Phelps on Taxes

Ned Phelps, the latest econ Nobelist, talks to the Wall Street Journal and gives some policy advice that neither political party will embrace:

WSJ: Barring a breakthrough in productivity, how can the U.S. solve the problem of its impending obligations? Should it raise taxes or cut Social Security benefits?

Prof. Phelps: Over the last couple decades, the federal government has virtually abolished taxation of a wide swath of people with smallish incomes. This was a mistake, because we need all the tax revenue we can get. It's inefficient to have low marginal tax rates on low incomes, because people with upper middle incomes and high incomes get the same breaks, but they don't get any incentive to work harder. What you want to do is give tax breaks that give people an incentive to earn income that would not otherwise be earned. So in my view, President Bush should have restored the taxes on the low-income people rather than lowering the taxes on the high-income people.