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The US Senate wonders about tax policy for the American Dream: here is the homework they gave me

November 11, 2012

On a hot evening in July I flew back home to Ottawa from Washington DC after having testified before The United States Senate Committee on Finance. But that was not the end of it. A few days later an email arrived with a list of questions. The Senators gave me homework!

Tax policy is currently at the center of public policy discussions in Washington, much of this dealing with deficit reduction: the extent to which cuts in government spending or increases in taxes should be used to narrow the gap between revenues and expenditures, and who should pay any increase in taxes.

Indeed, a prominent Harvard economist, Larry Summers, who has played important roles in both the Clinton and Obama administrations, recently spoke about these discussions in a speech given in Ottawa on November 8th that you can listen to on the web site of Canada 2020, a Canadian think tank. Summers looks at this issue from the macro-economic perspective suggesting that if fiscal policy—the government’s taxing and spending decisions—is severely tightened, the US could fall back into recession.

But the debate between the Republicans and the Democrats is also about redistribution: who will pay the costs in the short-term and the medium-term.

This discussion may lose sight of the question the Senate committee addressed on that hot July day, but which remains all the more important: how should tax policy be reformed to promote opportunity in the longer run?

The hearing, held on July 10th, was called “Boosting Opportunities and Growth Through Tax Reform: Helping More Young People Achieve The American Dream.”

It involved four other witnesses, all experts on some aspect of labour economics, poverty, and government policy: Katherine Newman of Johns Hopkins University, an anthropologist who profiles the experiences of poor families and the working poor; Lars Lefgren, an economist from Brigham Young University who studies human capital and education; Erin Currier who is the project manager of the Pew Charitable Trust’s Economic Mobility project; and Eugene Steuerle of the Urban Institute who offered testimony on patterns in government spending addressed to promoting mobility and opportunities.

You can watch a video of the testimony and download copies of the written submissions from the Committee’s website.

My favourite part is about an hour in when the co-chair, Senator Hatch, offers me the opportunity to explain the meaning and implications of the Great Gatsby Curve.

But I must say that while leaving the Senate Committee that afternoon, I felt my testimony may not have been specific enough to help in designing tax policy for opportunity. So in a sense I was glad to receive the list of more detailed questions from the Committee. Over the course of the next few days I will post the answers I offered. As you read them please feel free to share any insights or concerns you may have.

[ The first question is by Senator Hatch, who asks about the validity of the statistics. Read the answer here.

The second question is by Senator Baucus, who asks if things are getting worse. Read the answer here.

The third question is also by Senator Baucus. It concerns why the US education system falls short of promoting more opportunity. Read the answer here.

The next question is also by Seator Baucus, and deals with the design of public policy when parents don't always act in the interests of their children. Read the answer here. ]

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12 Comments
  1. Allen Scantland permalink

    What are your thought on a flat tax on gross revenue for business entities that gross over $1 million. No deductions no tax provisions, nothing. A flat tax on gross revenue for these enterprises will eliminate all the tax code as it relates to skewed and preferred deductions, and address the growing flight or tax avoidance strategies like tax havens, transfer pricing and other currently legitimate strategies to lower your taxes. Fact is America, Canada and Europe needs a stable environment for business to grow, to provide steady gvt revenues and employment. By having a convoluted taxation system for business only increases the costs for business, increases public cost in administration of the tax system, reduces tax compliance, encourages tax flight & seepage.

    I’m not entirely certain this measure should be applied to Smaller enterprises as they do need be flexible and allow for growth and failure. Allowing for progressive taxation of small enterprises and allowing for deduction of the factors of production and business will allow them to continue investment and growth and also allow them to fail without incurring a significant tax burden.

    Your thoughts?

    • Dr. Dhanayshar Mahabir permalink

      Miles , it must have been a very rewarding experience to testify on this very critical issue. I have seen the questions posed by the senators …all very interesting in themselves but the one which I think most valuable is the last posed by Senator Hatch….What makes for an “efficient neighbourhood.” This in my mind points us in the right direction for it focuses on the type of local public goods that should be provided by the state. Schools, relevant curricula, day care facilities, libraries, access to computer facilities,and “big brother” mentoring programs all seem to be apriory very valuable. The relationship between the church and the schooling of the young ..and the links between business and the community also seem to be of some importance. This of course requires us to move beyond pure macro policy to one that is more interdisciplinary . The “efficient neighbourhood hypothesis” thus requires the inputs of the planners, the sociologist, and economists inter alia. Given the size of the US I am sure there exists neighbourhoods which have been so transformed over time and which will provide useful lessons for the policy makers.

      • Thanks for this Dhanayshar. I have to really give this some thought because, as you will see, my answer to this particular questions is rather unsatisfactory. There is strong evidence that evidence that neighbourhoods per se do not influence longer term outcomes, and the extent to which we observe a relationship it is due to sorting of particular types of people.

    • Allen, see Mike McCracken’s response below.

  2. Mike McCracken permalink

    Sounds like a VAT. If defined as a percentage and applied from the first dollar of revenue (no exemptions) then there would be no incentive to stay small. If this is in lieu of HST and the corporate tax, then a rate of 20-30% should be enough to raise additonal funds without the distortions.

    • Thanks of this. For readers outside of Canada, HST refers to “Harmonized Sales Tax” — the value added tax in Canada that is coordinated between some of the provinces and the federal government.

Trackbacks & Pingbacks

  1. here is the homework they gave me » MemePosts
  2. The US Senate wonders about tax policy for the American Dream: Senator Hatch asks about the validity of the statistics « Economics for public policy
  3. The US Senate wonders about tax policy for the American Dream: Senator Baucus asks if things are getting worse « Economics for public policy
  4. The US Senate wonders about tax policy for the American Dream: why are schools failing to promote social mobility? « Economics for public policy
  5. The US Senate wonders about tax policy for the American Dream: Do parents act in the best interests of their children? « Economics for public policy
  6. The US Senate wonders about tax policy for the American Dream: How can income transfers be designed to benefit all children in need? « Economics for public policy

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