This week on Facing the Future, we focused on tax policy with Howard Gleckman, non-resident fellow at the Urban-Brookings Tax Policy Center, who discussed the key points of his recent column titled, “What The Ugly History of Tax Policy Over The Past Four Decades Means For The Future.”
Gleckman described the ways in which he believes tax policy has deviated from fundamental principles; raising sufficient revenue equitably and efficiently. “The idea of tax policy,” he said, “used to be principally to raise money for the federal government and to do it in a way that was equitable and fair to people of all incomes. And even with people making the same income, you want them to pay more or less the same tax. You want it to be simple and you want it to be efficient. We’ve completely lost the thread when it comes to using tax policy to raise sufficient revenue to pay for the government. We had a nearly $2 trillion budget deficit this year, so clearly we’re not raising enough money to pay for what we want to do.”
Beyond the revenue shortfall, Gleckman said, “Taxes are not equitable. Increasingly, people making the same amount of money are paying different taxes, just depending on the way they make the money, which doesn’t really make any economic sense. And, increasingly, they’re inefficient. We’re imposing tax policy in ways that discourage people from investing in the most efficient ways. So, there are these three principal goals we’ve had, and now we’re violating all three of them, often at the same time.”
Another problem Gleckman identified is a narrowing of the tax base, combined with lower tax rates. “Laws of tax policy are you want to have low tax rates and we’ve succeeded in doing that,” he said. “The problem is that at the same time we’re lowering tax rates, we are exempting all kinds of income from tax. You see it in the bill that Congress passed last July, at the encouragement of President Trump. Tip income, at least for some people, under some circumstances, is tax-free. And the question you could ask yourself is why should a restaurant server who gets paid with tips not have to pay tax on their tip income, yet somebody who works in a warehouse who makes exactly the same amount of money have to pay income tax on their income? Doesn’t make any sense.”
Looking ahead, Gleckman said, “My sense is we’ve raised about as much as we’re going to raise through the income tax. So, I believe that we, over the next few decades, probably are going to enact some sort of a consumption tax and there are a lot of different ways to do this. You can do a value-added tax, which is what most European countries do. You can do a cash flow tax on American businesses or you can do a tariff. The first two actually make a lot of economic sense. Tariffs, to be blunt about it, are stupid.”
“The president has operated under this strange assumption that tariffs are paid by foreign countries,” Gleckman observed, “and the reality is that tariffs are not paid by foreign countries, they’re paid almost entirely by American businesses and American consumers. American businesses pay the tariff at the border and they either eat the cost, or they reflect the cost by raising prices of whatever imported goods they’re selling. And it not only works for retail products, but it’s also very important to note, they work for what are known as intermediate goods. The parts that are used that go into, let’s say, American manufactured cars often come from overseas.”
“The other thing to know about tariffs,” Gleckman continued, “is, yes, tariff revenue has increased dramatically under President Trump, but it still reflects only about 10% of what we collect in income taxes. So it’s very difficult, as a matter of math, to think you could take tariffs and use them to replace the income tax. There’s just not enough imported goods to make that work. And the other thing to remember is, the higher the tariff rate, the fewer goods we import. And the fewer goods we import, the less tax we collect. So, it’s sort of a vicious cycle here, and in the end, it generates less revenue, not more.”
“The big question,” Gleckman said, “is what is the tax code going to look like in future years? We’re going to have to rethink what we’re doing with the tax code. We’ve got to raise the money from someplace. Continuing to borrow it from foreign governments, particularly China, given our relationship with China these days, doesn’t seem to make a lot of sense. So, what are we going to do? I’m not one who thinks the United States is going to be Greece. We still have the world’s reserve currency. We still have some flexibility here. But this can’t go on, and part of the solution has to be tax policy.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
