I’m a tad bit late on commenting on the tax compromised reached between the White House and Republicans, but I think that there has been some fairly high-quality commentary around the blogosphere. I stand mostly with the reasonable left in supporting what was put into the package, even though we got the wrong payroll tax cut, and a strange and potentially politically deadly compromise on the Estate tax (which I otherwise oppose, but wouldn’t let my positing get in the way of providing economic stimulus, like some on the left).

Mark Thoma worries that the payroll tax cut will become permanent (edit: found the link). This is the mirror of the argument that government spending tends to become permanent, as well…which I have an inkling that Mark doesn’t mind that feature so much.

I think Kevin Drum misses a grand opportunity to call out to the left to articulate a better way forward here:

In the end, this is the second stimulus we all wanted. It’s not a very efficient stimulus, and it sadly caves into the conservative snake oil that the sum total of fiscal policy is tax cuts, but them’s the breaks. Anyone who doesn’t like it needs to spend the next two years persuading the public not just to tell pollsters they don’t like tax cuts for the rich, but to actually vote out of office anyone who supports tax cuts for the rich. That’s the only way we’ll win the replay of this battle in 2012.

I’m not looking to go tit-for-tat on whether direct government spending/investment is “more efficient” than providing payroll tax cuts, as it’s pretty clear which side we are both on (as I’m much less sanguine on the Keynesian consumption function, for a reasonable view from the other side, see here), however I do want to address his prescription of a public awareness campaign in order to return to “normal”, with normal being defined as roughly “Clinton-era tax rates” on capital and high incomes.

I view this very compromise as a golden opportunity for the left to reinvent themselves with regard to taxation, win an adjacent political battle (and a dear progressive goal), and wrap it all up in a bow that not only makes our government funding more efficient, but lowers tax rates for virtually everyone. And that is to begin a campaign of gradually removing the income tax, in exchange for a revenue-neutral tax on carbon, which would be gradually instituted as the income tax was phased out. In addition, offer an automatic stabilization policy of payroll tax cuts (all of them, or at least all of the “employers share” — the better side to cut — in exchange for a sharply more progressive payroll tax, used to fund Social Security and Medicare/caid. Institute a progressive VAT or GST with a standard deduction of the first $25,000 of income for all taxpayers, and expand a means tested EITC, as well. You could trade this for elimination of minimum wages, but that’s not a real pressing problem in my mind. At the end of the line, offer a land tax in exchange for really whatever the right happens to want for it. Repeal of the estate tax, maybe?

That would be a real “progressive” package that would end the debate regarding the level of income taxation (from any source; labour, capital, etc). It would simplify our tax code, and get rid of ridiculous inefficiencies like the mortgage income tax deduction. More importantly, contrary to our current tax code, the new consumption-based funding of government would encourage a greater savings and investment equilibrium.

Beyond the scope of this post — but relevant — is different ways that you can find to streamline efficiency of the government. I seem to remember an argument put forth by Matt Yglesias that I personally agree with (and can’t find the link to currently), and find it baffling that it is so often overlooked; and that is that there are some government workers whose marginal utility is so low, that paying them anything at all constitutes overpayment. So it’s not a question of overpayment, it’s a question of marginal utility. At the margin, is society gaining utility by paying various individuals? If yes, then pay them. If not, then don’t.

That aside, I do think that this is a unique opportunity for Democrats to articulate a new vision for government funding that better enables elements of the welfare state that they hold so dear, this is highly progressive, removes the distortions and bad incentives created by the income tax, and genuinely makes the economy more efficient — facilitating growth. It could be a popular platform, and one that I would vote Democrat for, and I’ll be that many other pragmatic libertarians would feel the same way.

Of course, at the end of the day, I still believe that monetary policy is the last mover. The Fed has quietly indicated that it is looking at extending QE2, which is definitely good for the prospects of any pet fiscal policy.

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