Economists Consider Tax Reform Ideas

A pair of tax experts described what policies they think would best help the country. A “broaden the base, lower the rates” mantra rose to both of their lips.

A pair of tax experts described what policies they think would best help the country. A “broaden the base, lower the rates” mantra rose to both of their lips.

President Barack Obama proposed tax changes on Monday, which are meant to pay for his American Jobs Bill, shrink the deficit, and make the tax code both fairer and more effective in raising revenues. He wants to close tax loopholes for corporations and high-income earners, and allow the tax cuts for people making over $250,000 per year to expire, as they were set to do in 2010. But his ideas have little chance of becoming law while Republicans control Congress.

The best thing for the country, as everyone agrees, is to revive the economy. Dr. James Alm, professor and chair of Economics at Tulane University, thinks it is time for comprehensive tax reform.

He said in a phone interview that it is both human nature and political nature to complicate the tax code. Legislators may write laws to reward desirable behaviors and reduce incentives for others, like offering a tax credit for insulating houses to lower energy costs—that’s an example of a well-intended tax complication. But politicians also want to reward their friends and punish their enemies, and add partisan carrots and sticks into the code.

Alm once helped Jamaica reform its tax system. Personal and business income was taxed at an extraordinarily high rate, but there were so many deductions, credits, and loopholes that no one paid the highest rate. “Marginal rates went up to 60 percent for an income of $5,000,” he said.

Jamaica simplified its tax code, and also lowered the rate (the percentage of tax anyone owed) instituting a flat income tax rate of 25 percent. The result was greater revenue for the government coffers. More people and businesses had to pay the going rate, but the rate they had to pay was more reasonable than it had been when there were many ways to get out of paying.

According to Alm, years later, Jamaica’s tax structure started to get complicated again. “But not as complicated as ours,” he said.

Alm said he faulted Obama’s proposed “basically positive” tax reforms for being “piecemeal, ad hoc.” It would be “far better to have a much more comprehensive reform.”

If all tax loopholes were eliminated it could eliminate the deficit—an argument for comprehensive reform.

Dr. Timothy Kearney, business professor at Misericordia University, said in a phone interview that the president and his advisors had identified a lack of demand and were trying to deal with this by pumping up short term demand with tax credits, incentives, and temporary cuts. But Kearney does not expect that to boost the economy. According to him, both theory and practice have shown that people consume based on their lifetime earnings. They spend to maintain what they regard as a permanent way of life.

“We definitely need tax reform, we have had no comprehensive tax reform since 1986. To broaden the base and lower the rates leads to greater revenues overall,” said Kearney.

According to Kearney, “President Clinton said keeping rates on savings and income the same is counterproductive. The Taxpayer Relief Act of 1997 led to a good inflow of revenue.”

In order to get at the root of these economic problems, Kearney thinks it would be wise to go through all the federal regulations and identify which ones may be holding back the economy. “Spending must be controlled, but the best way to control spending is to get the economy moving. Of course you should always watch spending. The consensus view is growth will take care of spending problems,” said Kearney.

Kearney, like Alm, thinks a simpler tax code is needed. “Tax policy should be effective and easy to monitor.”

{etRelated}Despite the recent debt debate brinksmanship and the uncompromising atmosphere in Washington, Kearney is optimistic: “I think the U.S. is going to come out of this just fine. I think the president, Nancy Pelosi, Mitch McConnell, and his Democratic counterparts have the country’s best interests at heart. The big issues are on the table.”