The Think Tank: Fixing America in 5 Not-So-Easy Steps

think_tank_thumbPutting our money where our mouth is, ‘The Think Tank’ delivers policy and legislative recommendations to tackle America’s problems.

Another season, another pointless Washington showdown. I trust by this point we’re all familiar with the broad strokes: failing to move forward with legislation like grown-ups, the two parties have instead tried to gain the upper hand whenever the government’s spending or borrowing authority has expired. The first few times it had the air of crisis – this time around many of us penciled in the ‘emergency’ into our calendars months in advance.

President Obama announces the deal that resolved a debt ceiling crisis in early 2011. According to schedule, here we are again.

President Obama announces the deal that resolved a debt ceiling crisis in early 2011. According to schedule, here we are again.

That isn’t to say it’s all, or even largely, artifice; a government shutdown or a debt default would be a disaster.

At the center of the conflict you’ll find what you always do in a Washington brouhaha: power and politics. In substantive terms, however, the fight is about spending – how much, on what, and where do we get the money. So here are five ideas that would work to make things better, and might gain the support of voters if Washington was still in the business of proposing solutions.

(1) Lower the nominal corporate tax rate.

Corporate profits are up, the stock-market has rebounded, and some of America’s largest companies aren’t paying taxes – so why would you want to lower taxes? Well, because few corporations are actually paying them. The tax code is so rife with loopholes and exceptions that companies rarely pay the statutory rate, but those that do end up paying a rate that isn’t globally competitive. Better to lower that rate and close the loopholes. Not only would that be fairer, it would also be more efficient.

Also, the United States taxes profits earned overseas, but only when that money is brought back into the country. The result is that companies have an incentive to keep foreign profits elsewhere and away from the US economy. This makes little sense. The business community has been calling for a ‘repatriation’ tax holiday to allow them to bring that money stateside. We should do that by lowering the tax rate on overseas profit form the statuary 35% to something in the neighborhood of 10% to 15%. The revenues collected should be set aside to pay down the national debt.

(2) Eliminate all itemized deductions and lower the marginal personal tax rate.

Yes, all deductions would include the mortgage interest deduction. It would also include medical deductions, deductions for state taxes, and a number of other popular things. To offset the economic impact on individual taxpayers, we should also increase the standard deduction and lower marginal tax rates. All of this should be done in a revenue-neutral way; let’s get structural tax reform now and fight about funding levels later.

Done properly, such a reform could be infinitely simpler than what we have now, and that would be fairer to average tax payers who don’t have the resources to leverage the complexity of the current system to their own advantage. Nothing in such a reform would need to affect the progressivity of our tax system, but it would do a lot to make it more transparent.

(3) Eliminate the health insurance exclusion.

When you receive a wage, the government taxes your income. But if you receive health insurance as part of your compensation, the value of that isn’t taxed. This is an unintended consequence of WWII wage controls and the not-too-surprising response by businesses to undermine those efforts – and it both costs the government a ton of money as well as introduces a bunch of distortions into the market.

It’s also fairly regressive: if you’re well-paid and receive great health insurance then the value of this loophole to you is quite high, but if you’re poor and don’t receive health insurance, then the value of this loophole to you is zero. Instead, we should treat the health insurance portion of your compensation package the same way we treat other wages and then adjust tax rates to zero-out the economic impact.

(4) Institute a carbon tax.

Burning fossil-fuels, like a lot of extractive and manufacturing activities, comes with the risk of serious externalities – that is, consequences that are not captured in the buyer-seller relationship. When you buy and burn coal, no one gets compensated for the resulting pollution. This is an example of market failure; a tax on CO2 emissions would help improve the efficiency of the market by pricing in these externalities. The effect should be, in the long run, decreased demand for fossil fuels through innovation.

Line plot of global mean land-ocean temperature index, 1880 to 2012, with the base period 1951-1980. The black line is the annual mean and the red line is the five-year running mean. The green bars show uncertainty estimates.

Line plot of global mean land-ocean temperature index, 1880 to 2012, with the base period 1951-1980. The black line is the annual mean and the red line is the five-year running mean. The green bars show uncertainty estimates.

Of course, there’s also the whole climate change thing to consider. And there’s little disagreement: of all the schemes out there for lowering CO2 (as well as methane) emissions, whether it’s a cap-and-trade system or subsidies to green-energy companies, the carbon tax is the most market neutral and most efficient. If you believe we should do something, this is what you should support; if you believe we should do nothing, this is your least-of-all-evils option.

To work, a ‘carbon tax’ should have no carve-outs and should return most, if not all, of the revenues to consumers in the form of a rebate or refundable tax credit. People can then spend that money to offset higher fuel prices or use it to go on vacation or pre-order the next season of Game of Thrones. The point isn’t to raise money, it’s for prices to accurately reflect the cost of the product.

(5) How about we avoid this whole thing in the future?

This whole scheduled-showdown thing is kind of a stupid way to run a country. I’ve already expressed my skepticism that everyone involved is animated by an earnest concern for the country’s wellbeing, but I’m willing to concede that our fiscal challenges are, at the very least, a necessary predicate for the current mess in Washington.

But the exact mechanisms that bring us here are more mundane: the debt ceiling and the lack of a budget. Let’s start with the debt ceiling.

First of all, I find the legal argument that the debt ceiling doesn’t actually exist to be pretty interesting. I’ll cover that tomorrow.

Second, why in the world should we hand either house of Congress the ability to force the country into a debt-default because it doesn’t want to separately green light the necessary borrowing to cover the spending it’s already approved? It really makes no sense – if Congress wants the government to spend money, it can authorize it to do so; if it doesn’t want it to spend money, then it shouldn’t authorize it do so. The debt-ceiling does nothing but invite political brinksmanship – it should be abolished.

What about the budget? You can’t force legislators to play nice with each other, though there are a lot of ideas for how you might try. Most of them – like making all members of Congress ineligible for reelection if the body fails to pass a budget – sound enticing, but would probably run afoul of the Constitution. It would be easier to simply change the rules of the House and Senate, so here’s my suggestion:

If the Congress fails to send a budget to the President, then the leadership in both bodies as well as the relevant committees should be dismissed and made ineligible for leadership posts for a set period of time.

At the very least, new leadership would provide all of us with a bit of novelty.

Follow Pedro on Twitter @IamPedroA.

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