New Tax Revenues: The Fiscal Crisis Fix?
This is part six. Click here to read the entire series.
The fourth element of a conservative response to the fiscal crisis is to pay attention to revenues.
Gov. Mitch Daniels has a funny line about wanting a tax code that looks like somebody designed it on purpose. It's a project worth considering.
Back in the 1980s, the top rate of tax was pulled down to 28% by the systematic elimination of deductions and credits. Within a decade, the top rate had climbed back to almost 40% - and new credits and deductions proliferated. A bad trade.
If a 25% top rate is wanted - and it certainly seems a good idea to me - isn't the way to finance it the same way as was done in 1986? If base broadening alone does not do the job (and it will not), then find other revenues in ways that are socially useful: higher taxes on energy to spur efficiency, higher excise taxes on alcohol and corn-based sweeteners, a VAT if need be. (I'm surprised that we have got this far in the debate without any political figure proposing to legalize marijuana and then tax it heavily. I suppose that's because the legalizers tend to be the same libertarians who oppose all taxes.)
But if you're looking for a grand bargain, and if you're a conservative seeking to hold down top tax rates, you don't want a two-way bargain, Medicare vs. income tax cuts. You want a multi-point bargain that includes revenue increases so keenly desired by liberals that liberals will overlook those revenues' non-progressiveness.
The fifth element: growth acceleration.
Brink Lindsey makes the important point that the US economy compensated for low per-capita productivity growth in the 1970s and 1980s by adding many more workers to the population. The baby boomers come of age, and American women hugely increased their labor force participation.
Some suggest that the trick can be repeated in the years ahead by increasing immigration even above current very high rates. This seems to me a very bad idea. Remember, the problem that we are trying to address is the fiscal crisis of the state. It is not a very good scheme to address a fiscal crisis by importing millions of very poor people who will need much more state aid than they - and very likely their children and grandchildren - will ever pay in taxes.
What we need to do instead is seek every way over the medium term to restore very high rates of growth of per-person productivity - so that slower population growth can nevertheless still translate into strong economic growth.
For example: There remains important work to do on the trade front. The US still collects surprisingly high tariffs on cheap goods, from tableware to sneakers. Abolish them all.
For example: Traffic congestion represents an important economic cost. Americans in most metropolitan areas waste an hour or more a day traveling to and from work. Al Gore was right back in 2000 to worry about traffic as a political issue, and it needs to return to the agenda again, with special emphasis on road improvements and telecommuting.
Recessions are periods in which firms correct inefficiencies. They can be the same for governments and societies.
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