Wrong on Taxes

Glenn Hubbard has an interesting piece in the New York Times in which he endorses the deficit commission’s recommendations to broaden the tax base through the elimination (or at least reduction) of the mortgage-interest deduction, the exemptions for charitable contributions, and the employer-provided-health-care subsidies, as well as the earned-income tax credit. He also applauds the proposition to lower the marginal tax rates on both the personal and corporate income tax. He does regret that the plan isn’t more radical in moving toward a consumption-based tax rather than an income-based one, and he regrets that it proposes to treat capital gains and dividends as ordinary income, since this move continues the tradition of favoring consumption over saving and investment.

That being said, he presents a good argument that some of the Right’s criticisms about raising taxes are not all that justified.

The right’s criticisms are more puzzling. Groups like Americans for Tax Reform insist that any member of Congress who supported the proposal would be voting for a tax increase. It is hard to share the view that no tax increase of any sort can figure in a fiscal solution. The proposal calls for taxes and spending to be capped at 21 percent of gross domestic product, which, while higher than I might design, is a serious suggestion worthy of debate.

Second, it is not reasonable to argue that there is no single activity that can face higher taxation. If the economy must pivot toward investment and exports, tax policies must be changed to encourage productive investment over consumption.

Hubbard’s point is well taken. But I think that a better lesson for the Right to learn this time around is that tax cuts won’t get us out of this crisis. Don’t get me wrong, I am all in favor of lower taxes for us all. However, in the past, Republicans have been wedded to the idea that tax cuts alone can sort out all of our financial problems and grow the economy enough to outgrow the deficit. More accurately, in the past, Republicans have spent a great deal of time arguing for lower taxes but have meanwhile neglected to cut spending and reform entitlements, which are just as important. I hope they don’t make that mistake again now that they have regained some control on the Hill, because there is no way we can grow ourselves out of this mess.

Finally, I share Hubbard’s enthusiasm about the commission’s attempt to move towards a broader based, lower rate tax system. But I definitely hope that the 21 percent cap on spending is just a high starting point, not a low one.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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