - despite some serious flaws - given, for example, that it appears to be a modestly progressive package overall.


PC said...

I didn't understand #3. What is "the revenue gain from repealing tax expenditures via lower individual rates."? I didn't much understand the rest of #3 either! Maybe it's just too technical for a broader audience.

Daniel Shaviro said...

That was just clumsy writing on my part. I meant using lower rates to give back the revenue gain from repealing tax expenditures. I'll modestly edit the post to clarify this.