The Big Tax Smackdown

By Frum, David | Newsweek, December 17, 2012 | Go to article overview

The Big Tax Smackdown


Frum, David, Newsweek


Byline: David Frum

The GOP has ideas. If only they could rise above the political din.

The fiscal-cliff negotiations are driven by politics, and not very inspiring politics at that. The reelected president wants to bend congressional Republicans to his will. Republicans don't wish to be bent. Yet behind the dominant political story there happens to be some actual policy ideas that deserve more of a hearing than they're getting.

Question: if the United States needs to raise more revenue from the federal personal-income tax, how should that revenue be raised? By hiking tax rates or by reducing tax deductions? Democrats prefer higher rates; Republicans prefer reduced deductions. Each side may have its own cynical motives. The Republicans happen to have better arguments.

Almost every economist who studies the issue agrees that higher tax rates harm the economy. The Tax Foundation is the group whose study demolished the Romney tax plan--and was quoted in tens of millions of dollars of pro-Obama advertising in 2012. Here's its assessment of the effect of higher tax rates: They "discourage work, saving, and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today's tax code."

Republicans, on the other hand, have taken aim at tax preferences that are almost uniformly harmful.

The biggest tax preference in the individual tax code is the treatment of employer-purchased health-care benefits. An employee who earns $60,000 and receives a health-insurance policy worth $8,000 pays income tax on the $60,000 but not on the $8,000. This exclusion has thrust employers into the role of main buyers of health insurance. It hides the costs of health coverage from employees and thereby makes it easier for health providers to raise fees.

The exclusion is such a bad policy that we should want to get rid of it, even if doing so wouldn't raise a dime in extra revenue. But as it happens, the exclusion costs the Treasury an estimated $130 billion a year, only a little less than the entire cost of the U.S. Navy. And because low-wage workers often receive no health coverage at all while high-wage workers receive ample benefits, elimination of the exclusion for people earning more than $250,000 would recoup a very big part of that $130 billion. …

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