economics

February 19, 2010

Thoughts about the Fiscal Commission

Filed under: Uncategorized — ktetaichinh @ 6:34 am
Tags: , ,

Here is a question I have been pondering.  If you were a member of the fiscal commission, what would you try to achieve?

The answer for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the “tax and spend” party.  President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it.  That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.

But what if you are conservative?  This is harder.  You can try to stick to your no-tax-increase position.  The problem is that doing so would require spending cuts larger than are politically realistic.  If I were king, I bet I could find sufficient spending cuts.  But I am not expecting to be anointed any time soon.  If the fiscal commission is going to succeed, tax increases will have to be part of the deal.

A reasonable position is, perhaps, that the commission should not succeed.  After all, it is the president’s responsibility to put out a budget.  The one he just released is, as I explained in my recent Times column, not sustainable.  He just passed the buck to the fiscal commission.  Perhaps conservatives should not allow him to do that but, instead, should try to force him to put out a sustainable budget on his own.  After all, isn’t that Peter Orszag’s job?

But let’s suppose that you are a conservative and you want the fiscal commission to succeed.  You will have to agree to higher taxes as part of the bargain.  But what should you aim to get in return?  Here is my list.

  1. Substantial cuts in spending.  Ensure that the commission is as much about shrinking government as raising revenue.  My personal favorite would be to raise the age of eligibility for Social Security and Medicare.  Do it gradually but substantially.  Then index it to life expectancy, as it should have been from the beginning.
  2. Increased use of Pigovian taxes.  Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue.  He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
  3. Use of consumption taxes rather than income taxes.  A VAT is, as I have said, the best of a bunch of bad alternatives.  Conservatives hate the VAT, more for political than economic reasons.  They should be willing to swallow a VAT as long as they get enough other things from the deal.
  4. Cuts in the top personal income and corporate tax rates.  Make sure the VAT is big enough to fund reductions in the most distortionary taxes around.  Put the top individual and corporate tax rate at, say, 25 percent.
  5. Permanent elimination of the estate tax.  It is gone right now, but most people I know are not quite ready to die.  Conservatives hate the estate tax even more than they hate the idea of the VAT.  If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

One thing is clear: The Democrats in Congress would hate the five demands above.  But that is precisely the point.  The fiscal commission is giving the Democrats something of very high value: political cover for a major tax hike.  If Republicans are going to give them that, they should get something very big in return.  If the conservatives on the commission could achieve my five goals above, it might be a deal worth talking about.

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