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Financial Literacy - Taxes
SPOTLIGHT
The tax system needs an overhaul
The political environment is poisoned because most legislators have signed a no-new-taxes pledge.
Taxes made easy

Interview: Leonard Burman, Ph.D.

There have been rumblings that the threat of an economic recession might lead to continuing the tax cuts. Do leaders need to take a firm stand about the budget deficit and the national debt by imposing higher taxes regardless of such economic mood swings?

Talking points
AMT
Reform needed
Funding policy
Tax increases
Simplifying the code
Income gap
Consequences of inaction
Capital gains
Health care

The ideal time to tighten up is when the economy is growing, otherwise it's more painful. One of the things that increasing spending and cutting taxes does is stimulate the economy, so it would have made sense to make spending cuts a few years ago, but we were instead pumping enormous amounts of stimulus into the economy.

Tax increases now could cause a recession in the short term -- although that would depend on how the Fed responds. But at some point we will have to recognize the financial constraints facing the government.

unless things change, at some point there will be a massive flight away from overvalued government bonds.

Ronald Reagan passed a huge tax cut but then backed off of it. Businesses were complaining that inflation and high interest rates were hampering their ability to invest, and both of those were spurred by the government's deficit spending. The problem is that nobody sees the immediate consequences of current government policy because interest rates have stayed low.

It reminds me of the stock market bubble of the late '90s and the current housing market bubble. What we're really experiencing here is a bond bubble where unless things change, at some point there will be a massive flight away from overvalued government bonds.

You mentioned that the tax code needs simplifying. Are there any efforts underway to simplify the tax code, or is that a priority of the past?

The president commissioned a panel to look at tax reform and the results were pretty good. The problem was that the panel's proposal would have raised taxes for some people. With any tax reform, some people will end up paying more. Unfortunately, we've got a giant AMT problem that nobody knows what to do about. And if Congress doesn't do anything there will be a big tax increase in 2011 when the current tax cuts expire.

The political environment is really poisoned. Almost all members of Congress have signed a no-new-taxes pledge. In the short term that doesn't mean much, but in the long term it's deadly. Nobody seriously believes that we can solve our long-run budget problems with spending cuts alone.

-- Updated: Dec. 26, 2007
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