Reporting suggests that Congress will continue to consider a variety of legislative solutions to support Americans enduring the ongoing public health crisis, provide short-term financing and taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief for businesses and individuals, and eventually, revive economic growth after the crisis passes.
With policymakers contemplating more spending even as tax revenues fall relative to previous years, the deficit is now a major point of contention. As members of Congress and the White House discuss proposals which could increase the deficit, all parties should keep two principles in mind:
First, the question is not whether deficits matter, but when they should be considered. Second, sound tax policy can ensure more efficient ways to raise revenue, which can reduce the deficit and provide the government with more tools to address future crises as they arise.
The Deficit Question: When, not Whether
Fiscal conservatives are expressing their concern with increasing government debt associated with relief spending, arguing that any future relief proposal be paid for. According to some, the suggestion that certain states could receive taxpayer-financed support from the federal government is also out of the question.
Others propose that now is the right time to spend federal dollars to fight the pandemic effectively through public health measures and policies supporting businesses to stem the tide of increasing unemployment claims. In their view, the main priority is to defeat the virus. Any discussion over the deficit can come later.
Still others argue that any discussion of the deficit is superfluous since economic conditions demand more federal involvement. If there were ever a time to borrow and spend, it would be now. Since the Trump Administration has already spent the last three-plus years increasing the deficit through a variety of tax and spending proposals, these proponents argue, why not increase spending when it is truly needed?
While all three camps are well-intentioned in their desire to accomplish their goals, whether that be a balanced budget, effective relief, or increased federal investment, the current debate is missing a key element: The when. Few fiscal conservatives would argue that the government should not levy any taxes, reducing the government to solely borrowing to resolve the public health crisis. Most of those less concerned with the deficit would also not argue that debt does not matter at all, but rather at what stage does it become the primary concern.
Realistic public policy recognizes that sometimes it is better to spend a certain amount of money now in order to prevent greater economic debilitation later. Moreover, not every dollar spent, or revenue forgone, has the same effect. As Tax Foundation has pointed out, full and immediate expensing and neutral cost recovery are far more effective policies for encouraging economic growth and job creation than a capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. cut or increasing the Child Tax Credit, for example.
However Congress decides in the coming months, it is critical for policymakers not to let the deficit be the only litmus test which determines the course of action. Sometimes borrowing and debt make sense in order to prevent a worse outcome. For example, even the great fiscal conservative and devoted proponent of budget balance, United Kingdom Prime Minister William Pitt (the Younger), concluded that debt and borrowing was a necessary sacrifice to ensure the survival of Great Britain from surrender to post-revolutionary France in the Napoleonic Wars. In the same way, lawmakers must realize by now that money will be spent during the pandemic to avoid worst-case outcomes for the economy and public health. There is no easy way out of these difficult fiscal facts. The question is how best to use public funds to protect Americans and help the economy recover over the long term.
Some Tax Policies Are Better than Others
Sound tax policy strives for simplicity, transparency, stability, and neutrality. While it is difficult to achieve these principles simultaneously, each should be a guiding principle for future tax legislation. The coronavirus pandemic provides a critical opportunity for lawmakers to look at the code with fresh eyes and ask which parts do more harm than good, create more burden than relief.
As it pertains to correcting the tax treatment of investment, lawmakers have a rare opportunity to treat capital and structural expenses more favorably by allowing businesses to immediately and permanently write off these expenses in the first year (full and immediate expensing) or at least keep their value across the years they are required to deduct the asset (neutral cost recovery). On the labor side, policymakers should evaluate whether increasing taxes on corporations falls more on the entity or the laborer’s wages.
Taxing a broad base with low rates is far more effective at raising revenue than adding complicated provisions to the code which are difficult to interpret, such as the Base Erosion and Anti-Abuse Tax (BEAT) and the Foreign-Derived Intangible Income (FDII) contained in the Tax Cuts and Jobs Act. Moreover, increasing or retaining tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s such as the state and local tax (SALT) deductionThe state and local tax (SALT) deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cuts and Jobs Act (TCJA) capped it at ,000 per year, consisting of property taxes plus state income or sales taxes, but not both. ), which protect certain constituencies, reduces simplicity and efficiency.
Removing the SALT deduction and reducing the number of tax expenditures would lead to a simpler code with a broader base. Base-broadening measures make the code more neutral and easier to move toward lower rates since more goods and services are subject to the tax.
Transparent, simple, and stable tax policy ensures more efficient revenue collection, which can, in turn, increase productivity and tax revenues—reducing the deficit over the long run and providing the government with more tools to address future crises when they appear.
Prudent tax policy should always consider revenue shortfalls. However, it should also remain flexible enough to provide short-term relief and long-term stability to businesses and individuals facing enormous challenges due to no fault of their own.
The coronavirus pandemic demonstrates, perhaps more clearly than any other situation in recent memory the need to reevaluate the wisdom of promoting temporary, complicated, confusing, and biased tax policy.
Members of Congress should think clearly about the need to pursue stability, transparency, simplicity, and neutrality in any future tax legislation, whether the package is in response to the coronavirus outbreak or not. Ultimately, revenue shortfalls and deficits can be addressed best by considering when to consider the deficit as the primary priority and reevaluating how revenue can be raised most efficiently through sound tax policy principles.
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