Tax Reform That Works For All
The Republicans are trying to jam a reckless health care bill through Congress so that they can move on to their real objective: another round of deep tax cuts for the rich, paid for by deep cuts in public services, more debt on the backs of the young, and reckless disregard for the environment. We need tax reform, but of a very different kind.
A real tax reform would address four problems. First, it would raise total revenues as a share of GDP, in order to cut the chronic budget deficit. Second, it would address the crisis of falling wages and disappearing jobs facing working-class America. Third, it would curb carbon pollution, which is dangerously warming the planet. Fourth, to spur saving and investment, it would shift taxes toward consumption rather than income.
To keep public debt from soaring, we will need to cut the deficit. Republican leaders dream of cutting the deficit by slashing Medicaid, education, science, and other vital programs. Yet the public is aghast at such proposals. There are no realistic prospects for major budgetary savings, because we have so many pent-up needs for new infrastructure, expanded higher education, and other public investments. At best, we could cut wasteful areas of federal spending (for example, the military and over-priced drugs) and increase spending for infrastructure, education, R&D, and other public investments.
Tax policy should also help to address the crisis facing low-skilled workers. Technology continues to eliminate low-skilled jobs as workers are replaced by smart machines. The workers are forced to shift to even lower-paying jobs. To boost the take-home pay of low earners, we should expand the highly successful earned-income tax credit.
Tax policy should help to solve global warming by putting a new tax on carbon pollution. A reasonable approach would be to introduce a gradually rising tax on CO2 emission, accelerating the shift to wind, solar, nuclear, and other low-carbon sources of energy. Since the US economy emits around 5 billion tons of CO2 each year, a tax of $40 per ton of CO2 emitted would raise around 1 percent of GDP in revenues.
Finally, tax reform should shift taxation from income toward consumption, to spur higher saving and investment. A smart policy would be to reduce the marginal tax rate on new business investments by allowing companies to expense some or all of their new investments.
We would need new government revenues to cut the budget deficit and offset revenue losses from an expanded EITC and a cut in the marginal tax on new business investments. A new tax on carbon pollution would provide some new revenues but more will be needed.
The best candidate for higher revenues would be a value-added tax, or VAT, essentially a tax on consumption rather than investment income. Liberals traditionally object to a VAT because they say it’s regressive, but its overall effect can be progressive when it finances progressive spending on health, education, job training, science, and an expanded EITC. That’s why the social democracies of Northern Europe have long embraced the VAT. Conservatives, on the other hand, object to the VAT because they dream of slashing the deficit by deep cuts in social programs, against the will of the people.
Therein lies the compromise. Liberals should accept the VAT as the price to pay for properly funding the government, including highly progressive objectives such as health, education, and infrastructure. Conservatives should accept the VAT as the way to fund the cuts in the marginal tax rate on business investment and as the effective answer to the already high and rising budget deficits.
Consider the test of pragmatism. How are the world’s most successful economies funding government? Australia, Canada, Denmark, Germany, the Netherlands, Norway, and Sweden all have lower deficits, better health care, lower tuitions, lower inequality, and less poverty than the United States. All of these countries raise more tax revenues, and offer more generous social policies, than the United States, in part through the VAT. It’s time the United States undertake a tax reform that is truly for the common good.