Growth, fairness and adequate revenue add up to tax policy ‘trilemma’

October 16, 2012 11:00 AM

Mary Ann Travis

Breaking news last week was that the federal budget deficit had topped $1 trillion for the fourth straight year. There also was good news: That gap was $207 billion less than last year’s deficit. Because more people had jobs and received income, tax revenue rose by 6.4 percent from the year before to $2.4 trillion, while government spending fell 1.7 percent to $3.5 trillion.

tax trilemma

Taxes for lower- and middle-income people are part and parcel of the strategy for reducing the U.S. budget deficit. Economists at the Murphy Institute’s Fiscal Trilemma Conference will address how to avoid shifting too much tax burden to wage earners while instituting tax reform to promote economic growth. (Photo by Paula Burch-Celentano)

It’s obvious that the U.S. government needs to take in more revenue to close the deficit, says Steven Sheffrin, executive director of the Murphy Institute at Tulane University.

“Even if we cut spending, we’re still going to probably have to raise some more money,” he says.

But if taxes are raised, “we want to make sure that it doesn’t hurt economic growth over the next 15 years.”

And if tax reform has a goal of promoting economic growth by less taxation on savings and investments, will lower- and middle-income people be hurt by more taxes on wages and earned income?

“It’s difficult to meet the three objectives of raising enough revenue, being fair and promoting growth,” says Sheffrin. “What matters is how taxes are structured.”

The three tax policy goals of adequate revenue, fairness and growth are at odds with each other, resulting in a “fiscal trilemma” that is the focus of a Murphy Institute conference on Friday, Oct. 26.

The economists who will present papers at the Fiscal Trilemma Conference are from universities and think tanks. Some have worked at the Treasury Department; others have worked for political campaigns or on congressional staffs.

“This is a crowd that knows the information well,” says Sheffrin. “We’re going to test each other’s arguments” about tax reform, economic growth and progressivity in the tax system.

The papers later will be published in Public Finance Review, a journal edited by Tulane economics professor James Alm.

Tulane University, New Orleans, LA 70118 504-865-5000 website@tulane.edu