Tax Reform – Key to “Winning the Future”

19 Aug

Oh no! It's so bad! Again!

I sure hope Andrew Ross Sorkin has been taking notes. Between the debt ceiling showdown and the downgrade of U.S. debt, the economic uncertainty and financial volatility of summer of 2011 is going to leave everyone from academia to the boardroom scratching his head for years to come, so you can rest assured that financial journalists are warming up their word processors, itching to pull the story together.

As the markets oscillate and photographers capture the quintessential “this is bad this is really bad” shot of Wall Street traders grasping at their faces with despair, one can’t help but wonder what leadership elected officials in Washington plan to do to improve the economic outlook. In the past I would trump the virtues of Adam Smith’s invisible  hand, but given the absurdly high unemployment rate and the juxtaposition of record cash levels on corporate balance sheets to the budget deficits of government at all levels,  I don’t think we can improve the economic situation without significant assistance from Washington.

At some point in the not too distant future,  difficult decisions regarding the U.S. government’s expenses and revenues will have to be made. This is a great time for members of Congress to put on their architect hat and envision what kind of U.S. they want to build. Do we want to have strong infrastructure and education systems, a significant percent of energy from “clean” sources, and low unemployment, among other desirable things? If that is the U.S. we want to live into, then we have to work backwards to the decisions we make now. As any homeowner knows, moving into the house of your dreams requires starting with a blueprint that defines the vision, and a roadmap of project milestones and to-dos that must be achieved along the way.

In order to achieve some semblance of fiscal health, I propose the following tax reform. Keep in mind this is by no means exhaustive, and please, feel free to weigh in on the discussion.

  • Eliminate (many, but not all) tax deductions and credits. For instance, why are we still encouraging and incentivizing home ownership via mortgage interest tax deductions? If a consumer has the means and desire to own a home, that’s wonderful, but the government should not encourage living outside of one’s means. Also, to make the case for sustainability, urban economists such as Ed Glaeser argue that a suburban lifestyle has a much larger environmental footprint than an urban one, so we shouldn’t de-incentivize urban rentals in favor of home ownership
  • Institute a financial transactions tax for transactions over $1mm. The financial crisis of 2008 made it all too clear that reckless trading has severe implications outside of  the two parties executing a trade, but the public should not be held responsible for such recklessness. A tax as small as 0.25% would add tens of billions of dollars of revenues, and would not critically impact the liquidity of the market. Only institutional traders or high net-worth individuals are trading in these increments anyways, so it is not unreasonable to demand an insurance premium for a sense of market stability
  • ELIMINATE FARM SUBSIDIES. Because it simply does not make sense to subsidize obesity via cheap high fructose corn syrup.
  • Reform corporate tax code to the extent that effective tax rates are uniform across all corporations. A uniform effective tax rate would provide a sense of stability in the markets, and would give corporations a better sense of long-term liabilities. This can only be achieved if loopholes, tax credits and deductions are realigned as well. I think it would be feasible to increase the average effective tax rate through a combination of reducing the nominal corporate tax rate and eliminating tax loopholes
  • Legalize it. It is mind-boggling that Americans can legally purchase and consume 80-proof alcohol, cigarettes, and McDonald’s McNuggets, but they cannot legally purchase and consume marijuana. Legalizing and taxing marijuana at 8-10% would not only add billions to the government’s coffers, but it would also create thousands of (legal) jobs and drastically reduce the violence in Mexico and near the border.
These are just a few thought starters, but the point is that the path to a fiscally sound government, and therefore a healthier economy, is going to require additional revenues in addition to spending cuts.

2 Responses to “Tax Reform – Key to “Winning the Future””

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