Along with Paul Krugman, Simon Johnson and James Kwak have emerged as the leading center-left thinkers, who set the tone for the wider constellation of progressive activists, intellectuals, and, to an extent, ambitious staffers and politicians. So it’s nice that Johnson and Kwak often have sensible things to say. In a short essay titled “Four Steps to US Fiscal Health,” I found much to disagree with, e.g.,

The second change is carbon pricing, either by auctioning emissions allocations or by taxing carbon directly, at rates that start low and rise over the coming decades. Given large potential revenues – in 2008, the CBO estimated that one proposal would yield $145 billion in 2012 and more in subsequent years – it would make sense to dedicate a portion to cushioning the impact of higher energy prices on the poor, while applying the rest to the fiscal balance.
Opponents argue that carbon pricing would hurt economic growth. But a recent study commissioned by The Economist found that a carbon tax would increase both government revenue and economic output – primarily by replacing existing, inefficient energy subsidies.

There are a few small problems with this sanguine analysis, which The Economist, to its credit, made clear:

Philip Summerton, of Cambridge Econometrics, explains that, with a general carbon tax replacing specific, expensive subsidies for renewable energy, more gas-fired power stations would be built. Since gas power is cheaper than wind power, for example, that would lower the cost of electricity. That, in turn, would boost production: manufacturing would grow by an extra 2.5% by 2020. [Emphasis added.]

We could also simply eliminate specific, expensive subsidies for renewable energy. This would presumably increase economic output, which would in turn increase government revenue. The challenge, of course, is eliminating specific, expensive subsidies for renewable energy. It is by no means obvious that the wind power lobby would want to surrender its specific, expensive subsidies when faced with the prospect of a general carbon tax — indeed, many will call for using the revenue raised by a general carbon tax to subsidize renewable energy, among other things. The Cambridge Econometrics model assumes away a vexing political economy problem.

Interestingly, a general carbon tax that raises 1 percent of GDP in revenue would also, according to Summerton, lead to an increase in carbon emissions.

And on health reform, Johnson and Kwak miss the mark:

This year’s health-care reform legislation, the Affordable Care Act (ACA), is a starting point. According to CBO data, the ACA will reduce the long-term fiscal deficit by two percentage points of GDP per year. A top priority should be to preserve and expand its cost-cutting provisions. Another obvious step to consider is to phase out the tax exclusion for employer-sponsored health plans, which would not only increase revenue, but also end the distorting effects of employer subsidization of health care.
But efforts to tackle health-care costs continue to be hampered by widespread reluctance to tackle sensitive issues, as epitomized by the “death panel” tempest of a year ago. Reshaping the US health-care system to focus on successful outcomes and quality of life, rather than on employing the newest and most expensive technology, is a challenge for which no one yet has a proven solution. It remains, more than any other single factor, the key to long-term fiscal sustainability. [Emphasis added.]

As NRO readers understand better than most, there is good reason to doubt the CBO’s projections. But they are very right to endorse the politically difficult step of phasing out the tax exclusion. And if they are open to reshaping the US health system through business-model innovation in the for-profit and voluntary sectors, the broad outline of their analysis sounds about right.

The two other ideas Johnson and Kwak introduce, a call for comprehensive tax reform and a Financial Activities Tax, both sound like good ideas. On comprehensive tax reform, I’d suggest a different emphasis:

The first is comprehensive tax reform aimed at aligning tax policy with desirable economic incentives. In particular, the US should consider introducing a value-added tax (VAT), widely used in other industrialized countries. By levying a tax on consumption at each stage of the production chain, America could reduce the overconsumption that helped feed the recent credit bubble, encouraging savings and investment instead. To be sure, a simple VAT is regressive, though it can be made progressive by combining it with a partial rebate or by exempting necessities.
Moreover, the US should look hard at tax breaks that act like hidden spending programs. One place to start is the tax deduction for interest payments on home mortgages. The deduction is currently available on mortgages of up to $1 million, this forming a key component of America’s excessive incentives to buy houses – a policy eschewed by most other industrialized countries.

Johnson and Kwak suggest introducing a VAT, without any mention of using it to replace the income tax or, at the very least, use it to fund a dramatic reduction in the income tax. I’m very wary of introducing a new consumption tax alongside the income tax. A better alternative might be wholesale replacement of the income tax with an X tax, first devised by economist David Bradford in 1986. Alan D. Viard, Robert Carroll, and Scott Ganz described its virtues, and its political vulnerabilities, in an AEI working paper in 2008.

One area where I imagine I will disagree with many other conservatives and libertarians is on Johnson and Kwak’s call for a Financial Activities Tax:

The third change is a tax on the financial sector, in the form of a Financial Activities Tax on profits and remuneration at big banks that enjoy implicit government guarantees. The International Monetary Fund estimates that this form of value-added tax could bring in between 0.5 and one percentage point of GDP in revenue.
Such a tax, moreover, would aim to eliminate the funding advantage that large banks enjoy over their smaller competitors, while limiting the incentive for big banks to become even bigger. As the IMF argues, if applied across the G-20, a Financial Activities Tax would help constrain the worst features of the financial system and reduce the competitive distortions created by the megabanks. [Emphasis added.]

I would want to be very careful about the design of such a tax, and the language Johnson and Kwak use gives me pause. I don’t like the idea of the federal government dictating compensation schemes. In fact, I think this is a uniquely bad idea. Yet I can see something like a very small Tobin tax or financial transactions tax being part of the future revenue mix. Moreover, the idea of taxing systemic risk, to put it crudely, is attractive, though there might be better ways to do it.