The most important tax reform decision

(This is cross posted at The Reality Based Community blog).

The most important tax reform decision is deciding to collect enough revenue to pay for the spending that the nation plans to undertake.

This basic decision is often lost in the discussion of other (important) issues: marginal rates, tax expenditures, the Buffet rule/fairness, changes in the mix of taxes used to collect revenue, impact on the economy, etc. There are many key decisions to be made if we are to transition toward a sustainable federal budget, but most fundamentally, we must decide what proportion of GDP will be redistributed via government expenditure, and then develop a tax code that can collect the amount of revenue necessary to pay for such spending.

If we are to ever having anything near a balanced budget again, it will require a substantial increase in taxes received as a percent of GDP over the 18 percent of GDP collected on average the past 4 decades or so. Spending has averaged around 20.5 percent of GDP over the same period of time, but that is simply a restatement of the fact that the U.S. has only had 4 balanced budgets since I have been alive.

It is of course mathematically possible to shrink spending to meet the historical level of tax collection. However, it is important to realize that we spent more than 21 percent of GDP (the target for revenue/spending balance in around 2035 suggested by Simpson-Bowles) in 1970, 1975, 1980 and 1985—and the baby boomers were mostly working and paying taxes then, and not moving into eligibility for Medicare and Social Security. And no one has identified a health reform plan that could plausibly be enacted that could slow long range health care spending growth by the degree needed to achieve a balanced budget in the 18-19 percent of GDP range preferred by many Republicans, given other spending realities.

There are technical aspects of tax reform, no doubt. However, the biggest decision is to determine how much revenue is needed to finance the spending programs the country decides to undertake, and to then move to the related issues of reforming our tax collection system. Sometimes the simplest decisions are the hardest to make.