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Irwin Kellner
Dec. 14, 2010, 12:20 a.m. EST
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By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "” Any overhaul of the income-tax code will produce more losers than winners. It has to, since the object is to reduce the national debt by squeezing more revenues out of taxpayers without them realizing it by lowering tax rates.
Talk about déjà vu all over again. We last heard this line of reasoning some 30 years ago, when supply-side economics was all the rage. Then, it was claimed, lower taxes would encourage business to invest more, thereby creating jobs and thus more tax revenues.
The huge budget deficits that blew up during President Reagan's first term demonstrated that what looks good on paper does not always translate into positive results in the real world.
This time around, would-be tax reformers think that by ridding the tax code of most deductions, credits and exemptions, the tax base will be broadened, thus generating more tax revenues.
It remains to be seen how taxpayers will react to the elimination of their cherished deductions and exemptions, but my guess is most won't exactly be jumping for joy.
For example, changes to the deductions for mortgage interest and property taxes certainly won't be welcomed by current and prospective homeowners. Without these deductions, the cost of buying and owning a home effectively goes up, thereby pricing many people out of the market.
And do you think charities will greet an end to the deduction for charitable contributions? Quite the opposite, I would think.
As for business, being able to expense the depreciation on a piece of equipment or a building can make the difference between affordability and not for many firms. This, of course, would suggest less, not more, investment with a resulting loss of jobs "” the last thing this economy needs.
Tax reform can also be used as a subterfuge for redistributing income and wealth from rich to poor or from business to consumers and vice-versa, depending on which party gets the upper hand in rewriting the tax code.
If the pols would be satisfied by reducing the size of the country's debt relative to our gross domestic product, this can be accomplished by running smaller budget deficits.
However, to shrink the actual debt itself Washington would have to run surpluses in its budget. This won't happen anytime soon "” nor should it, in view of the precarious state of the economy.
Former Reagan White House budget director David Stockman says the tax deal emerging in Washington is "Keynesian flimflam" that won't help stimulate the economy. In an interview with Simon Constable, he rails against the current system of deficit financing and warns the U.S. faces a crisis of indebtedness in the long run.
If anything, this economy needs more stimulus, not the restraint that would result from any effort to reduce the budget deficit. This means more deficits "” for a while.
When the time comes to reduce the government's budget deficit, there is one way to do it that does not require alienating a big chunk of the population or getting bogged down in tax reform.
This approach is to get the economy to grow faster. The higher the economy's growth rate, the more tax revenues it will throw off, which, when combined with spending restraint, will shrink the deficit over time.
To me this is a win-win strategy. Who would argue with a policy that creates jobs and helps improve living standards while boosting sales and earnings at the same time?
The main question is how best to accomplish this objective. Should we cut taxes, raise spending or both? As long as it stimulates the economy, any of these choices is fine with me.
And if it means running a big deficit for a while longer "” so be it. The best way to reduce the deficit in the long run is to keep running one in the short run.
Irwin Kellner is MarketWatch's chief economist.
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island.
General Electric's latest acquisition aims for a piece of the oil industry action off Brazil. It's also a protective move post-Cancun, writes Jim Jelter.
3:37 p.m. Dec. 13, 2010
"Irwin Kellner: More losers than winners from tax-code overhaul http://bit.ly/heJjQL" 12:25 a.m. EST, Dec. 14, 2010 from MktwKellner
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