For GOP, to tax or not to tax is the question

June 26, 2011

Reihan Salam may well be correct that if Republicans don’t “compromise on curbing tax breaks, we’ll wind up with marginal tax rate increases” since a high percentage (some 72 percent according to a recent WaPo poll) of Americans seems to favor raising top tax rates. But here is how I see things:

1) What will Rs get in return? Structural changes to entitlements — or some manipulation of the CBO baseline, such as $1.4 trillion in savings from a Afghanistan troop draw down?

2) The mix of spending cuts to revenue increases must tilt overwhelmingly to the former, assuming the spending cuts are legit. Research from AEI  has found that countries with successful fiscal consolidation plans have something like a 85%-15% ratio of spending cuts to tax revenue increases. Democrats seem to prefer nothing more than 3-1 — and that is probably counting less interest expense as a spending cut.

3) My preference is far more tax revenue through faster growth. As I point out in a new piece I wrote for The Weekly Standard:

But AEI’s scholars created a plan that would boost tax revenue to a consistent 19.9 percent of GDP by replacing the income tax with a broad consumption tax and substituting a carbon tax for alternative energy subsidies. Only three years in U.S. history have seen higher tax levels as a share of output. The team’s explanation: “We cannot simply tax our way to a balanced budget without suffering the consequences of a -sluggish economy and reduced prosperity. We also cannot simply cut spending without risking the loss of essential services for an aging population, undercutting our infrastructure on which economic growth builds, and reducing our ability to defend the country against its enemies.” …

What’s more, there’s every reason to believe that pro-growth policies can produce added tax revenue by making the U.S. economy bigger. The AEI plan, for instance, was required to use the gloomy economic forecasts of the CBO, which assume long-term GDP growth of around 2 percent. But many economists believe replacing the current income tax system with a more economically efficient consumption tax would boost long-run output. If growth were substantially higher than the CBO assumes, then the long-run revenue requirement to make the numbers work could be in the neighborhood of 19 percent of GDP—the same as in Ryan’s “Path to Prosperity.” But the pie would be bigger.

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