Links - Public Policy Common Sense
It doesn't have to be hard.
These may not be common sense, in fact the opposite is more likely conventional wisdom, but here are two recommendations that should be. First comes taxes and then comes subsidies.
Regarding taxes, readers here know the way: tax resource consumption not production (aka, a consumption tax). How and why? Scott Sumner spells it all out very well.
In my view, the original sin of tax policy was the decision to focus on income, not consumption. Once we started down that road, we created a system where closing one loophole would inevitably create a couple more. Yes, if income really is the thing that should be taxed, then it makes logical sense to tax unrealized gains. But income is not the right base for our tax system; consumption is what matters.
You can think of a consumption tax as a system that taxes current and future consumption at the same rate. As always in economics, it’s possible to dream up theories where this is not optimal. But ask yourself the following question. If a neutral attitude toward saving is the baseline assumption, how likely is it that the optimal tax regime in a more realistic model would tax saved income at a higher rate than currently consumed income?
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One advantage of this approach is that it allows the government to make the tax system as progressive as desired. Thus “it favors the rich” is not an argument against consumption taxes, although it may be an argument against a VAT-only consumption tax.
Would there be problems with this sort of system? Yes, but they’d mostly be the same problems that we face with our current income tax systems. (I use the plural for systems, as there are two personal income tax regimes and a corporate income tax.) People will try to get consumption relabeled as investment. Tax authorities will need to take a close look at what entrepreneurs are calling “business expenses”. But for most of us it would have the simplicity of a system with unlimited 401k privileges. The proverbial “income tax on a postcard.”
So that’s the theory, but how about in the real world? How do real world complications change things? I’d emphasize two broad principles:
It’s far easier to develop a sensible tax system when tax rates are relatively low. This is because the (deadweight) welfare cost of taxes does not go up linearly with the tax rate; it increases with something closer to the square of the tax rate. One way to keep rates low is to replace a big part of your welfare state with a Singapore-style forced saving model of social insurance. But if you cannot do that, and need more than 20% of GDP at the federal level, then it’s probably best to have two tax regimes, each raising between 8% and 15% of GDP.
When you discover that there are real world problems with a consumption tax, the right response is not to throw up your hands and say that we need to go back to an income tax. That approach will never work satisfactorily. Instead, the right approach is to keep the basic consumption tax framework, and then tweak the tax system to address particular problems, such as how to tax owner-occupied housing, or how to distinguish between consumption and investment. Real world solutions will always be a bit messy under any tax regime. But if you begin with the correct (consumption tax) framework, it will be easier to develop sensible tweaks.
To understand the extent and (ulterior) motivations behind the current tax labyrinth, look no further than his post script:
PS. States like Texas and Florida seem to get by fine without a state income tax. But I’ve always wondered why states that favor income taxes feel the need to have their own separate (and complicated) income tax system. Why don’t they tell taxpayers “send us a copy of your federal forms and then pay us X% of what you paid the IRS”? Are there any states that do that?
The reason that is not done is of course all the special interests who desire using the tax regime monster to steer public policy (Baptists) and manipulating it for personal gain (bootleggers). And while we’re talking about bootleggers . . .
Regarding subsidies, readers should remember: Don’t play games you can’t win, and you cannot lose if you don’t play. That is the great advice Scott Lincicome offers as he discusses corporate incentive subsidies from states and localities for so-called “economic development”.
Well, if you listen to local politicians and other subsidy advocates, their pitch sounds a lot like the one made for subsidized sports stadiums: These magical subsidies will get us the company/jobs and all sorts of additional economic benefits that would never happen without the subsidies. Yet concrete and widespread evidence of these benefits ranges from thin to nonexistent. For starters, both academic research and company statements show that subsidies were directly responsible for only a small fraction of local investment decisions. In most cases, governments were simply duped into paying companies to do what they already planned to do, regardless of taxpayer funding. Furthermore, claims that economic development subsidies consistently generate “spillover” or “multiplier” effects for local communities (i.e., economic benefits that far exceed budgetary outlays) have little empirical support. Our own quantitative analysis shows, in fact, no strong relationship between state subsidy levels and economic output or growth. If anything, the relationship runs the other way—states that offer lots of subsidies tend to be poorer and/or grow less[.]
Be sure to check out the chart(s) of the week at the bottom of the post for other insightful points on unrelated topics. Somewhat surprising they show that:
U.S. immigrant population is BELOW where it should be based on the ~18 trend prior to Trump.
Americans spend comparatively little out of pocket for health care.