Greg Mankiw posted an op-ed in the New York Times on Saturday with his own personal prescription for reforming the federal tax system. See Greg Mankiw, A Better Tax System (Assembly Instructions Included), New York Times (Business Section Jan 21, 2012).
Mankiw says he is providing four "principles" that will show the tax system was designed with a purpose. The trouble with Mankiw's principles is that his "assembly instructions" construct just another variant on the right-wing plan to have the middle (and lower) classes pay all the tax while the rich get richer. The purpose is to shift the tax burden down to the middle class and let the Romney's and their ilk off the hook.
Here's what he proposes:
1) broaden the base and lower the tax rates.
Mankiw notes that Bush's deficit commission proposed this, as did Obama's copycat commission. So what. Both of those groups were dominated by economists who tend to think like the right, that "investors" at the top of the income distribution should get all of the tax breaks.
Of course, base broadening and rate reduction was the mantra for the 1986 reform of the tax code, as well. But back then the top rates were twice what they are today, and there were even more loopholes (if that is imaginable). So lowering rates to gain elimination of some of the worst of the subsidies and giveaways made sense.
Now, the top rates are too low for this to be a workable solution today---especially when we are in the midst of an economic recession requiring government stimulus, which can best be accomplished with either borrowing or more tax dollars from the rich spent to support projects that will be positive for the overall economy. Not only that, lowering the top rates further would be quite simply unfair to the vast majority of taxpayers--it would relieve the wealthiest of the wealthy of much of their already insignificant tax burden, while shifting the resulting cuts (or increased taxes) onto those who can least afford it. If anything, the mantra today should be to broaden the base and raise the rates--especially in the multimillion income area in order to make our tax structure genuinely progressive. When the top rate starts at an amount that Mitt Romney can consider "just a little bit" (he was referring to his $370,000 in actually "work" earnings from speeches, in comparison to his millions from unearned income), it is obvious that we need more sensitive brackets that pay attention to the current stratospheric unearned income amounts of the truly wealthy.
The only loophole that Mankiw talks about reducing is the one for mortgage interest. Now, that deduction is especially beneficial to high income taxpayers at higher rates. But changing it will have an additional impact on housing prices, since it has likely been built into the market price. So the change that makes sense is to reinstate the income cap to many of these deductions, as Obama has suggested, so that they are limited to people who are in the middle or lower income distributions.
2. Tax consumption rather than income
Mankiw obviously has no fresh ideas. This is the proverbial GOP suggestion--the USA Tax, the "FAIR" tax, the 9-9-9 tax (which would ultimately have reverted to a national sales tax), etc. Consumption taxes are not 'better' than income taxes. In fact, they are much worse because they are regressive, with their impact being felt most strongly by those with the very least income. This so-called reform would shift the tax burden off the wealthy rentiers with their unearned income and onto those who labor hard and long for their bread and butter. Nothing reasonable about it.
Does the fact that Thomas Hobbes thought a consumption tax was a good idea carry much weight. I don't see why it should. Does the fact that "much modern economic theory" agrees? So what if acolytes of the Friedman school of economics who care a lot more about their purportedly scientific efficiency theories than they do about equity conclude in their nice little mathematical depictions of unreality that consumption taxes are better? What do they really know about how taxes ought to work, or what is fair, or even what the impact on the economy will be? Their assumptions about how people make decisions are so far removed from reality that one tends to ignore their policy prescriptions.
Does the idea that "legislators have come to appreciate the logic of taxing consumption" change my mind. Not one whit. Those legislators who have passed the Roth IRA provisions and other provisions that shift in part to a consumption tax (mostly for the benefit of those who are rich enough to set aside IRAs) haven't provided convincing studies of the impact of their provisions or their attention to the equity of consumption taxes. They have tended to state ideological positions as though they were fact--such as the right's idea that earned income should be taxed and unearned income should not, purportedly based on the idea that the wealthy will then use their extra money as entrepreneurs to create new jobs.
Further, Mankiw assumes that we would develop a "progressive" consumption tax to replace the income tax. He fails to note that the rates on a progressive consumption tax would need to be staggeringly high in order to draw from the highest income a reasonable amount of the tax burden. Can you see Conrgress passing a consumption tax with rates on the highest income of several hundred percent or even a thousand percent or more? Yet that would be necessary, since the very high income consume only a small portion.
3. Tax bads rather than goods
Here Mankiw is surely dealing tongue in cheek. He takes the economic notion that taxes always distort decisionmaking and seems to conclude that taxing earned or unearned income is not a good idea. Do we substitute sin taxes? Seems to be the gist of it.
But I'm going to assume he really means that when possible, it makes sense to tax things we don't think are good for people or the planet--cigarettes and climate-change-causing oil and gas burning. Ok. That one I'll go for, but that's just what reasonable legislators ought to be doing all the time, as we discover what's bad that people nonetheless really like to do.....
4. Keep it simple, stupid.
My response to that: Simplicity is not the be-all and end-all of tax reform, stupid. In fact, our tax system is already pretty simple for most middle income taxpayers. It is complicated for the non-wealthy by three things--the alternative minimum tax (AMT), the preferential rate for capital gains, and the earned income tax credit (EITC). The AMT is a problem with the Bush cuts in rates, since it claws back further into the middle class. If we let the Bush tax cuts expire, then the AMT will operate more as it should as a backup to cut down on excessive preferences. (See my earlier postings on possible changes to the AMT to make it fairer.) Of course, the CG preference is an easy one--get rid of it. It is a terrible provision today, because it exacerbates the inequality that is getting to the point of no return in the United States. Tax policy should not make things worse when it doesn't need to. And of course we should keep the EITC, since it performs an important societal function (and also helps to fight inequalities).
So we already have a relatively simple tax system for most taxpayers, to the extent that is possible. Simplicity isn't a very important goal for those at the top of the income distribution or for corporations--they will inevitably hire sophisticated tax advisers anyway, and we have to write the rules with some detail as they apply to them, or they will just romp around them and through loopholes of their own interpretative imagination.
Fairness is a much more important goal than simplicity. How come Mankiw doesn't even mention it? Oh, I see. He's an economic adviser to vulture fund manager Mitt Romney.....
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