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Serious Policymaking

June 24, 2016 Leave a comment

Much of the political behavior we see is theater or, even worse, buffoonery.  I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.

This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.

The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.

The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.

Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.

There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.

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