Monday, May 9, 2011

How to raise revenue

Even though Republicans seem to have taken some kind of blood oath not to raise taxes, it is obvious to me that in order to reduce the deficit and make the U S Government treasury bills a sound investment, and thus keep their interest rates low, the government needs to both cut spending and raise revenues. 

So, how to raise revenues?  It looks to me like there are three ways.

First, raise tax rates.  This might be the easiest solution politically, and the one that Obama supports.  Of course, he only wants to raise tax rates on the top 2%, and thinks he can sell that politically.  The trouble with that is that it doesn’t raise nearly enough revenue to make any real dent in the gigantic budget deficit; it raises about $36 billion per year, which is peanuts compared to a $1.6 trillion deficit.  The only way to get enough money though increased tax rates is to raise tax rates on the middle class as well as the super rich. 

Second, close the loopholes and deductions for individuals and corporations - otherwise discussed as eliminate tax earmarks.  This would have to fight every lobbying group in America.  I am all for it, but the voting population has to have a much more urgent sense of financial catastrophe before it demands such a move.  These tax expenditures cost $1.1 trillion per year, and eliminating all of them would go a long way toward getting our deficit down to a normal, acceptable size. 

The third possibility is to put a cap on the total reduction in taxes that individuals can get.  Martin Feldstein calculates that by limiting the maximum tax reduction to 2% of total adjusted gross income would raise tax revenues about $278 billion.  Still not nearly enough, but that amount would grow over time.  I would ask Mr. Feldstein to make the same calculation on setting a maximum reduction of taxes owed by corporations and businesses as a percentage of gross sales.  I would guess that these two tax reduction caps would go a long way toward dramatically lowering our deficit, and thus keep the credit ratings of the U S Government good enough to keep the interest rates on U S Treasuries low and the percentage of the budget needed to pay for the interest on the debt from skyrocketing.

Of course, none of this will happen without strong, persuasive leadership from the only person who can provide that leadership – the president.  The alternative will be for us all to wait until the financial catastrophe hits, and interest rates take off, and the interest on the debt eats up budget leaving no money for anything else.  By then, I don’t know if it would be possible for the government to act in a way that would bring the interest rates back down.  At least, not for quite a long time. 

Pro-active is better than reactive.