Just coincidentally, here is a blog post I wrote on Concord’s blog today.  In it, I say deficits can sometimes be good, and deficits can sometimes be bad, depending on the condition of the economy (emphasis added):

In a recovering economy still below “full employment” level, the binding constraint is lack of demand for goods and services. Increasing the supply of productive resources won’t increase GDP if there is already excess supply, or idle capacity, in the economy. It will only increase unemployment. In such an economy, fiscal policy can increase GDP by stimulating consumption — either through the government’s direct purchases of goods and services, or through tax cuts or transfer payments that indirectly increase private spending. Deficit spending can be effective at increasing demand and GDP immediately; how effective it is depends on how well targeted the policies are toward households and businesses most likely to spend additional funds on goods and services, and on how much the industries that produce those goods and services respond by hiring additional workers.

Sudden fiscal consolidation or deficit reduction, on the other hand, can jeopardize an economic recovery if it substantially reduces the net incomes of households that spend most of their income. (Such “austerity” measures can also spur a political backlash, as we are seeing now in Greece and France.)

In contrast, in a fully-recovered, full-employment economy, the size of the economy is limited by the level of productive capacity, or the aggregate “supply side” of the economy. Increasing demand without increasing supply only creates inflationary pressures. Under these conditions, higher private and/or public saving will most effectively expand the economy.

Deficits harm economic growth by reducing national saving (public plus private saving), which reduces the capital stock, labor productivity and household incomes. So deficit financing of tax cuts or spending designed to encourage the supply of productive resources handicaps the likely payoff. If policies can be structured to preserve the positive incentive effects on the supply of labor and capital while avoiding deficit financing, then those policies are much more likely to increase GDP.

As the economy gets closer to full employment and there is less need to stimulate demand, fiscal policy should transition from deficit-financed policies that encourage consumption, to paid-for policies that increase national saving.

And just because deficit spending in general can be helpful in a recession and recovery and harmful in general in a recovered economy, doesn’t mean all deficit spending is equally good in a recession and recovery, or all deficit spending is equally bad in a full-employment economy.  There are benefits and costs in either situation that should be evaluated as thoughtfully as possible in order to maximize the net benefits of the policy.

So I don’t support “austere” fiscal policy, but I do keep hoping for “smarter” and (net) beneficial fiscal policy.  It is not at all hard to do in economic theory.  The difficulty lies mostly in political practice.  I’ll explain more on that soon when I write more about what happened at today’s fiscal summit.

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This is my last column as a regular contributor to Tax Notes, so I thought I would close with a focus on my favorite tax topic, which somehow manages to stay evergreen because policymakers never quite settle the issue: the Bush tax cuts.

Policymakers are headed toward a big fiscal cliff after the election, with the expiration of the Bush tax cuts this time joined by automatic spending cuts known as the sequester. The looming sledgehammerlike spending cuts of about $1 trillion over 10 years have caused a panic. But the expiring tax cuts are worth several times that — more than $2.8 trillion over 10 years, or more than $4.5 trillion including alternative minimum tax relief, even without counting interest costs.¹ It’s a good reminder that the most important aspect of the Bush tax cuts (leaving aside the politics) is their cost.

Instead of complaining about the size of the Bush tax cuts and not doing anything constructive about it, policymakers ought to commit to using that size in a positive way. The fact that we have a valuable policy lever available to us is fortunate.

Keep Them, but Pay for Them

Everyone loves the Bush tax cuts because they’re tax cuts. They increase after-tax incomes for most of us, so we personally benefit. The problem has been that financing them has kept the true cost out of the awareness of policymakers and the general public. The benefits of the tax cuts have been private goods, but the costs have been public bads.

Congressional Budget Office projections have shown repeatedly that achieving the current-law baseline level of revenues — the level consistent with letting all the expiring tax cuts actually expire — is one way to get us to an economically sustainable level of deficits over the next decade or two. (Beyond that we will need to cut net spending associated with the retirement programs.) But as I’ve emphasized many times, achieving current-law baseline levels doesn’t have to mean literally sticking to current law and letting the tax cuts expire as scheduled. It could instead mean paying for any of the tax cuts we choose to extend.

The question policymakers and the public must ask ourselves is not whether we like or have enjoyed having the Bush tax cuts, but which part of them we love the most, and whether we love them enough to be willing to pay for them. Do we prefer the Bush tax cuts (any part of them) to the other types of tax cuts (such as expensive tax expenditures) or areas of spending that would need to be given up to offset the cost of the Bush tax cuts?

If the answer is yes, then by all means we should extend those portions of the Bush tax cuts. Being forced to pay for something is a great way to figure out how valuable it really is. Having Bush tax cuts that are compliant with “pay as you go” rules also would preserve the private benefits of the tax cuts we choose to extend, while getting rid of the associated public cost of higher deficits.

Let Go of Them to Pay for Better Policies

If we decide not to extend the tax cuts, it’s probably because there is a more attractive policy alternative.

The several-trillion-dollars cost of the Bush tax cuts is huge, yet the evidence of their economic benefits has been limited. If you go back and read several past issues of the “Economic Report of the President” from the George W. Bush administration, you will notice that its praise of the Bush tax cuts mainly emphasizes how large they were (and still are). But that is an endorsement of the large income effects of the tax cuts — effects that would occur under any cost-equivalent tax cut or spending increase. Holding the cost of the tax cuts constant, we have to ask: Are there alternative tax cuts or spending that would achieve better economic effects in terms of microeconomic incentives, macroeconomic impacts, and the distribution of income?

For example, we may need the Bush tax cuts to continue because our economy can’t handle that large of a withdrawal of fiscal stimulus at once. But there might be alternatives that provide more bang for the buck. We may want to keep the lower marginal tax rates under the Bush tax cuts to encourage the longer-term, supply-side growth of the economy, but are there alternative tax cuts or spending increases that could do better at increasing human capital formation, labor supply, and investments in new and socially valuable technologies? And could even deficit reduction be a surer route to economic growth than the Bush tax cuts have been? The answer to both is yes — which means we should want those alternative policies and deficit reduction more.

Use Their Expiration for the ‘Buffett Rule’

One way in which the Bush tax cuts have clearly been viewed as not economically helpful has been regarding the distribution of income. President Obama has always complained about the unfairness of them — how they have given the lion’s share of their benefits to the rich. Obama repeatedly addresses his complaint by proposing to let expire only the top two brackets of the cuts — the brackets that affect only households with annual incomes exceeding $250,000. But that doesn’t mean the rest of the Bush tax cuts (still worth more than $2 trillion over 10 years) would not benefit households now in the top brackets.

In fact, even if the top two brackets (now at 33 and 35 percent) reverted to their pre-2001 law levels (of 36 and 39.6 percent), households in them would still benefit the most in dollar terms from the extended lower rates in the lower brackets. The rich would still be receiving a disproportionate share of the Bush tax cuts — no longer disproportionate relative to their shares of income, but still disproportionate relative to their shares of the population.

Because the $2.8 trillion in tax cuts disproportionately benefits the rich, letting them all expire would raise the tax burdens of the rich. In an earlier column, I pointed out that although the millionaires’ share of the tax burden of letting all the Bush tax cuts expire is much smaller than it would be if only the upper-bracket Bush tax cuts were allowed to expire, the additional tax revenue collected from millionaires would be higher under full expiration.²

Whether all of the Bush tax cuts or just the upper-bracket ones are allowed to expire, the result would be greater progressivity. Such a policy decision could be taken as a proactive component of any “Buffett rule.” Ideally, the expiration of some or all of the Bush tax rates, which on its own would generate reduced incentives to work and save, could be coupled with base-broadening reforms that would help promote the Buffett rule by reducing tax expenditures that solely or disproportionately benefit the rich but would also reduce rather than increase the distortions of the income tax system on economic decisions.

Let the Budgeteers Take Control

Given that the most valuable thing about the Bush tax cuts is their cost rather than the merits or flaws of the structure of the policy in terms of its base and rates, the budget committees and budget process will be a big deal in terms of what will happen to the tax cuts. The difference between “business as usual” deficit financing and the outcome if pay-go rules are applied without exception is more than $4.5 trillion over 10 years.

The budget committees should flex their policy muscles and do the heavy lifting regarding the impending expiration of the Bush tax cuts. They could propose legislation requiring strict pay-go rules on the tax cuts and setting revenue levels in the budget resolution consistent with letting the full complement expire. They could also explain and illustrate how complying with pay-go doesn’t have to mean increasing tax burdens at a time when our economy cannot handle it. Any part of the tax cuts that we want to extend immediately can be paid for with gradual revenue increases or spending cuts over the rest of the 10-year budget window. And while the budget committees cannot dictate the specifics of tax policy (that is left up to the House Ways and Means and Senate Finance committees), they are the ones that set the ground rules and boundaries that the taxwriting committees must work within.

The budget committees also have the option of at least stating their preferences about the specifics of tax policy (such as the mix of rate increases versus base broadeners in the revenue-raising strategy) in the policy sections of the budget resolution or in the committee reports accompanying the legislative text of the resolution.

Politically, the hardest part about making the best of the Bush tax cuts has always been paying for them. That is why the role of the budget committees and the budget process is unusually critical on this particular, and large, tax policy decision.

Deal With the Turkey in the Lame Duck

All these ways of making the best of the Bush tax cuts are not precluded by the fact that this is a presidential as well as congressional election year. If we consider the many ways in which policymakers have failed over the years regarding decisions about what to do about the Bush tax cuts, it’s clear we can’t blame just the budget committees for not putting their foot down about the current-law baseline and pay-go. When Obama and Republicans want to keep extending and deficit-financing them, we can understand why Congress on its own was unable to get its bipartisan act together and behave better. Doing the right thing by the Bush tax cuts requires strong leadership unencumbered by unrealistic campaign promises.

There are several reasons to be optimistic about doing better once we get past the next election. The near-term economy is not as fragile as it was two years ago, the last time the Bush tax cuts were about to expire, making the idea of letting go, even gradually, more palatable. At the same time, the various debt crises in Europe serve as a warning about the unsustainability of the U.S. fiscal outlook and its implications for the economy in terms of longer-term growth and shorter-term stability.

Finally, after this November’s election, no matter who is elected president, we are likely to have a president who is less tied to a campaign promise that commits him to keeping the Bush tax cuts and who was voted into office by a public that is now far less enamored of the Bush tax cuts than it has ever been.

The cliff on the Bush tax cuts comes less than two months after the election. Is that too little time to do better than business as usual? While it may not be possible to replace the Bush tax cuts and the rest of the federal income tax with a full-out version of base-broadening, rate-reducing, revenue-raising fundamental tax reform like the plans recommended by bipartisan groups, it is not hard to set a goal in the lame-duck session of making only positive, even if small, steps regarding the Bush tax cuts. In the lame-duck session, Congress and the administration can commit to either letting parts of the Bush tax cuts go or turning them into more fiscally responsible versions that achieve better economic results.

At a minimum, policymakers should not have to revert to full extension of the cuts as a form of compromise as they have done in the past. Deficit-financed extensions should be limited in scope and temporary in timing, and permanent extensions should comply with strict pay-go rules over the 10-year budget window. Policymakers will be able to do this with the help and leadership of the budget committees working with a president who is able to get off the campaign trail and back to work, all of them cheered on by an American public that well understands by now the inevitability and necessity of hard choices. They can turn this turkey of the Bush tax cuts into something much better.

¹ Congressional Budget Office, “The Budget and Economic Outlook, Fiscal Years 2012 to 2022,” Jan. 2012, Doc 2012-1855 , 2012 TNT 21-26 .

² Diane Lim Rogers, “Who Wants to Tax a Millionaire?” Tax Notes, Feb. 6, 2012, p. 725, Doc 2012-1867 , 2012 TNT 24-16 .
END OF FOOTNOTES

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Less time required for Tax Notes means maybe, finally, more time to get back to this blog!  And I have a new project developing that I hope to be able to tell readers about soon.  Thank you for sticking with me through thick and thin here!

My final column with Tax Notes as a regular contributor came out today, available here if you are a subscriber.  If not, you will have to wait until next week when I will reprint the column in full here.  The title is “Making the Best of the Bush Tax Cuts,” and the main point I make is that of all the possible economic effects of the Bush tax cuts, and all the arguments made about the cuts (for or against them), by far the most significant, most noted, most praised or most maligned characteristic has been their size (or revenue loss).  Even supply-side proponents of the Bush tax cuts hardly ever talk about the supply-side effects of the tax cuts in truly supply-side terms; i.e., they don’t try to argue that the incentive effects of lower marginal tax rates on labor supply or private saving have been huge.  They just talk about how the tax cuts have been huge, and so wouldn’t it be bad if they went away?  Liberals have argued that the tax cuts have been costly and have disproportionately benefited the rich, meaning the government has given away a huge amount of money to the rich, so wouldn’t it be good if they went away?  So the bottom line is that for all the talk of all the promising, bipartisan ideas for tax reform that would reduce the deficit, there is still huge disagreement about what to do with the huge thing known as the Bush tax cuts.

But it’s a good thing that we still are debating this topic, because it means we still have some choices to make over a huge pot of money.  In my column, I try to pitch this optimistic view:

Instead of complaining about the size of the Bush tax cuts and not doing anything constructive about it, policymakers ought to commit to using that size in a positive way. The fact that we have a valuable policy lever available to us is fortunate.

It is obvious by now, after all these years of arguing about the Bush tax cuts but continuing to keep them just as they are, that the disagreement is not over the shape of tax reform we’d all like to see (broader base, fewer tax expenditures that upside-down subsidize the rich, low marginal tax rates), but rather over the size of the revenue stream we should be collecting under this beautifully bipartisan (but still hypothetical) tax reform.  That’s why it surprised me when at last week’s tax reform event hosted by the Brookings Institution’s Hamilton Project, none of the experts emphasized a point that I do in my final Tax Notes column:  that this is more a disagreement over budget policy than tax policy, which means that the budget process and budget rules will be unusually important to the success of any deficit-reducing tax reform effort in the next few months and years–which means that, oddly enough, the budget committees may be more important players in achieving tax reform than even the tax-writing committees.  While the budget committees have not had much say on the issue of the Bush tax cuts up until now, in my column I offer up several reasons to be more optimistic about the future, including the possibility of better dealing with the “turkey” (aka the Bush tax cuts) in the “lame duck” session:

All these ways of making the best of the Bush tax cuts are not precluded by the fact that this is a presidential as well as congressional election year. If we consider the many ways in which policymakers have failed over the years regarding decisions about what to do about the Bush tax cuts, it’s clear we can’t blame just the budget committees for not putting their foot down about the current-law baseline and pay-go. When Obama and Republicans want to keep extending and deficit-financing them, we can understand why Congress on its own was unable to get its bipartisan act together and behave better. Doing the right thing by the Bush tax cuts requires strong leadership unencumbered by unrealistic campaign promises.

There are several reasons to be optimistic about doing better once we get past the next election. The near-term economy is not as fragile as it was two years ago, the last time the Bush tax cuts were about to expire, making the idea of letting go, even gradually, more palatable. At the same time, the various debt crises in Europe serve as a warning about the unsustainability of the U.S. fiscal outlook and its implications for the economy in terms of longer-term growth and shorter-term stability.

Finally, after this November’s election, no matter who is elected president, we are likely to have a president who is less tied to a campaign promise that commits him to keeping the Bush tax cuts and who was voted into office by a public that is now far less enamored of the Bush tax cuts than it has ever been.

I’ll repost the column in full here next Monday.  (PS: Like any commentary on the Bush tax cuts, it seems, the cartoon above is old yet still timely; I have used it on my blog before.)

The tax cuts championed by President George W. Bush a decade ago, and extended in 2010, are due to expire at year’s end. That would mean higher taxes at every level of income, as well as higher taxes on dividends, inheritance and capital gains.

“The biggest hits would be on the very wealthy,” says Williams. “Those are the people who’ve benefited most from the Bush-era tax cuts. But people at the very bottom would be hit as well.”

All of this will happen automatically unless Congress and the president act in concert to prevent it.

“It’s the do-nothing option,” says Williams. “If Congress does nothing, taxes go up automatically.”

Not everyone is alarmed by that.

New York Mayor Michael Bloomberg told CBS last month that taxes have to go up for everyone in order to put a dent in the federal budget.

“Most of this country is middle class. And that’s where most of the tax revenue is. So if you want to raise $4 trillion over the next 10 years, which gets you halfway — only halfway — to a balanced budget, everybody’s taxes have to go up,” said Bloomberg.

Action, Or ‘Benign Neglect’?

Economist Diane Lim Rogers of the deficit-watchdog Concord Coalition agrees that stemming the tide of red ink will require more tax revenue. But she sees some problems with letting the Bush-era tax cuts expire all at once.

“It wouldn’t be the worst thing that could happen,” says Rogers. “I think economists would prefer that instead of things happening out of benign neglect, that better things could happen out of good policymaking.”…

I don’t know why I said “economists” would prefer; heck, everyone should prefer that, as long as we have some faith in the role of government to promote the public good. I had elaborated to Scott that the economists’ problem with just letting the tax cuts all expire is that we have other options to raise revenue that economists would consider more efficient and just as or more fair.

I go on to talk about my second favorite tax topic after the Bush tax cuts: tax expenditures and the need to reduce them as a way of cutting government spending in a progressive manner.  I am still hopeful that after we go through all the other possible ways to reduce the deficit and realize we won’t accept much of them or that they don’t work, we’ll come back to the goal of pursuing sensible tax reform.

As we arrive at the federal tax filing deadline (this year on Tuesday, 4/17), it just so happens that Congress and the Administration have been thinking of different ways to raise tax burdens on the rich.  Last week I participated in a “Tax Day” event at the Tax Policy Center called “Should the Rich Pay Higher Taxes?” as one of the “four Ds” panel which also included TPC’s director Donald Marron, former CBO director and former McCain adviser Doug Holtz-Eakin (now president of American Action Forum), and economist rich guy (and a member of the “Responsible Wealth” coalition) David Levine.  The TPC has our handouts and a video of the event posted here.  (The video is also embedded above.)

TPC’s Howard Gleckman moderated the event (and blogged about it afterward, here) and at one point asked each of us “who is rich?”  I at first didn’t know how to answer that; “rich” is a relative concept that depends on one’s personal “baseline,” of course!  But then I circled back to the focus of the event–what the tax burdens of “the rich” should be–and I realized that in that context, all federal income taxpayers should be considered “rich,” in that we are all, all combined at least, paying too little in taxes.  Revenues as a share of GDP are far lower right now than the 18 percent historical average over the past several decades, which is too little anyway to produce economically sustainable budget deficits now and going forward (let alone enough to cover spending fully).  And although a lot of that currently-below-average level is because of the short-term but stubbornly persistent weakness in the economy (a cyclical phenomenon), projections show that even when the economy gets back to “full employment” and even when revenues/GDP recover back to and above the historical average (even under the policy-extended baseline, by the way), revenues are still not going to be enough to keep up with the growth in government spending–even if health reform (already in place and to come) successfully reduces the growth in Medicare spending.

So if “the rich” are defined as those who can afford and ought to be expected to pay higher income taxes, then “the rich” really has to be much more broadly defined than “people like David Levine” (who are multi-millionaires).  And if you watch the video of the TPC event, we all pretty much agreed on the premises that: (i) we need more federal revenue; (ii) “the rich” can manage higher tax burdens the best (and should be asked first); and (iii) David definitely qualifies as “rich.”  We had more differences in opinion over: (i) how much more revenue we need (and implicitly, what the right size of government is); (ii) how that revenue should be raised in terms of base-broadening vs. rate-raising reforms; (iii) what the right basis of taxation is–income or consumption; (iv) if David’s wealth comes more from his high productivity and hard work, or more from good luck; and (v) if raising tax rates on people like David will cause them to not work so hard, or if it just means they will not be as “lucky” in terms of their tax burdens.

David is practically begging to make him, and other millionaires like him, pay higher taxes, and feels the best (maybe easiest) way to do so is in the latest legislative version of the “Buffett Rule”–which basically imposes another “alternative minimum tax” to brute-force effective tax rates on the incomes of the rich to be at least 30 percent, without changing (improving) the definition of taxable income.  I and Donald agreed that David can afford to face a much larger tax bill, but that it would be better (more economically efficient and better for supply-side incentives) if his burden were raised by paring back the tax subsidies David receives via, for example, itemized deductions and the preferential tax rates on capital gains and dividend income.  Doug also agreed that the best way to raise tax burdens on the rich is to reduce tax expenditures rather than raise marginal tax rates, but he did not count the preferential rates on capital income as a tax expenditure (because he advocates consumption as the right basis of taxation), and also probably would not agree with me and Donald on how much revenues/GDP need to rise.  And all of us, being economists, agree that in theory and all else constant, higher marginal tax rates can discourage the incentives to increase the supply of productive resources (via working and saving) to the economy.  But if there’s one thing that economist and rich guy David made clear in telling of his own personal experience with wealth and taxes, it’s that even for really rich people, the economist-labeled “income effects” of taxes–the effects of having more or less after-tax income–are typically far bigger than the economist-labeled “substitution effects” of taxes–the effects of marginal tax rates on relative prices which cause people to substitute away from taxed or higher-taxed activities and into untaxed or lower-taxed ones.  I feel that conservatives (like Doug) who want lower marginal tax rates tend to over-sell the empirical significance of those substitution effects, yes, but liberals (even rich ones like David) tend to forget that as long as some substitution effects exist, it’s better to raise tax burdens by broadening the tax base (in a progressive manner) than by raising the top marginal tax rate.

So, the TPC event made clear that “yes, the rich should pay higher taxes.”  But it also highlighted where the challenges to achieving fundamental tax reform will be, in coming to agreement about who exactly is “rich,” and how exactly they will be made to pay more in taxes. We have far more work to do regarding federal tax policy than what is currently being debated–in a very narrow sense–about the “Buffett Rule.”

(Cartoon by Rick McKee of the Augusta Chronicle.)

The headline stories in today’s papers about the GSA’s parties and the Secret Service’s prostitutes are unfortunate, particularly as they coincide with the federal tax-filing deadline.  One’s enthusiasm or just plain willingness to pay one’s legal tax liability is directly related to one’s trust of the government–the assurance that we “get our money’s worth” in the taxes we pay into the public sector.

These examples are egregious displays of the classic “waste, fraud, and abuse” that Americans fear permeates the government, yet both are very “small” compared with most of what the government does and most of what it commands and spends in our society’s resources.  In theory, these incidents should not affect our society’s ability to raise an amount of revenue adequate to pay for the size and shape of the government we all desire.  In practice, however, they no doubt will–because Americans, greatly encouraged by the politicians who serve them, love dwelling on the small, scandalous, and fleeting stuff, especially when it distracts away from the large, difficult, and persistent stuff.

(I’ll have more to say about the rich guy paying the taxes in the above cartoon, later today.)

The former president may speak more eloquently than we’ve heard him speak before about his tax policy (perhaps taking some talking points from Paul Ryan?), but the bad news is that simply re-labeling the tax cuts as, for example, the (now) “Obama tax cuts,” won’t make those claims of wonderful supply-side growth effects suddenly come true. (Here is a CNN story on yesterday’s speech.) But the new presidential ownership of the bulk of the tax cuts–and the continued campaign promises by all candidates to keep the bulk of them (warts and all)–still assures us that they’ll largely persist in our future.

My latest (and last, btw!) column in the print Christian Science Monitor, which was belatedly posted on their website last week.  Let me know what you think–especially if you are an Asian American who is the child of immigrant parents or if you are otherwise in a family still grappling with the cultural differences between Asia and America.  My own take on it was (L)inspired by my 13-year-old, bball-playing son Johnny’s new-found (half-)”Asian pride”–as he himself labeled it.  The CSM editor had to revise the opening sentence between the print and online versions, to account for Lin’s season-ending injury.  Here’s that latest version, reprinted in full:

It says something about the improbable season of Jeremy Lin that in two months he has gone from bench warmer to injured NBA star whose injury and six-week absence might keep the New York Knicks from making the playoffs.

Then again, everything about Lin has been improbable since he stepped onto a basketball court Feb. 4 and led the woeful and depleted Knicks to the first game of a seven-game winning streak. An Asian-American Harvard graduate – with a degree in economics to boot – was suddenly outscoring NBA stars. Commentators quickly dubbed it “Linsanity” – noting how odd it seemed that an Asian-American was the hottest thing in pro sports.

As an Asian-American, I have another word for his rocket-fueled season: inspirational. The bucking of the Asian-American stereotype is likely to have a positive effect, not only on the attitudes of non-Asians toward Asians but also on the aspirations of Asian-Americans themselves.

Many ethnic groups are stuck with worse stereotypes in America, but even the generally positive bias surrounding Asians can operate as a straitjacket. Asian-American kids are expected to be good at academics, especially math and science, and to excel at rote assignments, carrying them out obediently, politely, and responsibly. People believe we excel in our quantitative precision more than through any creativity or social skills – certainly not by dribbling a basketball!

These messages don’t come just from American society. They often come from our parents, especially immigrant parents. They raise us to be very motivated in school and steer us away from social, athletic, or most artistic pursuits because such activities are typically viewed as detracting from, rather than complementary to, the main goal of academic excellence.

It’s understandable why Asian immigrant parents (and immigrant parents generally) might raise their born-in-America kids that way. It’s a safe way to help one’s children integrate into and succeed within American society, since these precisely defined goals in academic subjects are less culturally and socially dependent. Someone who can solve math problems in Asia can solve them in America, too.

My own parents (my dad from South Korea, my Chinese mom from the Philippines, and both PhD chemists) raised me that way, and, like many Asian parents who hold their kids to very high standards, they meant well. But I would have never become an economist were it not for the distributional requirements in college that required me to take at least some social science classes – those subjects my parents somewhat dispara­gingly labeled “soft” (not “hard”) sciences.

No matter what one’s cultural background, branching out beyond our stereotypes and “comfort zones” can be good for us. As The New York Times’s David Brooks has explained in his book “The Social Animal,” developing our “human capital” as fully as possible depends on nurturing qualities that go far beyond our ability to score high on standardized tests.

Children are more likely to grow up to be successful adults the more opportunities they have to try different things – even things that parents might not expect their kids to be that good at. I tell my own children that if they do what they truly love, the money will follow – simply because loving what you do is the best way to do it really well.

Yes, Asian-American parents might have a harder time than other parents in “thinking outside the box” and allowing, and even encouraging, their kids to expand their horizons beyond the math-and-science-type academics. But that’s why Lin’s breakthrough is more than just “Linsanity.” His success – in the NBA of all places – is potentially a game changer for Asian-Americans.

[***REVISED 2 pm, to make correction noting that the CRS study does not assume the top 20 tax expenditures are completely "untouchable" but just that they would not likely be substantially reduced.]

The Congressional Research Service has released a new report by Jane Gravelle and Thomas Hungerford called “The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening.”  In a nutshell, the report could be called “Base Broadening Is Hard to Do.”  The Washington Post’s Lori Montgomery summarized it nicely on Friday, including getting this Republican staffer’s reaction to it:

Republican tax aides dismissed the report as unhelpful.

“Reports suggesting tax reform isn’t easy are greatly appreciated. We look forward to future reports on water being wet,” said Sage Eastman, a senior aide to House Ways and Means Committee Chairman Dave Camp (R-Mich.), whose panel drafted the principles for tax reform laid out in the Ryan budget.

The CRS report emphasizes that although the 200+ tax expenditures under the federal income tax are worth over $1 trillion per year, the largest 20 of them represent 90 percent of that revenue loss.  When you look closely at that “top 20″ list, copied above from the table in the CRS report, it is easy to get discouraged about the prospects for substantial tax base broadening.  As I explained last November in Tax Notes (subscription-only access here), the largest tax expenditures look a lot more like “entitlements” than “loopholes”:

Consider the biggest of the big tax expenditures: the exclusion for employer-provided healthcare and itemized deductions. Economically, there is little rationale for subsidizing those particular activities, especially for handing out the largest subsidies to people with the highest incomes. But politically they are untouchable. They clearly benefit real people, not just individuals or corporations of questionable reputation, and they are far from “loopholes” that are easy to cut.

Those individual income tax expenditures sound a lot like entitlement spending, defined by Merriam-Webster’s Dictionary of Law as “a government program that provides benefits to members of a group that has a statutory entitlement.” Those groups are employees with health insurance, households with mortgages, people who donate to charities, and so on.

And that’s why the CRS authors conclude that “It appears unlikely that a significant fraction of this potential revenue could be realized.” Instead of the more than $1 trillion that could be gained if all tax expenditures were eliminated–which would support substantial marginal tax rate reductions including getting the top rate down from 39.6% to 23%–they believe “it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening.”

I think I’m slightly more optimistic than CRS, because their conclusion assumes we can’t do much to change–at least in any substantial sense–those top 20 tax expenditures.  I think we could actually do better.  For example, in his latest budget the President himself has proposed to scale back a lot of these largest tax expenditures by limiting the benefit of those tax expenditures to the richest households to the levels of benefits that would be obtained at lower marginal tax rate brackets.  It’s an ambitious amount of base broadening, although only for a narrow group of taxpayers (the familiar households with incomes above $250,000).  (The limit of the broadening to that small group results in a revenue gain of $584 billion over ten years–which is like broadening the tax base by about 1/20th the total value of tax expenditures.)  But my point is there are ways to substantially reduce the cost of the most expensive tax expenditures to both make the proposals more palatable and to raise enough revenue to support a decent amount of rate reduction or at least “rate preservation.”  It still isn’t easy to do, but that’s still mostly a political obstacle rather than an economic or administrative one.