Three Principles for New Tax Policy

The folks over at Our Fiscal Future asked me to write a short piece to commemorate tax week. Here’s an excerpt:

Let me offer three basic principles that our leaders—and our fellow citizens—should keep in mind in evaluating new revenue options:

  1. It is usually better to broaden the tax base rather than increase tax rates. Why? Because high tax rates create disproportionately large economic distortions and invite widespread evasion. Any effort to increase revenues should therefore focus first on the many special credits, exemptions, and exclusions that undermine our current tax base. Such “tax expenditures” cost more than $1 trillion each year but receive surprisingly little oversight. Some of these provisions generate economic or social benefits, but many are simply hidden ways to help special interests. Reducing or eliminating those tax expenditures could bring in new revenues, improve economic efficiency, and avoid the economic damage that would result from higher tax rates.
  2. Income taxes are usually worse for the economy than consumption taxes. Why? Because income taxes discourage saving and investment, while consumption taxes do not. That is why a rising chorus of experts is recommending that the United States consider a value-added tax, rather than higher income taxes, if it decides it wants to finance substantially higher government spending.
  3. Taxes usually discourage whatever activity is being taxed; as a result, it is better to tax bads rather than goods. Taxes on pollution, for instance, should be preferred over taxes on working, saving, or investing.