Romney, Obama and the long, partisan road to tax reform(Read article summary)
When it comes to tax reform, there is a lot of common ground, but still many differences, between Romney's approach and Obama's approach, Rogers writes.
Last week as part of theÂ â€śStrengthening of America-Our Childrenâ€™s Futureâ€ť projectÂ that the Concord Coalition is a co-sponsor of, a forum was held in New York on the topic ofÂ â€śpro-growth tax reform.â€ťÂ Harvard economics professor and Romney adviser, Martin Feldstein, joined former Treasury secretary and Obama adviser, Lawrence Summers, to discuss what they consider â€śpro-growthâ€ť tax policy.Â A preview of their discussion was provided by former Senator Sam Nunnâ€™s co-anchoring of the CNBC â€śSquawk Boxâ€ť show earlier that morning; inthis segment Feldstein and Nunn discussÂ 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.Â (This latter issue will be most appreciated by those who have been following the Tax Policy Centerâ€™s analysis of the Romney plan and Feldsteinâ€™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 â€śpro-growth tax reform,â€ť there is a lot of common ground between economists who favor the Rs and economists who favor the Ds.Â Here are what I heard as some of theÂ main points of agreement between Feldstein and SummersÂ (what Summers referred to as the â€śstructure that Marty and I have converged onâ€ť):Â
- â€śPro-growth tax reformâ€ť means structuring the tax system to encourage longer-term expansion in the productive capacity (or â€śsupply sideâ€ť) of the economy.
- 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).
- A first priority to follow the â€śbroadening the tax baseâ€ť strategy is to reduce existing â€śtax expendituresâ€ť that are considered inefficient and/or unfair.Â 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.)
- Tax expenditures could be reduced in a variety of ways that donâ€™t have to target particular sectors of the economy (could be done in across-the-board, broad-brush waysâ€“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).
- Tax reform does need toÂ raiseÂ revenue (relative to the policy-extended, â€śbusiness as usualâ€ť baseline, and even before any â€śdynamic scoringâ€ť type effects are accounted for) in order to contribute to deficit reduction and (therefore) be â€śpro-growth.â€ť
- But â€śpro-growth tax policyâ€ť 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 heardÂ some remaining sources of disagreement between Feldstein and Summers, which are probably indicative of where â€śstumbling blocksâ€ť to bipartisan tax reform remain:
- Beyond decreasing tax expenditures/broadening the income tax base,Â what are some other features essential to â€śpro-growthâ€ť tax policy?Â (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 currentÂ preferentialÂ 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 â€śpro-growthâ€ť goal.
- Beyond deficit reduction, what is needed to grow the economyâ€™s â€śsupply side?â€ťÂ Feldstein would probably argue for working towardÂ smallerÂ government in scale and scope, while Summers clearly stated that pro-growth tax reform is (necessary but) â€śnot sufficientâ€ť to address our nationâ€™s growth needs, because we have â€śunder-investedâ€ť in many things.Â 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.â€“the components of the productive capacity of the economy.Â He stated that such public investments are a necessary complement to fiscal sustainability in a â€śpro-growthâ€ť fiscal agenda.Â (And immediately, Summers emphasized that continued stimulus-type policies, to keep demand for goods and services up, are still necessaryâ€“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 â€śgrowthâ€ť goals but fairness and fiscal responsibility goals as well.Â The broad contours of the common ground are indeed well â€śgrounded,â€ť but some of the remaining points of disagreement might be significant-enough stumbling blocks to make meeting halfway still challenging.