Obama's bad eco­nomic ideas

The Pak Banker - - OPINION - Glenn Hub­bard

PRES­I­DENT OBAMA'S eco­nomic pro­pos­als in Tues­day's State of the Union ad­dress were a dis­ap­point­ment. His ideas - free com­mu­nity col­lege, an en­hanced tax credit for child care and higher taxes on high-in­come earn­ers and large fi­nan­cial in­sti­tu­tions - failed to go beyond mere talk­ing points. With no chance of en­gag­ing the Repub­li­cans, they will surely die with­out a hear­ing. But the pres­i­dent's pro­pos­als do in­vite a case for a com­pre­hen­sive tax and en­ti­tle­ment re­form, one based not on re­dis­tri­bu­tion but on growth, work and op­por­tu­nity.

Our un­will­ing­ness to con­front mount­ing in­ef­fi­cien­cies in the na­tion's tax code and grow­ing obli­ga­tions in en­ti­tle­ment pro­grams has led to in­creas­ingly limited op­tions. Cor­po­rate tax re­form is held hostage to the mis­guided idea that tax cuts and tax in­creases must be bal­anced within the cor­po­rate sec­tor alone, and to the faulty as­sump­tion that ben­e­fi­cial tax re­form will not raise eco­nomic ac­tiv­ity. Pil­ing up child tax cred­its and sub­si­dies for health care over nar­row house­hold in­come ranges, as the pres­i­dent pro­poses, leads to high rates of tax­a­tion on earn­ings from work as as­sis­tance is phased out. Like­wise, rais­ing mar­ginal tax rates on in­vest­ment by the wellto-do re­duces as­set prices and is a threat to con­tin­ued eco­nomic ex­pan­sion.

So how can we en­hance growth, work and op­por­tu­nity? Four steps can help get us there.

The first is to move to a sim­ple business tax sys­tem, with a lower mar­ginal tax rate and no spe­cial in­dus­try pref­er­ences. There would be no sep­a­rate cor­po­rate tax, only a sin­gle business in­come tax for all busi­nesses. Ide­ally, in­vest­ment would be ex­pensed, and its cost de­ducted in the year it was made, rather than de­ducted grad­u­ally. Busi­nesses would be able to bring back over­seas prof­its free of ad­di­tional United States taxes. A one-time mod­est tax on cur­rent over­seas earn­ing could be used to help fi­nance re­form. Such a business in­come tax would en­cour­age both growth and in­vest­ment op­por­tu­ni­ties in the United States, while of­fer­ing more jobs and higher wages to Amer­i­can work­ers.

The sec­ond step is to use the in­di­vid­ual in­come tax to bet­ter re­ward work. The top tax rate for most Americans would be the same as the business in­come tax rate. To main­tain pro­gres­siv­ity, a sur­tax on wages would be col­lected on very high earn­ers. To make work more at­trac­tive, low-in­come work­ers, in­clud­ing sin­gle work­ers, would re­ceive an ex­panded earned-in­come tax credit and a tax credit to buy health in­surance (as op­posed to the more com­plex sub­si­dies that ex­ist un­der the Af­ford­able Care Act). The earned-in­come tax credit would be phased out grad­u­ally.

Work­ers would have the choice of switch­ing to op­tions avail­able un­der cur­rent law for em­ployer-pro­vided health in­surance and a health sav­ings ac­count, or a tax de­duc­tion for their own health in­surance and health sav­ings ac­count as in­comes rise. Re­duc­tions in mar­ginal tax rates to support work would be paid for by lim­its on tax de­duc­tions for more af­flu- ent house­holds.

The third step fo­cuses on ed­u­ca­tion and train­ing. Like in­vest­ment in tech­nol­ogy and ma­chines, in­vest­ment in hu­man cap­i­tal should be de­ductible from in­come. Out-of-pocket ed­u­ca­tional ex­penses for bona fide school­ing and vo­ca­tional train­ing could be tax de­ductible for all but af­flu­ent house­holds. Per­sonal re-em­ploy­ment ac­counts could be made avail­able to all in­di­vid­u­als fac­ing more than tem­po­rary un­em­ploy­ment, with in­di­vid­ual fi­nan­cial support for train­ing and a bonus for re-em­ploy­ment.

The fourth step is to strengthen re­tire­ment se­cu­rity, while ac­knowl­edg­ing the need for fis­cal con­sol­i­da­tion in en­ti­tle­ment spend­ing. Min­i­mum ben­e­fits for So­cial Se­cu­rity and Medi­care could be strength­ened to en­sure that peo­ple with low lifetime in­comes avoid poverty in old age. To re­duce fu­ture deficits in th­ese pro­grams and to free up funds to support work and op­por­tu­nity for younger work­ers in the fu­ture, So­cial Se­cu­rity ben­e­fit growth would be slowed for more af­flu­ent in­di­vid­u­als.

In the same spirit, chang­ing Medi­care so that in­di­vid­u­als would pur­chase in­surance from one of a num­ber of com­pet­ing plans, with the fed­eral gov­ern­ment pay­ing part of the cost, could fo­cus the largest sub­si­dies for health in­surance on those with low lifetime in­comes.

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