Apr 13, 2010
Ed. Note: Our Fiscal Future has invited distinguished guest bloggers to share their views about how to get the nation on a sustainable fiscal path. The views presented are their own, and do not necessarily represent the views of the Committee on the Fiscal Future of the United States or any of the organizations sponsoring this website. We welcome and encourage constructive conversation about the fiscal issues facing America, and hope you’ll join the conversation.
Our fiscal future is looking grim. The financial crisis and Great Recession have added several trillion dollars to our nation’s debts, and there are more deficits yet to come. In fact, under current policies the United States will run persistent, large deficits even after the economy recovers. Our national debt will grow faster than the economy in each of the next ten years and continue to do so in the decades beyond. That’s a recipe for fiscal disaster.
Rising spending—particularly on Social Security, Medicare, and Medicaid—is the key reason that our debts are projected to grow so rapidly. Spending restraint is thus essential to heading off fiscal calamity. But it’s hard to believe that spending restraint alone will be enough to address our long-run challenges. Given the magnitude of the commitments our government has made, we will almost certainly need to increase revenues as well. .
Economic growth can help, but growth alone won’t be enough to set us free. As a result, policymakers are already beginning to consider ways of adding additional revenue. .
To help get that discussion off on the right foot, let me offer three basic principles that our leaders—and our fellow citizens—should keep in mind in evaluating new revenue options:
- It is usually better to broaden the tax base rather than increase tax rates. Why? Because high tax rates create disproportionately large economic distortions and invite widespread evasion. Any effort to increase revenues should therefore focus first on the many special credits, exemptions, and exclusions that undermine our current tax base. Such “tax expenditures” cost more than $1 trillion each year but receive surprisingly little oversight. Some of these provisions generate economic or social benefits, but many are simply hidden ways to help special interests. Reducing or eliminating those tax expenditures could bring in new revenues, improve economic efficiency, and avoid the economic damage that would result from higher tax rates.
- Income taxes are usually worse for the economy than consumption taxes. Why? Because income taxes discourage saving and investment, while consumption taxes do not. That is why a rising chorus of experts is recommending that the United States consider a value-added tax, rather than higher income taxes, if it decides it wants to finance substantially higher government spending.
- Taxes usually discourage whatever activity is being taxed; as a result, it is better to tax bads rather than goods. Taxes on pollution, for instance, should be preferred over taxes on working, saving, or investing.
If Congress follows these principles, it can minimize the economic harm from new revenue measures and, perhaps, improve the environment to boot.
Donald B. Marron, who will become director of the Urban Institute-Brookings Tax Policy Center on May 17, is a visiting professor at the Georgetown Public Policy Institute and writes about economics, finance, and life at dmarron.com. He previously served as a member of the Council of Economic Advisers and as acting director of the Congressional Budget Office.