Tuesday, November 23, 2010

Elections have consequences: it is time to reduce the deficit

The proposal from the Chairman of the deficit reduction commission has the benefit of broadening the tax base, and reducing the marginal rates.  This is a huge step in the right direction.  Our current tax system is way too inefficient.
... the chairmen of President Obama’s deficit reduction commission, have taken at hard look at these tax expenditures — and they don’t like what they see. In their draft proposal, released earlier this month, they proposed doing away with tax expenditures, which together cost the Treasury over $1 trillion a year.

Such a drastic step would allow Mr. Bowles and Mr. Simpson to move the budget toward fiscal sustainability, while simultaneously reducing all income tax rates. Under their plan, the top tax rate would fall to 23 percent from the 35 percent in today’s law (and the 39.6 percent currently advocated by Democratic leadership).

I still don't like the term "sustainability" because it can mean almost anything. However, in this context, it almost makes sense.


  1. Luke, adjusting what gets taxed and how much might be efficient. But it diverts attention from the main issue. Our increased federal government spending necessarily implies increased taxation - now or in the future. Closing the budget deficit by increasing current tax revenues alone simply means that future tax revenues won't have to rise as much. Worse we may be feeding the beast.

    The only caveat is that we might be better able to afford spending that represents "investments" that help "grow" the economy. But the portion of the budget that is increasing fastest is transfer payments that are not only not investments but likely slow growth by distorting markets.

  2. Another thought:

    One way of thinking about it is that getting stuff is the cost we impose on others for the stuff we create and give. We could just create and give away some items without demanding anything in exchange, but by demanding items in exchange, we impose costs on society in order to get our production. This suggests that government spending not taxes is the true public cost of government, although taxes would be the private cost. This gives us a macro reason why countries that get large foreign donations to the state tend to do so poorly.

    Another thought experiment to illustrate my point: what if the state taxed but didn't spend? If it just put the money in a pile and burned it. What would be the macro effects?