Monday, November 26, 2007

Death and taxes and a dose of Chicken Little (and Jonathan Swift)

At first blush, the tax code overhaul proposed by Fred Thompson seems to make a lot of sense. It simplifies the code to two brackets (10% on the first $50/100K of income, 25% thereafter, provides better exemptions and allowances up to a certain amount, gets rid of most credits (but preserves education ones and child-related ones), indexes the rates to inflation and repeals the alternative minimum tax. I like it, except for the part about preserving the Bush tax cuts, which apparently, if extended past their sunset date, will cost the treasury $2.3 billion over 9 years.

That is A LOT of money. And I personally think the government is going to be more, not less, essential to our happiness in the coming years, and thus needs some cash on hand to fix some fundamental structural problems in the very near future.

So, thinking this through, I have to wonder if the impact on government revenues would be significant. Former Senator Thompson brushes off this question, stating the CW that tax cuts always encourage economic growth, which generates more government revenue that offsets code changes, but that's a flip answer to a serious question. Taxes do more than provide government revenue, and tax credits also incentivize certain choices and behavior. For instance, if there is no more mortgage credit (and I think it's unfairly out-of-whack in more expensive markets as it is), will this affect home ownership rates? (Leaving aside whether that is really a bad thing, of course.) Is the ready availability of higher education loans and interest deductions contributing to a degradation in the value of a bachelors degree, particularly among younger workers? More importantly, will the government have the money to train staff to respond to the rising tide of natural disasters, for flood control and water storage and transport, for maintaining public health and fast-tracking renewable energy systems?

The thing about government codes is the same thing about budgets: they are starting points in a debate that become fixed, with positional adversaries lined up pro or contra increases and decreases. This is unfortunate, because it probably does more to promote everyone's favorite government boogeyman, waste, fraud and abuse. It's about covering ass and protecting people's jobs, ultimately, but it's problematic nonetheless. This point is well-demonstrated by the looming budget gap in California. It is becoming increasingly clear that California needs to make changes to its tax code that will stabilize government revenues (property taxes would be a good place to start) so that the state can effectively respond to its slate of impending crises: education and infrastructure.

I can't help but worry that the big picture concerns of tax policy get lost in the battle for pork and constituency, and pandering to Americans' knee-jerk anti-tax mentality. I suppose that's not very capitalist of me, but I see the potential of government to provide a steadying influence in what are sure to be turbulent times ahead. But then again, if we go another way, maybe we'll just reach that other inevitability that much sooner. Which, if that occurs among a certain population segment, could ease these other problems.

What? I'm just sayin'.

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