Dangerous Curves

July 31st, 2010

Inspired by Dangerous curves ahead (Washington Post 7/31/10) and the recently released CBO debt projection. 

“Under the realistic budget scenario, to keep the debt to GDP ratio stable over the next 25 years would require immediate and permanent tax increases or spending cuts of about 5 percent of GDP. That is a significant amount, equivalent to about one-fifth of all non-interest government spending this year. But waiting and hoping is not a good alternative.” – Washington Post

How do we avoid those dangerous curves?

I hope that the plan below as a guideline serves.

That’s just a bunch of random bullet points, you’re probably saying.

Still, it’s a lot better than just hoping and praying.


Here’s your theme music, Wishin’ and Hopin’ by Dionne Warwick.

Here’s what I personally would add to the debt reduction mix currently being considered by the President’s Debt Commission:

  • Carbon tax (part of which could be redistributed as a “carbon dividend”)
  • Value-added tax
  • Where economically efficient, more user fees so that middle/high-income people who use government services pay for them
  • No or very low corporate tax, which should be considered both as a inducement for GOP compromise and since it is a relatively inefficient tax that breaks the “no double taxation of income” rule
  • No or very low death tax (ditto)
  • No income tax for incomes under $50-100K
  • Ideally (at least initially) no increased total tax burden for family incomes under $250K
  • Measures phased in over 10 years with budget balanced over 20, followed by debt reduction
  • Requirement that budget be balanced over a two-year budget cycle without counting Social Security or other trust funds
  • Investment fund
  • Rainy day fund
  • Real paygo
  • Spending cuts with majority, but tax increases automatic to balance budget (NB: That approach would theoretically lead to some built-in bias towards spending, e.g., if the lower and middle classes represent 75% of the vote and 50% of the tax base, each dollar in spending only costs them $0.50, and they’ll have an incentive to increase spending up to the point that government is 50% as efficient as the private sector. However, this theoretical advantage will probably continue to be offset by wealthy taxpayers’ greater ability to organize and lobby, and by Americans’ innate distrust of government.)
  • Progressive overall tax burden , since the marginal value of a dollar decreases as incomes rise (I personally would make the tax structure slightly more progressive than it is now, given that the current progressive impact of marginal income tax rates is offset by the regressivity of sales and social security taxes.)
  • Automatic tax increases would be evenly distributed throughout income groups (i.e., they would not make the overall tax burden more or less progressive).
  • Public campaign finance (not directly tax/spending related, but in my view still crucial to fundamentally changing the process that all too often makes.

Where do I differ from the GOP/Tea Party crowd? They think government is doing too much. I, on the other hand, think it’s not doing enough. But that’s what we have a representative democracy to determine, and if Congress (even a Republican-majority Congress) can come up with a trillion in spending cuts, so be it. But what shouldn’t be allowed to happen is that they, in the absence of any meaningful cuts (which, by the way, they have never been able to come up with), that government spending (which is really just another form of household spending) be allowed to continue to grow while revenue is cut (hence the automatic tax increases).

But in spite of my “big government” bent, I think I’m actually more free market oriented than the GOP/Tea Party crowd are. They have an innate hatred of government. I, on the other hand, view government as just another free market actor. Where government can provide a service that the private sector can’t provide, or can provide it better and/or more efficiently, I believe that service should be provided by government. There is nothing in this view that contradicts free market principals—in fact, I believe it upholds them, while the standard GOP/Tea Party view denies the free market on ideological ground. 

Remember, whether an individual, rich or poor, is getting his or her “money’s worth” from government is measured not be how much they get from any individual government program relative to their share of the costs, but how much they get in total services relative to their total tax bill. There’s a big difference between those two equations. With the former one, it’s easy for people to caught caught up in the minutia of programs that they pay for but don’t get services from, which is always going to be the case. With the latter approach, everyone (or almost everyone) is a winner.

That’s because even for the super-rich, it’s worth it to pay a little extra for a government that keeps the overall population happy and doesn’t periodically nationalize your billions or burn your mansion and kill your family, which often used to be what happened to rich people during periodic social revolutions. That’s the genius of the pressure valve that American democracy provides. And that, my wealthy Republican friends, is where we’re headed if your reflexive anti-government policies continue.

These changes could be phased in over the next 10-20 years, with most deficit reduction starting after the Bush recession is (hopefully) over in 2012. The key is not to achieve immediate deficit reduction (which would in fact be harmful to our short-term economic recovery), but to within the next few years establish the process and framework for mid-term stabilization and long-term debt reduction and re-alignment of our national spending and taxation levels.

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2 Responses to “Dangerous Curves”

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