A challenge to the Class of 2010:
Who’s not cutting the deficit?
Mexico’s deficit probably will get bigger: 0.5 percent of GDP, rather than 0.3 percent. Our deficit is bigger than Mexico’s entire economy.
Greece’s deficit is getting bigger. Who wants to be Greece?
And there there is us.
Obama’s deficit panel does not seem to be packing the gear to get the job done: It has focused mostly on tax increases, in the form of eliminating tax breaks such as the mortgage-interest deduction and the use of pre-tax dollars to pay for health-insurance benefits. As Vero has argued persuasively, the problem is not really revenue, it’s spending. I’m no fan of the mortgage-interest deduction, which distorts the housing market, and there’s probably a good case to be made on the pre-tax health-insurance spending — but neither of those measures is going to do a lot of good unless it is part of an overall rationalization of the U.S. tax system, which is a national disgrace. GAO estimates of the efficiency costs of our tax code — meaning the economic loss our tax regime imposes on the economy above and beyond the revenue collected by Uncle — run as high as 5 percent of GDP, i.e., roughly the cost of all U.S. national-defense spending combined. Federal tax-compliance costs alone run 1 percent of GDP. That is insanely wasteful.
We aren’t going to close the gap by working on the unholy trinity of “waste, fraud, and abuse.” By all means, cut waste, fraud, and abuse — but that isn’t enough. NPR and foreign aid? Sure, but that’s chickenfeed. Until you start tackling the hard stuff — which means entitlements and defense spending, among other things — you aren’t getting serious.
Here are some things to do:
First, reduce the federal head-count, even if that means paying a few federal employees higher salaries than we’d like. (Yes, first.) The nasty long-term costs are in benefits and pensions: Here’s the tradeoff: We don’t cut the bureaucrats’ pay, or cut it all that much, but we have a lot fewer of them, and we don’t put as much up for health-care and pension costs. This works even better at the state and local levels, where bureaucrats’ pensions tend to be defined-benefit plans rather than defined-contribution plans.
Second, see if Sarkozy will lend Republicans the necessary gear to raise the Social Security retirement age and start means-testing all of the major entitlements. How severely should we means-test? Enough to put them on a stable financial footing without a payroll-tax hike. Enough to remind people that they are welfare programs, not a retirement plan. Enough to make replacing them with private retirement plans, private disability insurance, and the like in a decade or two more palatable. You want to head off Fiscal Armageddon, then the total government payroll, its pension obligations, and the major entitlements are the place to start.
Third, just savage the hell out of discretionary spending. That’s the fun part, and Republicans should enjoy themselves. It’s also a chance for Republicans to reclaim their party’s reforming soul and throw some of their own favorites on the fire — farm subsidies, the scam that is the Small Business Administration, etc. I like the idea of butchering one Democratic sacred cow and one Republican sacred cow in pairs: two by two they go down — public broadcasting and farm subsidies, Amtrak and foreign-military financing.
Fourth, straighten out the tax system, preferably with a broad-based single-rate tax. The level of taxation ultimately will be set by the level of spending, but there’s plenty of room for improvement in the tax code. If Congress got really ambitious about putting a flat tax on all income — salaries, dividends, capital gains, inheritances, whatever — then there’s no reason to maintain a special carried-interest carve-out for the Wall Street weasels who funded the Obama campaign. (Hey, just sayin’.) That wouldn’t be terrible politics, and it would add tens of billions to tax revenues, too. Democrats will whine that it’s regressive. Republicans should respond that under a flat tax a guy who makes $200,000 a year pays twice as much as a guy who makes $100,000 a year, who pays twice as much as a guy who makes $50,000 a year. That’s progressive enough, and it’s a winnable debate.
And we’d save ourselves a lot of tax-compliance expenditures, lawyers’ fees, and grief by taxing all income at the same level. You know who was a fan of taxing capital gains at the same rate as ordinary income? The Reagan administration. Not a bad idea.
Fifth, develop a better plan for defense spending. Unlike practically everything else in government, fiscal considerations should take a back seat when it comes to national security — but not too far in the back. We need to fundamentally rethink our military priorities and our commitments around the world — rediscovering what is really essential to our national interest — and then redirect spending accordingly. A return to pre-2000 military spending seems to me a reasonable goal, and it is possible that further reductions are possible.
Also, a little politics: Step 1 (fewer bureaucrats) plus Step 4 (everybody pays the same tax rate) means a smaller permanent constituency for Big Government and Big Spending.
I’m not married to any of this. Got a better idea? Let me know in the comments.