I am fine with the current fiscal deficit–the evidence is pretty clear to me that we would be worse off in the absence of the stimulus, and so long as we can borrow cheaply, and build projects cheaply (because contractors are eager to get work), there are positive NPV opportunities for the public sector.
But the long term fiscal position worries me a lot (and it bothers me when people I respect as much as Paul Krugman soft-peddle it). The question is how to we get out from under?
The good news is that we have gotten out from under budget shortfalls before. The Obama administration proposes raising taxes on high earners, and that is fine, but it is not enough. More fruitful, I think, would be to go after the tax expenditures.
Leonard Burman, Eric Toder, Christopher Geissler estimate the size of tax expenditures. It is huge: depending on the modeling strategy they employ (they look at tax expenditures with and without interaction effects, and with different assumptions about the Alternative Minimum Tax), they estimate tax expenditures for 2007 of 700 billion to 760 billion. The largest expenditures are for retirement plans (126 billion), employer contributions for health insurance (138 billion), the mortgage interest deduction (92 billion), and preferential treatment of capital gains (84 billions).
If we were to eliminate tax expenditures, the overall effect on the tax code would be largely progressive. Pretty much everyone would take a hit, but those at the top would take a bigger hit. If the earned income tax credit (about 43 billion) were left alone the impact would be more progressive.
According to CBO, the long-term fiscal deficit is somewhere in the neighborhood of 600 billion per year. Elimination of tax expenditures other than the EITC would put us back into fiscal balance in a progressive manner without raising rates. It would also make the tax code simpler and less distortionary.
Just a thought.
Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!
Leave a Reply