Wednesday, January 10, 2007

Random Thoughts for the New Year

Greg Mankiw posted an opinion piece he wrote a while back for WSJ on raising the gas tax. A basic principle of tax policy is that if tax something you get less of it. Pursuant to that rationale we should be careful when we discuss increasing marginal income tax rates or captial taxation as a source of revenue. It is clear there are several externalities associated with the consumption of fossil fuels, environmental degradation only being the most obvious. The basic problem with consumption taxes is that they are regressive. However, as a gas tax or carbon tax is likely to raise substantial revenues, it could be used to as way to offset or replace the payroll tax, thus mantaining revenue neutralitly and replacing a regressive tax that is distortionary (in so far as it affects labor) with one that is less distortionary (by affecting consumption).

Another thing we could do with that tax code that would generate substantial revenue while enhancing the progressivity of our tax code and minimizing harmful environmental effects would be to eliminate or drastically reduce the mortgage interest deduction. The mortgage interest deduction is one of the more egregious deductions. One can deduct the interest on their mortgage from their income tax. The cap is up to 1 million dollars and one can also deduct the the interest on a second home mortgage or a home equity loan. It does not take too much imagination to envision who benefits from such an arrangement.

Anyhow, looking ahead to 2008, Republicans have to face the music. New revenues will need to be found to fund the growing entitlement program. We are likely to be in a minority for at least an election cycle. Democrats picked up 30 seats in the house and while they have razor thin majority in the Senate they will be defending fewer vulnerable seats in 2008. Republicans should consider revenue neutral tax reform if it is married to such things as means testing entitlement programs, raising the eligibility age, and carve out accounts for social security. Republicans need to focus on curbing the spending pressure the entitlement programs present but also on the least bad options for raising new revenues.

No comments: