While more fiscal stimulus is needed to juice the weak private sector, U.S. public debt is on pace to reach 100 percent of GDP in a little over a decade. At some point in the next five years, most analysts agree, we will need a serious debt reduction plan. What would an honest fiscal reform plan look like? Greg Mankiw draws up a five-step plan for conservative debt reform:
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
Suggestions (4) and (5) will find few liberal friends, but (1), (2) and (3) would be perfectly acceptable to many self-described liberals in journalism and academia. And yet Mankiw writes:
The answer [to fiscal reform] for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the "tax and spend" party.
This is unfair. I have not recently found any serious liberal policy thinkers who say the only solution to the debt is to raise taxes ad infinitum to keep up with unreformed entitlement inflation. If I do find one, I promise to call him crazy.
Instead, I've found people like John Podesta, president of the Center for American Progress (liberal enough for ya?) who told a budget reform conference on Tuesday that he supports: (1) a consumption tax like a VAT; (2) Medicare cuts and reform on the delivery end to pull its inflation curve down; (3) a goal to have a dollar of tax revenue support each dollar of federal spending, not including interest on the debt, by 2014, which could require (4) a freeze on certain parts of the budget, including security programs like homeland security and defense. That is a liberal plan to reduce the deficit, and it involves spending cuts, entitlement reform and tax increases, on the consumption side. The first three steps of the Mankiw plan involve ... yep ... spending cuts, entitlement reform, and tax increases, on the consumption side.
On many issues, sensible conservative and liberal policy thinkers say they "agree to disagree." But on the broad outlines of fiscal reform, it's like they disagree that they agree. Liberal writers can say "there are no conservatives for raising taxes!" and conservative writers can say "there are no liberals for reforming entitlements!" but saying so doesn't make it so. The political prospect of budget reform is dismal. We all acknowledge that. But it's increasingly clear to me that most good budget reform plans across the political spectrum share the same three pillars: spending cuts, entitlement reform, and tax increases, preferably on the consumption side.
So let's start there.