That Old Tax Magic

WASHINGTON, DC – Tax time in the United States – the dreaded mid-April deadline for filing annual income-tax forms – has come and gone. The system, Americans have been reminded, has become painfully complex, with many a loophole through which one might try to squeeze. 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.In the policy jargon increasingly heard in today’s political discourse, tax reform 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 – now the presumptive Republican candidate to challenge President Barack Obama in November. Romney 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.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% – will bring the budget and national debt under control. That, too, is a pipedream.Americans – and taxpayers in many other countries – need a more transparent approach to assessing candidates’ budget proposals. In the US, there are groups that offer their own assessments. For example, the Committee for a Responsible Federal Budget performed an admirable service in “scoring” the fiscal plans of rival candidates for the Republican nomination.The problem is that in an election with high stakes and deep polarization, who, exactly, can voters trust? Everyone has an agenda, perceived or real. The veracity of any organization that is funded by particular individuals, or through less transparent corporate channels, will be called into question.What the US and many other countries need is an independent, competent, and experienced body that leans neither right nor left. Fortunately, the US 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 1970’s 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.Simon Johnson, a former chief economist of the IMF, is co-founder of a leading economics blog, http://BaselineScenario.com, a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.Copyright: Project Syndicate