Let's begin to think big about the tax code

Nov. 3 (Bloomberg) -- Billionaire investor Wilbur Ross, chairman of WL Ross & Co., talks about U.S. midterm elections. Republicans were projected to take control of the U.S. House and had picked up at least two Senate seats in elections marked by voter anxiety over jobs and the economy. Ross also discusses U.S. global competitiveness. He speaks from Washington with Charlie Rose on Bloomberg Television's "Battle for Capitol Hill." (Source: Bloomberg)
By Ezra Klein
Washington Post Staff Writer
Sunday, November 7, 2010; 10:08 AM

The conventional wisdom is that Tuesday's Republican rout will mean President Obama has to stop thinking big and begin compromising where he can. That's only half right. To get anything done over the next two years, Obama will have to compromise with the GOP. But that doesn't mean the time for thinking big is over. It means it's finally beginning.

For the past two years, Democrats had congressional majorities unequaled since the 1970s. That gave them something rare: Enough votes to get things done. But that also meant prioritizing accomplishments over vision. Obama couldn't spend his time giving soaring speeches about the perfect and then put his shoulder behind the good - or, as is more often the case in the U.S. Senate, the better-than-nothing. He had to somehow get that better-than-nothing over the finish line, and that meant publicly advocating bills that were full of deals and flaws and shortcomings. Change, it turned out, meant an ugly slog.

But that's over now, and it frees Obama to return to what President George H.W. Bush so memorably called "the vision thing." And he's helped by the presence of a specific thing in need of some vision: the economy.

For the past two years, we've been responding to the aftereffects of the economic crisis. We should still be responding to it. But the short-term problem of 10 percent unemployment is matched by a long-term problem of slow growth. For all the trouble unleashed when the bubble popped, its rise wasn't so great, either: Middle-class incomes fell in the decade before the crash, and inequality skyrocketed. Growth was okay, but it wasn't great. And the drivers of the economy - namely, credit-fueled consumption and esoteric financial dealings - were unsustainable.

The question of what comes next has been overwhelmed by the need to ease the pain now. But since Republicans in Congress have been very clear about their belief that there's little more for the government to do about easing the pain now, there is time and space for politicians to think hard about what comes next. And the place to start is with the tax code.

Now, if Obama - or, for that matter, the Republicans - were only two or three votes from a major overhaul of the tax code, they'd have to start making deals and trimming ambitions and talking out of the sides of their mouths. But they're not. So maybe, just for a little while, we could have a conversation about what it should actually look like, rather than what could actually pass.

For one thing, a 21st-century economy should be able to get rid of the worst mistakes it made in the 20th century. The deduction for employer-based health care is one of those mistakes. It was a carryover from World War II's wage-and-price controls, and it's given us a system that costs too much but in which most of us are so far from those costs that we're not willing to make the sacrifices reform requires. On top of that, it's awfully regressive: In effect, it means that people without health-care insurance, or with insurance that doesn't come from an employer, are subsidizing the people whose employers do give them insurance - and those folks are, on average, the richer group.

Similarly, the mortgage-interest deduction encouraged an overinvestment in housing, and did so at the expense of renters. Like the exclusion for employer-based health care, it's regressive, and it makes housing seem cheaper than it is. It's time to get rid of both, perhaps by converting them to refundable credits of some kind.

Speaking of consumption, it's time to start taxing it. Tax experts almost universally agree that taxing consumption is better than taxing savings and investments, but we tax savings and investments and let consumption off scot-free. Shifting some of our income tax burden to a value-added tax - a tax that would fall on what we spend, but spare what we save and invest - would balance the scales a bit.

Which brings us to income taxes. Shifting part of the income or payroll tax burden to a carbon tax would have two advantages: First, it would tax something we want less of rather than something we want more of. We all agree that work is a good thing. Many of us, however, believe that carbon emissions are a bad thing. And even those of us who believe it's unclear whether they're a bad thing probably agree that there's a higher chance that they turn out to be bad than that work turns out to be a bad thing. And second, it would be a great boon to our green-energy industry - and that's an industry that's going to be terrifically important to our economic fortunes in the coming decades.

It's also time to get serious about the corporate tax. We have one of the highest corporate tax rates in the world, but we raise much less money from it proportionally than other countries do. Why? Because the tax is full of loopholes and easy exits. We should clean the code out, bring the rates down and apply it more fairly.

All of this, of course, could be done in a revenue-neutral fashion. But it shouldn't be. We say we're concerned about the deficit, and we're right to worry. But plugging the hole will require tax increases as well as spending cuts. The George W. Bush tax cuts - which were passed in response to massive surpluses - have pushed revenue far beneath where it needs to be for fiscal sustainability. We should get revenue back to the 20 percent or so of GDP that it was before the tax cuts passed. That was the 1990s, just to be clear, and it was a pretty good time for our economy.

By this point, you may be wondering where the vision thing has gone. All I've done is offer up a bunch of tax-policy ideas. But real vision is specific about policy. And these policies, put together, point toward an economy that's gotten its health and housing sectors under control, that's focused on savings and investment rather than credit-fueled consumption, that's taking the risks of global warming and the opportunities of green energy seriously, that's making it easier for corporations to locate here and create jobs and growth, and that's dealing with its deficit problem in a balanced and forward-looking fashion.

So that's an opening bid. President Obama or the Republicans could offer it. It won't pass in the next two years, and it might not even lead to compromise legislation in the next two years. But to get our economy into shape later, we need to start thinking - and arguing - big now.

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