Josh Barro’s Fiscal Plan

by Ramesh Ponnuru

Josh Barro (who works at the Manhattan Institute and writes for RealClearMarkets and NRO’s Agenda blog) believes that in a few years we are going to need to cut entitlements and raise taxes. He has obviously taken a serious look at the numbers, but his article left me with a few questions.

“Federal revenues at 18% of GDP are simply too low to sustainably fund a politically plausible set of spending policies, even in a scenario where Washington politicians suddenly become serious about entitlement reform,” writes Barro. This may be right, but what makes higher federal revenues any more politically plausible? Maybe there’s no politically plausible way to get the deficit down to a sustainable level.

Later on Barro writes that “the federal tax code probably ought to become less progressive as a result of the upcoming fiscal adjustment. Because the dead weight-loss of a tax (the reduction in economic activity it causes) is a function of the square of its rate, increases in already-high marginal tax rates are inefficient ways to raise new revenue. So as the government grows larger (and so does the tax share of GDP) it becomes more necessary to rely on less progressive tax sources.”

But doesn’t this wrongly assume that tax increases have to take the form of increased tax rates? If we eliminated the mortgage-interest deduction or the tax exclusion for employer-provided insurance, wouldn’t we reduce deadweight losses and increase progressivity at the same time?