The Beltway vs I-95 on Tax Reform

By Derek Thompson

Glenn Hubbard strikes the right note on taxes and the Bowles-Simpson deficit plan. (Although, it sounds like Hubbard would prefer to shift and lower taxes, whereas I'd prefer to shift and raise taxes.)

For a plan so radical, Bowles-Simpson is surprisingly safe:

The commission's proposal ... missed a chance to make better, more radical changes to the revenue system -- like a shift to a consumption tax rather than taxing incomes. My greatest concern, however, is that the plan is more about "principal" (cutting federal debt) than about "principle" (what we want taxes and spending to accomplish).

To meet the nation's fiscal challenges, we need to refocus our economic activity -- primarily with less reliance on consumption and more on investment and exports. The Bowles-Simpson plan to cut marginal tax rates and the corporate tax would help. But their proposal to treat capital gains and dividends, which are now taxed at favorable rates, as ordinary income would not; in fact, it would hamper saving and investment. And the proposed increase in gasoline taxes seems designed simply to plug a budget hole, not to spur energy innovation.

The column reminds me how gaping the canyon between Washington and policy thinkers is. On the I-95 corridor between DC think tanks and Ivy League scholars, you can find considerable support for a dramatic shift in taxes, moving the country from a system that taxes good things to make money (income and investment) toward a system that taxes both to make money and to guide activity (a tax on consumption and carbon emissions would increase savings and support green energy).

But the status quo bias in Washington has a magical magnetic power to it. That's why the Bowles-Simpson plan, radical as it seems, is still very much an inside-the-box and inside-the-Beltway approach to tax reform.

This article available online at:

http://www.theatlantic.com/business/archive/2010/11/the-beltway-vs-i-95-on-tax-reform/66628/