Interview Editor Kathryn Short recently had the opportunity to sit down with Donald Marron, Director of the Tax Policy Center.
From his official biography:
Marron previously served as a member of the President’s Council of Economic Advisers, as acting director of the Congressional Budget Office, and as executive director of Congress’s Joint Economic Committee. Before his government service, he taught economics and finance at the University of Chicago Graduate School of Business and served as chief financial officer of a health care software start-up.
Here, Marron shares a few thoughts on Presidential elections, fundamental tax reform and the supercommittee. The full interview will be available in the Print edition of the GPPReview, available in Spring of 2012.
Georgetown Public Policy Review: Let me start with a general question to frame this conversation, and to give some background to readers who, like me, may not have tax policy expertise. In thinking specifically about tax policy, what are the most powerful levers for job creation, and what do you think are the most “over-hyped” ones?
Donald Marron: It’s always important to distinguish between the short-run and the long-run. In the short run, we have a very weak economy, and what people often characterize as a “Keynesian” way of thinking makes sense. You can do things to provide some stimulus that will put money in people’s pockets. They can spend it and that will create some jobs temporarily. On that front, proposals such as cutting the payroll tax seem to make good sense. They do add to the deficit, and so we have a whole set of problems there in the long-run. But I think you can make a good case for payroll tax cuts, on either the employee-side or the employer-side.
In the long-run, tax policy also matters, but it matters more for the incentives it creates, both for people to work and for people to invest in the capital equipment that businesses use to employ people. So there’s a lot to be said for moving toward a tax system that does not place excess burdens on folks who are out there trying to create jobs.
Now, that argument can sometimes get over-hyped, and there are folks who will tell you that any time you cut tax rates, the economy will grow so much that more tax revenue will come in, and that doesn’t seem to be true. But conceptually, it’s something to think about.
GPPR: Thinking specifically about some of the tax plans that have come out over the last couple of months, do you think there are any that seem stronger than others or elements that seem stronger than others?
DM: Again, there’s short-run and the long-run. The president came forward with a jobs proposal, which is very much focused on the short-run—the next year or two.
For the long-run, we have several presidential candidates out there who have proposed various tax plans. I think it would be fair to say that when you’re running for president, there’s a high degree of signaling in the plans you put forward. I don’t necessarily mean this to be as bad as it sounds, but the plans don’t need to be as connected to reality as the proposals that the President and Congress, if they’re serious about legislating, actually have to consider.
So you have Herman Cain with the 9-9-9 plan, you have Rick Perry with the Flat Tax plan. When you analyze those plans, they a) don’t raise enough revenue to finance where our government appears to be going, so they raise a significant question mark; and b) they would make the tax system notably less progressive than it is today, which, I suspect, regardless of how one feels about that, is quite a strong political constraint. The plans in their described forms would never come to pass. They might have features that promote long-run growth: getting rid of tax preferences, moving to lower rates, moving the burden so that more of it is on consumption and less of it is on income. Those are things that by themselves could be good economic policy in the long-run. But you also need to worry about distributional issues and about raising revenue so that we don’t have our debt grow completely out of control.
GPPR: It seems like some kind of change is coming to our tax code—all the presidential candidates are promising it, the Joint Select Committee on Deficit Reduction (supercommittee) is supposed to be doing something about it. But the reality is often much slower. Do you think the supercommittee will be successful? What do you see as a realistic timeline for reform?
DM: The supercommittee has a very hard task. It has a unique opportunity. The chatter at the moment is about some relatively small-scale revenue changes as part of an overall package. There’s an issue about the inflation measure used for calculating social security benefits and for indexing parts of the tax code. There’s some discussion of rolling back some things that could be characterized as spending in the tax code. So it’s possible that the supercommittee will be able to do some small things.
Some folks believe the supercommittee won’t actually be able to find a deal, so that’s certainly possible, too. Don’t expect them to do fundamental, wholesale tax reform—that’s asking too much.
Fundamental tax reform in 2012 seems unlikely. It’s hard to do those things in the shadow of a big election, especially when people perceive, either rightly or wrongly, that the president might change, or that the composition of either of the two houses might change. In that circumstance, there’s a big incentive for politicians to wait it out and find out how power will be distributed. The Tax Reform Act of 1986 was the last big, wholesale reform, and it was the result of multiple years of effort. It started in 1982 and it actually bore fruition in 1986, so it’s good that we’re working on it now.
Established in 1995, the Georgetown Public Policy Review is the McCourt School of Public Policy’s nonpartisan, graduate student-run publication. Our mission is to provide an outlet for innovative new thinkers and established policymakers to offer perspectives on the politics and policies that shape our nation and our world.