A Tax Reform Proposal That Could Win Over Everybody
If I were forced to choose after the election between extending the Bush tax cuts in total and letting them all lapse, I would join Tim Noah in opting for the latter. But I’m reluctant to assume that’s the best we can do. Indeed, as frustrating as the gridlock in Washington is, we should use it as an opportunity to strip down the tax debate to its basics, and reflect on where we want to go. Then we can determine the path that gets us closest to our goal.
In my judgment, the tax code we should aim for should have four key features. It should promote growth, or at least not obstruct growth by diverting resources from productive uses. It should be fair: It should treat taxpayers at similar income levels similarly, and it should tax individuals and families in accordance with their ability to pay. It should minimize complexity, to reduce both compliance costs and opportunities for manipulation. And it should raise enough revenue to pay for the government the American people want. Tax experts tell us that these features are in tension with one another, which means that policy makers must try to strike a reasonable balance among them.
Simply allowing the Bush tax cuts to expire on December 31 would fall afoul of at least three of these principles, and probably all four. It would pour a lot of new wine into the same old bottle—a tax code not notable for simplicity, fairness, or its propensity to promote growth. And while phasing in a tax increase would raise significant revenues, a large all-at-once hit to a still-fragile economy could end up reducing a growth rate that was already far from robust, cutting revenues down the road.