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Current tax policy has a lot to do with Congress' gridlock

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By James McCusker
Herald Columnist
Congress' supercommittee failed to come up with anything useful as far as the federal deficit goes. If we transform the experience into a practice test question in a high school advanced-placement statistics course, though, we could salvage something useful from its failure.
The question would look like this: If we select a sample of 12 from a population of 535 members of a dysfunctional Congress, what is the probability that the sample will be dysfunctional, too?
We don't have to be statisticians to have a pretty good idea of the answer. The supercommittee was doomed from the start. Beyond the political deadlock it lacked a critical resource: a tax and finance navigational chart with reference points to help get us from where we are to where we want to go.
Without that, it was an ill-starred, desperate effort to find a way around the congressional impasse over the budget deficit and the gathering storm of accumulated public debt.
Of course, no such kind of navigational chart exists. And that is why politics is steering the ship.
It is true that most members of Congress at this time, both liberal and conservative, believe that they represent a constituency that holds strong economic views and is most unforgiving of compromises, lapses, or deviations of any sort. Whether that belief is accurate, though, is debatable. It is certainly self-serving because it discourages thought or compromise, and validates the most cynical sort of voter-acquisition calculus.
Whatever our view of the underlying politics, it is clear that the principal issue in the budget deadlock is taxation. The budget deficit level is unsustainable but there is disagreement over how much of the repair workload should be carried by spending cuts and how much by increasing revenue by raising taxes.
Despite the huge size and enormous responsibilities of the federal government there is no tax policy document, no Constitution, nor any sort of reference point that the Congress or the public can turn to for guidance. As a result, every two years each Congress makes up tax policy as it goes along in a sort of large-scale, version of kitchen-table budgeting.
There is an attractive quality to this sort of practical finance, and it certainly has led to some good budget decisions over the course of our country's history. But the kitchen-table approach worked best for us in the days before the federal government became a player, in fact the largest player, in our economy. And it worked best before the federal government had acquired so many dependents.
The absence of a consistent tax policy means that the competing forces and philosophies affecting Congress's tax decisions are free to duke it out. In addition, the Congress does seek out and occasionally listen to expert advice in analyzing the economic impact of various tax structures. Still, without a guiding light the fiscal decisions of Congress often seem to be more of a patchwork than a coherent design.
The competing philosophies and economic effects of taxation become important when the operation of the federal government itself becomes a major factor in the economy, and they become critical when we have gotten ourselves into the kind of financial mess we find ourselves in now.
The basic economic reasons for federal taxation are:
Funding federal government operations. This motive goes back to the earliest days of the republic, when the bulk of the funds needed for the government came from import duties.
Redistribution of income. Income taxes turn out to be a very ineffective way to achieve this, quite possibly because in most cases the funds taken from the wealthy by governments are not given to the poor. In the U.S. the largest single income redistribution program was unintentional: Social Security. Even there, the redistribution is somewhat imperfect for the burden of the payroll tax falls on employers, not necessarily the wealthiest or those with the highest incomes.
Redirection of investment or of consumption or both. Luxury taxes and so-called sin taxes are an effect to discourage certain types of consumption. Tax breaks are used to encourage certain types of investment, which is one reason why the tax code looks like a set of encyclopedias. Both types of resource flows can be redirected within a single policy. Our clean energy policy, for example, involves both consumer and investor incentives.
Equity or fairness. From an economic standpoint, the underlying principle is, surprisingly, self-interest. The idea is that the more fortunate in our society should pay a greater share of the costs of maintaining and defending it -- not because they need to "give back" anything but because they have more to lose if the wheels come off the system.
This is the first of two columns exploring taxation issues and how they affect our efforts to resolve the financial problems blocking our economic recovery.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
Story tags » TaxesHouseSenate



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