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Tax Hikes Loom Once Pandemic Settles Down

Posted on May 15, 2020

Congress is rightfully keeping the economy afloat by flooding it with enormous amounts of cash, but lawmakers will have to find ways to raise revenue once the crisis eases, according to a panel of economists.

Two major problems before the pandemic — growing inequality and unsustainable debt — have only been exacerbated during recent months, Jane Gravelle of the Congressional Research Service said May 14 at the National Tax Association’s annual conference held via Zoom.

“We all know what the options are in this situation,” Gravelle said. Policymakers can choose to either raise taxes or cut spending, and cutting spending equates to cutting Social Security and Medicare, which seems unlikely, she said. “I think at some point there will be a need to bite the bullet and raise taxes,” she said.

Exactly what those tax increases should look like is less clear, Gravelle said. Policymakers may want to consider a new broad-based source of revenue, such as a VAT or a carbon tax. Or they could raise revenue from wealthy individuals’ unrealized capital gains that escape taxation either directly — for example, through an accrual tax on capital gains — or indirectly by raising corporate tax rates, she said.

A wealth tax is “very problematic in a lot of ways,” and an accrual tax on capital gains seems more feasible, Gravelle added.

A “minimal condition” for a developed country like the United States is that it have a stable debt-to-GDP ratio that doesn’t spiral out of control, said Douglas Holtz-Eakin of the American Action Forum. But achieving that would require substantial political will and energy to encourage economic growth as fast as possible, raise revenue, and control spending that “we simply haven’t been able to muster in the past,” he said.

Holtz-Eakin, a Congressional Budget Office director during the George W. Bush administration, agreed with Gravelle that a wealth tax wouldn’t be ideal, describing it as imposing “draconian taxes on the end return to capital.” But taxes will need to be raised on the rich somehow, including by base broadening and raising tax rates, he said.

That effort must also be accompanied by an extra revenue source, according to Holtz-Eakin, and the only viable one he envisions is a deficit-reducing carbon tax. “I think we’re going to have to come to grips with that, and it’s going to be very, very difficult, no question about it,” he said.

Another way of indirectly taxing the rich is to invest more in funding IRS enforcement and collections operations, especially from high-income individuals, suggested Natasha Sarin of the University of Pennsylvania Carey Law School. That method would have the dual benefit of raising revenue and reducing inequality, she said.

Sarin also recommended rolling back some parts of the 2017 tax cuts, including raising the corporate tax rate, in addition to other base-broadening measures. Repealing stepped-up basis at death, she estimated, could raise $4 trillion over a decade. However, Sarin said it’s becoming increasingly clear as the COVID-19 crisis persists that even that wouldn’t be enough to meet the economy’s needs, so a new source of revenue would be needed.

The White House has shown little interest in such tax increases. During the conference, Tomas Philipson, acting chair of the Council of Economic Advisers, said the Trump administration’s economic agenda of tax cuts, deregulation, new trade agreements, and energy independence is what led to the strength of the pre-pandemic economy.

“If you want to stimulate the economy, you want to stick to those principles going forward,” Philipson said.

Report Card

The panelists generally gave the federal government high marks for its relief efforts, but noted that lawmakers face significant challenges.

Holtz-Eakin described the government’s economic response at the start of the crisis as “absolutely perfect,” noting that the COVID-19 relief legislation enacted thus far has provided trillions in liquidity and cash flow to keep businesses and individuals afloat while the government put the economy into “suspended animation.”

“I thought you should be indiscriminately flooding everything you could with cash . . .  because if you don’t do that, there’s no economy on the other side,” Holtz-Eakin explained. But that will have to end eventually, he said.

Instead, new relief and stimulus programs could take the form of low-interest loans that require borrowers to display collateral and the means to endure the crisis before they’re provided taxpayer money. For businesses that can’t, “market forces are telling you, ‘Your business model no longer works,’” Holtz-Eakin said.

Holtz-Eakin also predicted that once the pandemic eases, companies will look at restructuring their businesses or factories to make them safer for employees and prospective customers, and policymakers may start eyeing tax credits or incentives for those purposes.

Sarin said she worries that as the economic downturn persists, subsequent relief and stimulus efforts will become politicized in a way that will be detrimental to the economy. She suggested that lawmakers boost automatic stabilizers until the economy starts to recover, to avoid the “massive political arguments” about whether the government is spending too much or targeting relief appropriately.

“You can start to see the debates already, the way they’re playing around austerity or doing too much for certain kinds of businesses,” but policymakers should be doing whatever they can, Sarin said. “This is not the moment to be worrying about debt or deficit issues,” she added.

But implementation of more automatic stabilizers based on triggers like the unemployment rate is unlikely to gain much traction in Congress. Gravelle said that such triggers have been proposed in the past, but “I don’t think Congress is interested in that.”

James R. Hines Jr. of the University of Michigan Law School observed that lawmakers would be reluctant to relinquish their power of the purse. “Congress likes to step in and be Father Christmas,” he said.

Follow Jonathan Curry (@jtcurry005) on Twitter for real-time updates.

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