I wish I had even a fraction of the talent that Jon Stewart and Stephen Colbert–the “sanity ralliers”–have in explaining tax and budget policy in engaging ways. The Jon Stewart segment is my latest favorite, but here’s a great one by Colbert on the “Buffett Rule.” In my Tax Notes column this week on “Evolved Tax Policy,” I argue that as our economy grows and changes shape over time, so should our tax policy. Why should we use our experience in the past to guide our policymaking more than our hopes and expectations for the future? How do I wish tax policy would better “evolve?” Here are a few ways I listed in my column (see the full column–if you are a Tax Notes subscriber–for more details):
Here are some forms of tax policy evolution we could use right now:
1. recognizing that expanding the economy via tax policy isn’t as simple as cutting taxes and that tax cuts involve costs as well as benefits;
2. allowing smart tax policymaking to at least occasionally trump clever tax policy politics;
3. acknowledging that Wagner’s Law — which holds that the public sector is a luxury good — may apply, suggesting that the optimal size of government and hence the optimal level of revenue/GDP grow over time with the economy; and
4. realizing or recognizing that because part of that growing role of the public sector may be the redistributive role, especially if wealth income inequality increase with aggregate income growth, the progressivity of the tax system may need to increase over time to partially compensate.
What is an example of how we’re NOT “evolving” on tax policy? The fact that proposals for “flat taxes” seem to be back in vogue. Take Republican presidential candidate Herman Cain’s “999 Plan.” A reporter called me about it, which was the only reason I went to the Cain website to check it out for a few seconds, which was all it took to “get” what his proposal is basically about: (i) switching to a consumption-based tax system that exempts income from capital–which on its own is “regressive”; (ii) switching to a single (”flat”) marginal tax rate schedule–which on its own is (also) “regressive”; and then (iii) switching to a not-just-double-but-triple tax of consumed income (instead of saved income) through the 9 percent business tax (exempting capital income) and the 9 percent sales tax (which naturally exempts savings) that are layered on top of the 9 percent income tax (which exempts capital income as well)–which means all that regressivity I already listed is tripled! Where did the 9 percent rates come from, I was asked by the reporter–and would it be revenue neutral? My response: “probably because 9 is one digit long” and theoretically, yes, it’s possible that a triple tax on consumed income with no or few exemptions which has an effective rate of 9+9+9 or 27 percent could indeed be revenue neutral. (From Cain’s description of the 999 base, it’s not clear what is exempt other than charitable deductions–oh, and all of capital income, of course.)
I don’t know if I’ll feel compelled to say anymore about the Cain tax plan unless the candidate actually seems to have a decent chance of getting the Republican nomination, but on the way to seeing if that happens I hope people recognize how insane his tax plan is (without needing any detailed analysis). This is one plan where my biggest reaction to the plan is not that it doesn’t raise enough revenue. Like I said, theoretically it could, but why would we ever want to do it that way?
It’s sort of an example of what I called “Neanderthal tax policy” in my Tax Notes column. So please don’t take it seriously. Yeah, I know–it’s hard to believe I can say you should take the guys from Comedy Central–Jon Stewart and Stephen Colbert–more seriously than some of these presidential candidates when it comes to their wisdom on tax policy. But you should.