An all-star roster of fiscal experts gathered at the Brookings Institution Tuesday to debate the future of American tax policy. The initial discussion featured former U.S. Treasury secretaries Timothy Geithner, Robert Rubin and Lawrence Summers, all of whom agreed on one overarching point: Given the size and scope of its obligations for health care, retirement and national defense in the coming years, the federal government needs to raise a lot more revenue.
How to go about raising that revenue — and what to do with it as it comes in — was a slightly more contentious issue. Both Geithner and Rubin said they worried about negative effects on growth from increased taxes, and spoke about the need to establish a fiscal framework that defines the constraints facing policymakers — most notably, what are the limits on deficits and the national debt? Summers spoke forcefully against that approach, arguing that policymakers should ignore the deficit and focus instead on creating a fairer society and increasing economic growth; once steps were taken toward those primary goals, the deficit could be brought under control more easily in a stronger economy.
Summers provided a list of specific policy changes he recommended to make the tax system fairer, reduce inequality and boost the economy:
- Improve tax compliance to capture a significant proportion of the hundreds of billions in taxes that go unpaid every year. Sanders said better IRS enforcement could produce more than $1 trillion in revenue over 10 years.
- Crack down on international businesses that are evading billions in corporate taxes by moving profits overseas.
- Reform capital gains taxation by eliminating the step-up in cost basis at death, taxing gifts to charity and real estate transfers, and eliminating the carried interest tax break.
Once those policy changes are in place, raising the capital gains tax rate to income tax levels would raise billions in new revenue, Summers argued, without weighing on growth. But the full set of policy changes are necessary, Summers said, in order to close off as many avenues for tax avoidance as possible.
All told, Summers estimated that his proposals could raise more than $4 trillion over 10 years — without imposing a politically contentious and economically uncertain wealth tax.
A menu of policy options: Other participants in the conference discussed a variety of options for raising revenues, many of which are spelled out in greater detail in the book accompanying the conference, “Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue.” Some highlights:
- VAT: William Gale of the Urban-Brookings Tax Policy Center proposed a value-added tax similar to that in most other developed countries. A 10% VAT would raise roughly $10 trillion over 10 years, Gale said.
- Financial transaction tax: Antonio Weiss, a financier and senior fellow at the Harvard Kennedy School, said a tax of 10 basis points on trading in stocks, bonds and derivatives would raise $60 billion a year without hindering market efficiency.
- Corporate tax reform: Jason Furman, who led the Council of Economic Advisers in the Obama administration, recommended a variety of tweaks to the tax code, including raising the corporate tax rate from 21% to 28%. He said the proposals would raise more than $1 trillion over 10 years and boost GDP by about 1%.
- Taxing inheritances: Lily Batchelder of New York University Law School proposed more stringent inheritance taxes that would raise $340 billion or more over 10 years.
The elephant in the room: While the conference provided plenty of ideas for improving the federal government’s fiscal situation, much less was said about how to enact the proposals in such a politically divided country. With one of the two major parties rejecting the very idea of using taxes to increase revenues, reaching a compromise to shore up Social Security and Medicare will likely be quite difficult. “We’re the sound of one hand clapping,” Geithner said, adding that he didn’t see a political coalition dedicated to fiscal reform coming together anytime soon.
