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Why Tax Reform? Why Now?

Why Tax Reform? Why Now?. Joel Slemrod University of Michigan . University of Minnesota October 15, 2012. Current Tax Policy Questions. 1 . How to collect a given amount of revenue? 2. How much revenue to raise, given the huge long-term fiscal imbalance and the fragile recovery?

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Why Tax Reform? Why Now?

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  1. Why Tax Reform?Why Now? Joel Slemrod University of Michigan University of Minnesota October 15, 2012

  2. Current Tax Policy Questions 1. How to collect a given amount of revenue? 2. How much revenue to raise, given the huge long-term fiscal imbalance and the fragile recovery? 3. When should we switch from focusing on the recovery to focusing on the long run? I’ll focus on the first two questions.

  3. Tax Reform Some recent base-broadening, rate-reducing proposals have been part of comprehensive deficit-reduction plans that address the long-term fiscal imbalance. Romney’s is not. They all lower headline tax rates. This provides political cover to politicians. Economic theory supports a broad base, with caveats.

  4. Why a Broad Base? A broader base generates less inefficiency per dollar raised. Except when it doesn’t, e.g. a gross receipts tax, R&D credit, charity deductions, goods with positive externalities, double taxation of corporate income, maybe even taxation of capital income. A better base reduces the social cost of raising more taxes.

  5. Progressivity Obama wants to raise income taxes on households making more than $250K; Romney doesn’t. Optimal progressivity involves a tradeoff between the economic costs of higher marginal tax rates and the social value of less inequality. To answer this, we need empirical economists (who disagree), and either ethicists or elections.

  6. The Long-term Fiscal Imbalance--Cause In 1950, people over 65 were 8.0% of the total population. This rose to 12.8% in 2009. It will be 20.8% in 2050. In 1950, there were 6.1 OASI (Social Security) beneficiaries per 100 covered workers. This rose to 27.2 in 2009. It will be 45.4 in 2050. The promises we’ve made to the senior population will cost 7-8 times more, per covered worker, in 2050 compared to 1950.

  7. The Long-term Fiscal Imbalance--Effect The fiscal gap measures the size of the immediate and permanent increase in taxes and/or reductions in spending needed to stabilize the debt-to-GDP ratio at its current level. Auerbach and Gale estimate that the present value of the fiscal gap is between $29 and $66 trillion, which is equal to between 3.8% and 8.8% of GDP. If we do nothing,….

  8. Closing Thoughts Tax policy serves many masters: short-term stimulus, fiscal balance, growth, resource allocation, distribution. The current debates touch on all these aspects. The election may resolve how these issues will be handled, but may not.

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