What Congress should do now

In a statement today, the President spoke about what he wants to see from a long-term budget deal. But the voices of ordinary people ought to be heard, too, so here are my wishes, some of them process-related and some more substantive.

  1. Congress should adopt a rule making a two-year appropriation cycle mandatory for all discretionary spending, make it easier to discharge overdue bills from the House Appropriations Committee, and prohibit filibustering of overdue appropriations bills even when they are not considered under reconciliation.
  2. The debt limit should be abolished, permanently. There is absolutely no excuse for such gimmickry; if Congress wants to limit the federal debt, it can and must do so by reducing the deficit.
  3. The mortgage-interest and state property-tax deductions should be means-tested. (Ideally they would be eliminated entirely, but that would hurt many homeowners with modest homes and modest incomes, and thus is politically unpalatable unless phased in over an impractically long period.) A reasonable phase-out would be to leave the bottom three quintiles at 100% deductibility, and then reduce it linearly to zero between the third and fourth quintiles. Use the savings to institute a nonrefundable rent-paid deduction, to reduce the housing-market distortion inherent in the ownership subsidy.
  4. Some measure of corporate tax reform is absolutely necessary. The U.S. has the most baroque system of corporate taxation in the OECD, with high marginal rates that essentially no company ever pays — both due to the large number of loopholes and exemptions, and also by manipulating their corporate structure through sham foreign licensing subsidiaries to shift income to offshore tax havens. A broader corporate tax, with lower marginal rates but more limited exceptions and a robust dividends-paid deduction, ought to earn favor with both parties even if it was revenue-positive.
  5. As part of the corporate-tax package, eliminate the special treatment currently given to individuals’ investment income, and return to treating it like any other income. The combination of the two should result in a market-driven rebalancing of dividend yields, as the change would eliminate the preference currently given to capital gains over dividends.
  6. The cap on the Social Security wage base should be eliminated. This will ensure the solvency of Social Security into the indefinite future, and the progressive nature of the benefit formula makes up for the flatness of the tax. It may also be possible (I don’t know if the exact numbers support this) to reduce the “payroll tax” rate at the same time.
  7. While I’m on the subject of the “payroll tax”: let’s fix that idiocy too. A “payroll tax” is no more and no less than an income tax that Congress (or the state legislature) has decided to hide from working people. The fix could be done in phases, with employers first required to report their “payroll tax” as “non-taxable income” on employees’ pay stubs and W-2s, and then a few years later, make it all taxable income and adjust the tax rates accordingly to be revenue-neutral on a bracket-by-bracket basis. The same thing should be done with other expenses that are currently pretended to be paid for by employers, like health care and parking. It shouldn’t be done with pension contributions, however, for reasons that should be obvious.
  8. Restore dischargeability of private student loans in bankruptcy.
  9. Introduce a financial transaction tax, on the order of 1 to 5 basis points. Use the proceeds to fund SEC and CFTC enforcement.
  10. Eliminate transfers from the general budget to the Transportation Trust Fund and either cut federal spending on transportation or else increase fuel taxes to pay for the amount of spending that is actually desired by Congress.
  11. Eliminate transfers from the general budget to Medicare, and increase Medicare taxes to fully fund all Medicare programs out of dedicated revenues.
  12. Introduce a national “diversity sales tax”, which would apply whenever a good is sold in one state and delivered (whether electronically or by courier) to an end user in another state. All such sales should be subject to the tax, whether or not the states participated in the program, and the revenue would be divided proportionally among participating states according to transaction volume, attributing each sale to both origin and final use states. Participation would be limited to states which agree to accept the proceeds as full and complete satisfaction of their residents’ sales and use tax liability for covered transactions, but states would be allowed to participate even if they did not charge a sales or use tax on intrastate transactions. (Revenue attributable to non-participating states would be distributed proportionally among the participating states, not left in the Treasury.) This would benefit many states and many businesses, but I’m not entirely sure it’s constitutional.

That’s almost all about taxes and tax expenditures; I have some ideas about spending priorities that will have to wait for another time.

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