For all the brave talk of a fiscal “grand bargain,” President Obama and House Speaker John A. Boehner are playing small ball on a narrow field designed by the Simpson-Bowles commission. In framing the case for reform, the commission took the basic tax system as a given. In contrast, a final deal should recognise that the country is taxing the wrong things. We should be shifting from taxes on corporations to taxes on pollution and wealth, from taxes on income to taxes on consumption. These changes would increase revenue and promote a more just and efficient economy.
The corporate tax is the brainchild of the early 20th century. Progressives used it as symbol to demonise evil corporate fat cats conspiring against the public good. But shareholders can pass on a great deal of the tax to workers and possibly consumers. To the extent that investors bear the burden, the high corporate rate encourages them to send their money overseas.
The traditional aims of the corporate tax are better served by other means. Imposing an annual wealth tax on the super rich is a more effective way to curb economic inequality. On very conservative assumptions, a 2 per cent annual wealth tax on households with $7.2 million in assets – the top half of the top 1 percent – would yield $70 billion a year. As the experience of France, Norway and other nations shows, it is perfectly feasible to impose such taxes, and they would put real meaning into the rhetoric of shared sacrifice.
Similarly, a carbon tax on polluters to curb global warming provides a better way to ensure corporate responsibility. The tax could yield an estimated $1.25 trillion over the next 10 years. This gives firms a powerful incentive to clean up cheaply, while consumers pay prices that encourage them to buy products that do less environmental damage. Japan has already introduced such a levy, and it is on serious agendas elsewhere.
These taxes are usually nonstarters for Republicans in the House. But would they consider them an acceptable price to pay in exchange for reduced corporate rates? The corporate tax yielded $175 billion last year. With the new taxes generating $2 trillion over a decade, the corporate rate could be cut significantly as part of a grand bargain that generated a huge net gain for the Treasury.
The president and the speaker also should be expanding their negotiating room by considering how a tax on consumption might contribute to a better deal on the income tax. Although they should clean up egregious loopholes, it is wrong, for example, to view the charitable deduction as illegitimate.
A better way to raise additional revenue may be to impose a new tax on the value firms add to products, which they can incorporate into the final price to the consumer. These value-added taxes play a major role in China and Europe. A modest value-added tax could well smooth the way to a deal that preserves some valuable income tax deductions without losing excessive revenue.
There is plenty of room to design a much better grand bargain than the package that may emerge from the narrow framework currently dominating Beltway discussion. Only one thing is clear: it will take time to organise the unlikely coalitions needed to redefine the terms of the debate. For example, the Chamber of Commerce, the Sierra Club and Occupy Wall Street must move beyond traditional antagonisms to recognise their common interests in campaigning for a shift from corporate to pollution and wealth taxation. Creative cross-party alliance-building also would be necessary to build support for a value-added tax that raises substantial revenue but protects low-income households from excessive tax burdens. While all this politicking is going on, the number-crunchers would have to provide the president and the speaker with the data they need for serious negotiations.
But first, we should drop the scare talk about the nation walking off a “fiscal cliff” if we don’t get to a deal before New Year’s Day. The lame-duck Congress should do nothing except pass minimalist legislation that gives the new Congress a six-month deadline to make the big decisions.
This pause also avoids a serious constitutional problem. In enacting the 20th Amendment to the Constitution in 1933, the American people launched an attack on the disgraceful practice of lame-duck lawmaking. Until then, lame-duck sessions lasted until March 4, giving election-day losers plenty of time to pass major statutes. To eliminate this abuse, the amendment required the old Congress to disband by Jan. 3, with the expectation that only a dire emergency would justify the lame ducks’ return to Washington during the holiday season.
Boehner was on solid constitutional ground in saying recently that “we won’t solve the problem ... in the midst of a lame-duck session.” Indeed, a rush to reach a final solution would create a terrible precedent, encouraging future Congresses to evade voter accountability by deferring big issues until after election day. This is precisely the evil the 20th Amendment was intended to eliminate.
It is both undemocratic and unwise for the current Congress to make a final deal that may shape fiscal policy for decades. Despite the scare talk, the president and the speaker should tell the nation that July 4, not Jan. 1, should be the target date for celebrating a truly grand bargain.