Tags: Feldstein | Reagan | Budget | tax | economy

Feldstein: Look to Reagan Plan to Solve Today's Budget Woes

Monday, 24 Oct 2011 02:34 PM

Harvard economist Martin Feldstein says Congress's Joint Select Committee on Deficit Reduction and its struggle to find $1.5 trillion in cuts over the next 10 years offers a unique opportunity to reduce future budget deficits by broadening the tax base and lowering individual tax rates.

“Broadening the tax base by limiting the use of tax expenditures (the special tax rules that substitute for direct government spending as a way to subsidize health insurance, mortgage borrowing and other things) could raise substantial revenue,” Feldstein writes in The Wall Street Journal.

Doing so doesn't require eliminating any of those tax expenditures, says Feldstein.
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“In a study of recent Treasury data, Daniel Feenberg, Maya MacGuineas and I found that limiting each individual's tax reduction from the use of tax expenditures to 5 percent of that individual's adjusted gross income would raise revenue equal to about 10 percent of current personal tax revenue,” he says.

Feldstein notes that President Ronald Reagan's Tax Reform Act of 1986 showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue.

reagan200ap.jpg
Ronald Reagan
(Associated Press photo)
"Taxpayers who faced a marginal tax rate of 50 percent in 1985 had a marginal tax rate of just 28 percent after 1986, implying that their marginal net-of-tax share rose to 72 percent from 50 percent, an increase of 44 percent," Feldstein observes.

"The greater net reward for extra effort and extra risk-taking led to increases in earnings, in entrepreneurial activity, in the expansion of small businesses, etc.," he says.

"Lower marginal tax rates also caused individuals to shift some of their compensation from untaxed fringe benefits and other perquisites to taxable earnings.”

The New York Times reports that although the White House and Congress still have a year to fashion an unlikely tax deal tax reform is unlikely to occur before the 2012 elections.

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Harvard economist Martin Feldstein says Congress's Joint Select Committee on Deficit Reduction and its struggle to find $1.5 trillion in cuts over the next 10 years offers a unique opportunity to reduce future budget deficits by broadening the tax base and lowering...
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Monday, 24 Oct 2011 02:34 PM
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