Advertisement

Forget Congress and let the Fed handle tax rates

Forget Congress and let the Fed handle tax rates
The Federal Reserve's stress tests are an annual checkup of the biggest financial institutions in the U.S. (Shawn Thew / European Pressphoto Agency)

The Democratic presidential candidates want the wealthy to pay a lot more in taxes while the Republican candidates say they think everyone, very much including the wealthy, should pay less. That disagreement has been at the crux of America's rapid-fire budget-related crises, from the near-default in 2011 that sent the stock market reeling, to the automatic, arbitrary budget cuts that Congress keeps having to partially lift.

Here's a solution: Congress should give up the job of setting tax rates altogether.

Politicians in general want to spend but don't want to tax — even Democrats are gun-shy below the top 10% — and they usually do a poor job of both when it comes to managing the ups and downs of the economy. As a result, we often end up with big deficits even in relatively good times (as in the late 1980s and the mid-aughts). And this leaves us with less flexibility, even if only politically, to stimulate the economy when it tanks. In modern times, politicians have not been able to raise taxes much either to shrink the deficit or to help pay for expensive military engagements like the Iraq War, let alone social programs.

Congress should therefore delegate setting the level of taxes to, say, the Federal Reserve.

The Fed is already charged with controlling the money supply in pursuit of stable inflation and full employment. Giving the Fed control over tax rates would mean that it would have another tool in its arsenal to help achieve those objectives, while better matching taxes to Congress' spending over time.

Under this arrangement, lawmakers would instruct the Fed to set tax rates as necessary in order to pay for Congress' spending and manage federal debt sustainably over time, achieve Congress' desired level of progressivity (Congress would have to specify how much higher top tax rates should be than bottom rates — because that is a value judgment that only Congress can make) and promote full employment and stable inflation. In good times, taxes might rise a little in order to help pay down our debt, while rates could go down a bit when the economy needs an extra spark.

Imagine the world that would result. Members of Congress could concentrate on making decisions about what programs were worth the money and on making those programs work — knowing that any extra spending would have to be paid for, automatically, with extra taxes ordered up by the Fed. (This would serve as a restraint.)

Advertisement

Democrats and Republicans alike would probably find it hard to wean themselves from their micromanagement of taxes. But over time, both parties might get something out of the deal.


Share quote & link

Meanwhile, the Fed would be able to manage tax rates rationally, in concert with monetary policy, without worrying about public opinion polls. Even better would be if this reform were paired with the gradual elimination of special tax breaks — so that Congress were forced to do its spending through the more-transparent budget process, rather than through the tax code.

Democrats and Republicans alike would probably find it hard to wean themselves from their micromanagement of taxes. But over time, both parties might get something out of the deal. Democrats could rest assured that taxes would automatically rise (or fall) to adequately fund government. Republicans could trust that deficits wouldn't get out of hand, and that politicians would not be able to spend willy-nilly without paying for it.

Of course, those who already dislike the Fed probably will be against farming out such an important task. Some might also claim it's undemocratic or even unconstitutional. But Congress (wisely) delegates its constitutional powers all the time — this would be no different than Congress' delegating its power to "coin money" and "regulate the value thereof," as the Constitution says, which Congress already assigns to the Fed and the Treasury Department.

We give the Fed the power to control the money supply precisely because politicians can be so willing to spend and so unwilling to tax that they are tempted to print money to make up the difference. We just haven't perfected the division of labor. The same reasons legislatures don't do a good job with monetary policy also apply to questions of taxing and borrowing.

By taking the endless fighting about taxes out of the realm of politics, at least to some degree, both parties might be able to focus on the fundamental question at the heart of the partisan divide: What do we want government to do, given that taxes are necessary to pay for it?

Aaron Goldzimer is a postdoctoral associate at Yale Law School. David Gamage is an assistant professor at UC Berkeley School of Law.

Follow the Opinion section on Twitter @latimesopinion and Facebook

Advertisement
Advertisement