Campaign Rhetoric vs. Fiscal Reality
WE'VE entered the season of economic silliness: a presidential election year. Campaign rhetoric is colliding with economic reality. Examples abound.
All the candidates advocate cutting taxes as part of an effort to eliminate the deficit. I believe that my taxes are much too high, but personal experience with exuberant supply-side economics also convinces me that general tax cuts (such as family tax credits) will make it more difficult to curb the future flow of red ink. Such tax cuts would be financed out of the deficit and would result in a larger budget deficit than if the current revenue structure were maintained.
Many of the candidates also advocate eliminating the Internal Revenue Service. Though IRS tax collectors will never win a popularity contest, they have to stick around to collect Social Security and Medicare taxes. As for the flat tax, that too will have to be collected by a government bureau.
Some candidates are vying to see who can come up with the lowest rate for the flat tax. The fine print shows us, however, that each of these ''low rate'' proposals assumes further, albeit different, cutbacks in spending. If government expenditures are to be cut at a substantial enough rate, the amount of required revenues to achieve a balanced budget will be lower. But that is not a differentiating characteristic; it would be true under all the tax reform plans. In contrast, professionals usually prepare their revenue estimates for any tax structure on the basis of ''revenue neutrality.'' That is, they postulate a new tax system that, at least initially, generates the same amount of revenues as the present structure.
Inevitably, each tax reformer promises to simplify taxes. The Internal Revenue Code should be simplified, but none of the proposals is as simple as proponents claim - with good reason. The transition from one tax system to another invariably generates both windfall losses and gains.
Take the proposed shift to instant ''write offs'' of capital outlays from the present way of spreading depreciation charges over the useful life of the asset. That desirable change is likely to spur new investment. But what about the businesses that recently purchased factories and production equipment? They won't be able to deduct their ''unused'' depreciation allowances. Similarly, if saving is going to be exempt from federal consumption taxation, what about purchases from ''old'' savings, on which taxes already have been paid? Fair treatment requires some special provisions to cover a reasonable period of transition from the old tax system to the new. But transition rules are typically the most complicated part of any tax code.
To deal with the gap between campaign rhetoric and economic reality, a few economic rules of the road might help. First, all of the tax reform proposals should be put on a common basis, so fair comparisons can be made. This means that, on the basis of a standard set of economic assumptions, each plan should generate approximately the same amount of revenue as the existing tax system.
Second, the tax reform waters should not be muddied by promises of heroic expenditure cuts. It will take fiscal austerity to achieve the already planned budgetary balance in seven years. To base the case for a new revenue structure on the speculative assumption that even more spending reductions than that will be made in the same time period is to indulge in the type of wishful thinking that got the United States into its fiscal dilemma.