Magical Thinking Is No Substute for Tax Reform 

Commentaries on economics and technology.
April 22 2012 6:30 AM

Magical Thinking Isn’t Enough

Romney and Obama both owe us better plans for tax reform.

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Mitt Romney speaks with voters on "tax day," April 17.

Jeff Swensen/Getty Images.

April’s dreaded tax deadline has come and gone. The system, Americans have been reminded, has become painfully complex. The fear of an audit by the Internal Revenue Service lurks in homes across the country.

At such a sensitive time, it is no surprise to hear politicians pitching the idea of “tax reform”—suggesting that they can simplify the system, close loopholes, and use the proceeds to reduce tax rates. The allure of such appeals is that a crackdown on others’ tax avoidance will mean that you personally will pay less in taxes. This tax reform, according to popular policy jargon, will be “revenue neutral”— meaning that it will not worsen the budget deficit or drive up the national debt. The broader subliminal message is that you can have whatever you currently expect in terms of government services for less than it costs you now.

The problem with this vision of tax reform is that it is magical—an attractive illusion with no basis in reality. Consider the recent pronouncements of Mitt Romney. He wants to cut tax rates, mainly benefiting those at the upper end of the income distribution. He also wants to close loopholes, but none of the details that he has offered add up to much. His boldest proposal—eliminating deductions for interest paid on mortgages on second homes—is trivial in terms of generating revenue.

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Obama is only slightly better. While he talks less about “tax reform,” he is currently communicating the message that merely raising taxes on rich people—the infamous 1 percent —will bring the budget and national debt under control. That, too, is a pipedream.

Americans need a more transparent approach to assessing candidates’ budget proposals.

What the U.S. and many other countries need is an independent, competent, and experienced body that leans neither right nor left. Fortunately, the U.S. has the Congressional Budget Office, which scores legislation in terms of its budgetary impact, assesses official budget proposals, and formulates its own economic projections. (I serve on the CBO’s Panel of Economic Advisers, which comments on the draft forecast twice a year but does not assess budget proposals or anything else.)

Because the CBO reports to the relevant congressional committees—those dealing with tax and budgets—both Republicans and Democrats watch its every move. But the CBO, created in the 1970ds precisely to bring greater transparency and accountability to the rather byzantine congressional budget process, really is independent and run by professionals.

The CBO does not, however, score proposals by political candidates, and that is part of the problem. In the run-up to the pre-election debates between Obama and Romney, both sides should agree to submit detailed budget proposals in the correct format for CBO assessment. The relevant congressional committees also should agree to this exercise.

If one presidential candidate refuses to cooperate in this manner, that should confer an advantage on the candidate who is willing to disclose more fully the specifics of his plan. And, to make this pressure to disclose meaningful, part of one debate should focus on budget proposals, with the questions being structured around how the CBO has reacted to specifics. If either candidate does not want to bring the national debt under control, he should be pressed to explain why.

This is not a matter only for the world’s largest economies. Candidates to lead their countries should not be allowed to get away with speaking in generalities or engaging in vague rhetorical flourishes. Democracy can and should be better than that.

This article was originally published by Project Syndicate. For more from Project Syndicate, visit their new Web site, and follow them on Twitter or Facebook.

Simon Johnson is a professor at MIT’s Sloan School of Management and the co-author of White House Burning: The Founding Fathers, Our National Debt, And Why It Matters To You.