Economists agree...

I heard a bit from Planet Money this morning, where they were talking to five economists from across the political spectrum, about six ideas the group agree on. I'd heard of the group before, and agree with some of what they said, but think some of it is blisteringly stupid.

We'll start with the parts with which I agree. That would be legalizing marijuana and taxing carbon emissions. Let's do it. Make sure we invest the emissions income in public transportation, but I completely agree with both of those.

Next, the one I somewhat agree on: eliminating mortgage interest deduction. I think that's actually overdone; personally, I would reduce, rather than eliminate, it. My pet idea is to reduce it down to one house, and a limit of the median home price of the year before (or two years before, if we want to make it predictable a little more in advance). That way it helps the middle class, and encourages home ownership, but isn't a vehicle for the rich to get richer.

Next, the one I'm not too sure about: ending the tax deduction for providing health care. I'm not sure what I think about it, but I think I'll come back to this in a minute.

Finally, the ones I find mind-bendingly stupid: eliminating corporate, income, and payroll taxes (ignoring, of course, that following through on these would make the suggestions in the last two paragraphs pointless). Payroll taxes are paid to separate out mandatory and discretionary spending in the government budget. If you want to make it trivially easy to underfund or eliminate social security/medicare/medicaid, then that's a great policy idea.

But eliminating corporate and income taxes really take the cake. The explanation advanced for corporate taxes is that you don't want to discourage reinvestment. Maybe it escaped them that those reinvestments aren't taxed, and never have been. Those are expenses. Businesses are only taxed on profits (you know, revenue minus expenses). I can't understand how someone (let alone five someones) calling themself an economist can make such a basic mistake.

But it's even worse than that; reducing corporate taxes actually DIScourages reinvestment. Why? Because, without corporate taxes, the cost to the business of making those reinvestments actually goes UP (it also raises the marginal cost of hiring, as well! Yeah, we don't want businesses hiring). If the tax rate is 35% (it's around there), and a business looks at a $1M capital investment, they can say that it really only costs them $650k, because they would have lost the other $350k anyway to taxes. But if there are no corporate taxes, they look at that investment, and say that it costs them $1M, making it less likely that they would make that investment (the ROI is guaranteed to be smaller).

On the income tax side, why is that stupid? Well, it's actually only stupid in terms of how it would be replaced. The stupidity is in terms of what you want to encourage or discourage. If you don't tax income, then someone needs to work less hard to get the amount of money they need for what they want to buy. What government should be encouraging is production, and should be mostly neutral on income.

Actually, it now occurs to me that this whole thing about eliminating tax is a complete supply-side attempt at a solution. There's actually nothing politically neutral about it (at least not these parts of it). It's attempting to increase the supply of money available for spending.

The part of it that is downright stupid is this: they acknowledge that taxing something discourages it. Why would you worry about discouraging income (which has built-in advantages, almost no matter how much it is taxed), and instead discourage consumption (which does not)? Consumption is good for the economy. It provides more demand, which will, in turn, require more supply (and more people to do work to provide that supply). The whole problem with supply-side solutions to problems is that too much supply DIScourages demand, which discourages economic activity overall. That means it, by design, leads to economic contraction. Why would the government want to pursue such a policy? It's self-defeating.

And all that ignores the large practical problems with a consumption tax. To whit, consumption taxes are inherently highly regressive (poor people spend a much larger portion of their income), and that's not easily flipped. You can increase the tax as items get more expensive, I suppose, but that's hard to keep from being highly gameable. And you can eliminate taxes on certain necessities. The point is, though, you quickly end up with a system every bit as complex as what we have. So what's the point?

No comments:

Post a Comment