More on frames for tax reform

Austin and Mark Spohr with interesting comments on my post yesterday arguing that you need to pick a level of GDP at to seek a balanced budget to be able to have a meaningful discussion about the important (but I say secondary) goals of fairness and economic growth. They got me to thinking and I try and work through some of it below.

Austin’s most basic comment/question is:

I don’t see why one must decouple and order as you (Don) did: fairness, economic growth, and the level of taxing and spending. What’s the objective (evidence or theoretical) basis for that? Aren’t the choices and framing here just manifestations of personal preference or values?

I don’t think they should be de-coupled, they are linked, but I was giving a rank order of the three frames through which to view tax reform. In terms of choices, preferences and values, I think in the tax reform/balanced budget debate there are a mixture of:

  • facts (with no change of current policy we will continue to have large deficits)
  • preferences/beliefs that at some point could become facts (if the debt-to-GDP ratio gets too large it will harm the economy). There is some evidence about this and theory as well, but at least some of it is cross national that makes it trickier to apply. This of course says nothing about appropriate level.
  • just plain preferences (I would prefer a more progressive tax code, all else equal)
  • predictions (without a net tax increase we will never have a balanced budget given any plausible level of spending that will be agreed upon). The key prediction is what is a plausible level of spending in an area, and then in total.

While Mark is correct that in theory we could have a balanced budget at almost any percentage of GDP (and there is tremendous cross-national variation), when thinking about the plausible levels of federal spending what any person is doing is making a series of predictions about spending on defense, health, social security, everything else combined, with interest on the debt being relatively fixed. Once you add the given “plausible spending decisions” to defense, health and social security (and debt service), you are then talking about ~15-16% of GDP in federal spending at minimum.

The most complete “liberal” deficit reduction plan is Center for American Progress that aims for balance at ~24% of GDP, while the Heritage and Senate Republican plans linked to a balanced budget amendment aim for ~18% of GDP.

For me to engage in a debate about fairness and economic growth in the tax code, I would need to roughly know which part of the 18%-24% of GDP range we were discussing. To do so, you have to make predictions about the plausible levels of spending on the big categories. We could have a more abstract discussion about fairness, for example, but I have trouble engaging it or viewing it as important without knowing what level of spending we are discussing, and the many answers to other questions that implies. That is how I think about it.


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