By James Kwak
I recently criticized Greg Mankiw’s New York Times op-ed. I like the post on his blog better (hat tip Tyler Cowen). Basically he says that if conservatives on the deficit commission want to make the commission work (a big if — see my previous post), they “will have to agree to higher taxes as part of the bargain.” In exchange, they should ask for the following:
- Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare. Do it gradually but substantially. Then index it to life expectancy, as it should have been from the beginning.
- Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
- Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives. Conservatives hate the VAT, more for political than economic reasons. They should be willing to swallow a VAT as long as they get enough other things from the deal.
- Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.
- Permanent elimination of the estate tax. It is gone right now, but most people I know are not quite ready to die. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.
I would agree with #1 (at least with a gradual increase in the eligibility ages, plus indexing, although the indexing should be lagged so people have some predictability) and #2.
It’s harder to give a blanket endorsement to the others, because they raise a number of issues that are interconnected: What taxes would you raise to compensate for elimination of the estate tax? How big would the VAT be? Mankiw has previously said he would be open to a VAT that was made progressive via a rebate to poor people — I would agree to that much sooner than to a VAT without such a rebate. Also, Mankiw prefaced this list by saying conservatives would have to agree to higher taxes. If he wants to cut income tax rates and eliminate the estate tax, just what taxes would he agree to make higher? Is he saying the VAT should not only make up for those cuts, but add additional tax revenue on top of that?
But if I were a Democratic representative on the deficit commission, I would certainly be willing to talk about those issues.
Just thinking: What if they put Mankiw and Krugman on this commission?