The Republicans claim that they reduce the government, but they are about to explode the budget deficit to prolong the tax reductions of President Trump – which would make interest in the national debt, already one of the most important expenses in the federal budget. It is not a way to reduce government size.
They could compensate for the lost income of tax reductions by reducing expenses and rights, but this would require difficult political choices. Instead, the Senate Republicans are trying to Use budgetary gadgets. To pretend that the tax reductions of 2017 were always prolonged, which gives the impression that the current proposal has no cost.
It is pure political cowardice. There is an alternative to this mess.
The American tax code is broken. It is mainly because it perceives income in an arbitrary, distorted and unjust manner. At the heart of the problem are “tax expenditure”: credits, deductions and gaps that benefit the government's favorite groups and behaviors.
These provisions make the tax code more complicated, less neutral and less focused on growth than it should be. Worse, they transfer the burden to disadvantaged groups, requiring higher prices to compensate for the lost income for races.
It is not only a question of accounting or administrative complexity; It is a question of morality. As the economist the late David Bradford has observed it, our tax code does not reflect any coherent philosophy.
It is a patchwork of exceptions and preferences designed by lobbyists than by civil servants. Political decision -makers say they encourage economies, promotion of equity or help the poor. In reality, many tax expenditure – also called tax reductions – are useless beyond the enrichment of powerful interest groups.
The solution is to return to the first principles. We must start by defining the tax base in a founded manner. What should count as an income? What should be taxed and when? It is only then that we can correctly distinguish legitimate exemptions and unjustifiable gifts.
Most tax expenses exist because our tax plate is treated as a hybrid waste. Officially, the United States manages income tax. But it includes certain consumer tax elements, such as deferred and tax pension accounts and exclusions of unrealized capital gains, in order to minimize the savings and investment penalty imposed by the use of an income tax base.
My favorite path is to adopt a stable consumption tax, like the A Proposed by Robert Hall and Alvin Rabushka. As part of this system, income is only imposed once – when it is spent – and savings are not penalized. There are no deductions for mortgage interests, No special credits for electric vehicles And no sculpture for the insurance provided by the employer.
The only remaining tax expenditure would be a generous personal allowance to exempt essential consumption – because everyone must buy the bases of life, and this neckline protects the smallest income against the payment of an extremely disproportionate tax. The result is a simple and transparent tax system with large equity and powerful pro-growth incentives. Keep what is justified. Eliminate the rest.
Short to this, we can always make immediate progress by fixing faults in the current system. This calls for evaluating each expense according to clear principles: does a provision prevent or allow a double taxation? Does this guarantee tax neutrality? Or does he reward politically connected industries?
Certain provisions should be kept, in particular a decrease in tax rates on capital gains and dividends and exclusions for life insurance payments funded by income tax. These are not documents; They correct the distortions created by income tax itself.
Most other tax expenditure fails this test. The deduction of mortgage interest benefits the rich while inflating the prices of housing. The charitable deduction, although noble with the goal, promotes the rich donors and introduces unnecessary complexity. Energy tax credits, companies' gaps and state and local tax deductions distort investments and transfer wealth up rather than outside.
These must be repealed or replaced by something better. For example, rather than specifically subsidizing the research and development of businesses through tax credits, we must allow complete expenditure of all capital investments. This would encourage innovation through the economy without choosing the winners and leaving others.
To illustrate all of thisMy colleague Jack Salmon and I produced a website that classifies tax expenditure over 170 years and over. There are those we keep, those we eliminate and those who could be too difficult to eliminate, for whom we offer reform ideas.
You would be amazed by the amount of income to compensate for Trump tax cuts and other popular spending programs. For example, like the Adam Michel of the Cato Institute noteCompleting only two tax reductions in inflation reduction – the production tax credit and the investment tax credit, both granted to special interest with a low return on investment – could pay all the best tax reductions.
Reforming the tax code will not be easy. Each deduction has a district and each escape a defender. But the advantages are enormous: lower tax rates, overall, greater economic growth and a transparent system more based on principles. Better still, this could help level the rules of the game between workers and investors, large companies and small businesses and tenants and owners.
In the end, the tax code should reflect the values of a free society. We deserve an equal treatment under the law, a minimum distortion of our choices and our taxation which is clear, understandable and fair.
Veronique de Rugy is main researcher at the George Mason University Mercatus Center. This article was produced in collaboration with the union creators.
