Confronting The Post-Election Reality Of Taxes And Revenues

The debate over taxes is trapped in the past. We need new revenue sources — and a carbon tax is a good place to start.

Two big points emerged from the party conventions: As the horse race became clearer; the actual policies became murkier.

Romney received no convention “bounce,” while Obama received a moderate bounce. While the bounce will go away, Governor Romney now faces a tougher uphill climb. The FiveThirtyEight blog gives President Obama an 80 percent chance of winning. The last plausible remaining chance for Mitt Romney is the debates, and maybe he can turn around that 80 percent number, but his convention speech is reasonably good evidence that he won’t.

So President Obama really will have to fashion a set of policies and a governing strategy for the next four years. And there’s the problem. Neither convention offered a shred of useful policy. The ideological core of both parties see returning to the 1950s as the direction to take. Both conventions and both parties have already rejected the idea that there actually are hard choices. I developed my own theory years ago that the more any candidate congratulated himself or herself on their willingness to make hard choices, the less they were actually willing to make any such choices.

Neither of the conventions offered up any view at all of the future beyond the election. Neither party can come to grips with real policy or choices about the future because they are both caught in a struggle to the death about, in essence, the past.

Taxes and revenue are illustrative issues. The right hates the idea of more revenue because it sees government as enemy number one (except for Russia). The left wants more revenue but wants even more to whack (via the tax code) whomever it currently dislikes. Neither side seems to care much about what ought to be the goal — equitable, sustainable growth.

Some realities about the current tax system: It is vastly and overly complex, it is inefficient, and it doesn’t raise enough revenue, which will be necessary even after you make allowances for substantial changes in today’s entitlements. But the big, hidden-in-plain-sight point is that we have reached a dead end with the income tax. The Romney tax plan, which simply assumes there is a free lunch out there somewhere, won’t happen, and would make matters worse if it did. The Obama tax plan doesn’t come close to a solution, even after you assume that the affluent pay more, as we should. We are not going to change the big deductions very much, so the base-broadening strategy won’t work. And not even Paul Ryan is willing to put out the details his budget glosses over. So we are going to need new revenue sources — and as it happens, I have a suggestion.

We should consider a carbon tax. (I have also argued that we should enact a low-level value-added tax, but that’s another day’s argument.) A carbon tax would raise substantial revenue — MIT’s recent study estimated such a tax at about $30 per ton of carbon would yield $1.2 trillion over the next decade. At the same time, a carbon tax would be the single most important step we could take to slow global warming. And now is a perfect time, as the energy revolution America is going through provides some actual pricing flexibility for a tax. We can make this change and still build a cheap energy platform for the next American economy.

Would such a tax solve our debt and deficit problems? Of course not; we are still going to have to cut the growth of spending and raise revenues. But such a tax would put a dent in the problem, make economic growth much more sustainable, and provide some lubrication for a possible bigger fiscal deal.

There is no other idea out there I know of that does these things, taxes “bads” rather than “goods,” and raises $1.2 trillion.

Roosevelt Institute Senior Fellow Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team. He has also served in senior roles in the White Houses of two Democratic Presidents. He currently chairs Resources For the Future, an economic think-tank in Washington focused on energy, climate, and the environment that is researching the carbon tax.

Cross-Posted From The Roosevelt Institute’s Next New DealBlog

The Roosevelt Institute is a non-profit organization devoted to carrying forward the legacy and values of Franklin and Eleanor Roosevelt.


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