When I saw this from the Government Accountability Office (GAO) on the tax reform debate, I wondered if it would be a political document, or if it would stick to economics:
(click on picture to retrieve pdf document)
I’m happy to report that it appears to be a straightforward presentation of the economics of tax reform. The presentation is balanced, non-technical, understandable, and it touches on all the issues surrounding reform such as efficiency, equity, transition costs, simplicity, transparency, administratibility, and so on. In fact, it might be good reading for the president and congress. Here are a few passages:
Federal borrowing has advantages and disadvantages that vary depending on economic circumstances. Borrowing, in lieu of higher taxes or lower government spending, may be viewed as appropriate during times of economic recession, war, or other temporary challenges. Federal borrowing might also be viewed as appropriate for federal investment, such as building roads, training workers, and conducting scientific research, that contributes to the nation’s capital stock and productivity. If well chosen, such activities could ultimately help produce a larger economy. However, if not well chosen, such spending could displace more productive private sector investments.
Federal borrowing also can impose significant costs and risks. Borrowing for additional spending or lower taxes for current consumption improves short-term well-being for today’s workers and taxpayers, but does not enhance our ability to repay the borrowing in the future. In the near term, federal borrowing also absorbs scarce savings available for private investment and can exert upward pressure on interest rates. Over the long term, federal borrowing that restrains economic growth will also restrain the standard of living of future workers and taxpayers.
Regardless of the assumptions used, reasonable long-term simulations indicate that the problem is too big to be solved by economic growth alone or by making modest changes to existing spending and tax policies. While entitlement reform as well as mandatory and discretionary spending cuts will likely be needed to close the longterm financial gap, the structure of the tax system should also be part of the debate as policymakers grapple with the nation’s long-term fiscal challenge. As part of this process, consideration could be given to improving taxpayer compliance and enforcement efforts, expanding the tax base, increasing current tax rates and tax rates on future generations, or a combination of these.
And, from another section on efficiency considerations:
Work versus leisure: Taxes—both income and consumption taxes—can affect the decisions that people make about how much time to devote to work or leisure in two ways. First, taxes may increase the incentive to work because workers must work more to maintain their after tax income. Second, taxes may reduce the incentive to work because workers earn less from an additional hour of work. The net effect may be no change to the overall supply of labor. However, even in this case, there is still an efficiency cost, which is determined by the second effect. By reducing hourly after tax earnings, income and consumption taxes distort decisions about how many hours to devote to work or leisure. Empirical research generally shows that at least for primary wage earners, decisions about labor force participation are not very responsive to taxes. However, decisions about labor force participation by secondary wage earners have been shown to be more responsive to changes in the tax system.
There are other tables, figures, and explanations as well. For example, here’s where taxes come from, like it or not:
Here's who pays at the federal level:
And here is where the money goes and how it has changed over time. According to this, the main feature evident over time is the conversion of national defense into Social Security, Medicare, and Medicaid. Whether that is good or bad will vary according to who you ask:
The document also talks about popular and, I suppose, unpopular tax reform proposals:
Though I'd quibble in places, all in all it is a useful guide to understanding the issues surrounding the tax reform debate.