The Corner

How to Pay for All This

From The Economist:

Americans are stuck with a budgetary conundrum: they seem to be opting for more government, at least in health care, yet they do not seem prepared to pay for it. Their leaders have indulged this fantasy. Mr Obama has foolishly sworn off higher taxes on 95% of households, and Republicans will not countenance them for anybody. This newspaper strongly prefers small government and low taxes, but if Americans are to have bigger government and a sustainable budget, tax revenues will have to rise.

The Economist is correct to suggest that Americans appear for now, despite the best efforts of the tea party crowd, still to be opting for permanently (I wouldn’t include some of today’s crisis arrangements in that calculation) bigger government in their future. As the paper’s writer suggests, that’s a bad mistake. And maybe one day we will have a GOP capable of making a coherent — and believable — case for a smaller, less intrusive, less expensive state. Given that that smaller, less intrusive, less expensive state does not appear to be on the agenda just yet, The Economist is right to ask how Obama’s Leviathan will be paid for.

Raising tax revenue will hurt less if the tax system becomes more supportive of economic growth in the process. Compared with other countries, America taxes consumption too little and income too much. Redressing this imbalance could, with time, help economic growth. First, broaden the income-tax base by eliminating exemptions, and if possible cutting rates. Second, introduce a carbon tax, the least distorting way to slow the growth in emissions. If that is not possible, sell rather than give away carbon-emission permits, or raise the federal fuel tax. A last resort is a broad consumption tax, such as a value-added tax. This is economically efficient, but could too easily become a politically convenient way to vacuum up more money and expand government.

It’s worth adding that those general prescriptions could and should apply no less to the funding of a much smaller government — with a fairly major caveat so far as carbon-emission permits are concerned. While (despite the recent most entertaining revelations coming out of the U.K.) a simple precautionary environmentalism of doubt ought to argue for some pricing mechanism for carbon emissions, the scope that such regimes offer for political manipulation make them too untrustworthy to be tried. Better by far to embark on a series of transparent and gradual increases in the federal fuel tax — something that would have obvious advantages for American security policy as well.