Pundits on both sides of US politics agree that you have to either cut spending and/or raise taxes in order to make a dent in the deficit between the money the government brings in and the money it spends.
Currently servicing the government’s debt of $14 trillion cost $190 billion in 2009, which is nearly 10% of total government spending, and nearly 50% of the interest payments are now leaving the country. Not to mention that the costs of servicing this debt are going to explode so much further over the coming decades in a way that will make a drunk teenager with dad’s credit card and an internet connection look a model of fiscal rectitude, unless something is done to realign government income with government expenditure.
Democrats ostensibly want to raise taxes so they can continue to provide government services at roughly the current level – around 20% of GDP, while Republicans ostensibly want to cut spending and shrink government services down to something closer to 16% in order to ‘promote economic growth’. (In fact most Democrats are arguing to both increase taxes and cut spending.)
So we’re faced with a stark choice: cut spending, raise taxes, or both.
For reasons that will become clear, both sides are – publicly at least – overlooking the best solution, option D. What would that best solution be?
What if you could lower taxes – but increase the tax take. Sounds counter-intuitive no? But this is not magical thinking, at least economically (it may be politically).
Harvard economics professor Martin Feldstein, former chairman of the Council of Economic Advisers from ’82 to ’84 under Reagan, outlines the argument in a New York Times op-ed.
Currently there are thousands of pages of codified giveaways written into the US tax code, which gives people money to have babies, buy houses, drill for oil, grow corn, and build weapons systems, amongst many, many more activities. This is why the US tax code is so mind-numbingly complex: there’s a giveaway for every constituency/lobby group right down to household pets.
But as Feldstein points out:
such tax expenditures create incentives for wasteful borrowing and spending; they have been factors in the mortgage crisis and the rising cost of health care.
Tax expenditures collectively increase the budget deficit by more than all other nondefense spending combined, other than Social Security and Medicare.
Many of these tax giveaways are exorbitantly wasteful. Corn subsidies for instance, do nothing but enrich big agribusiness like ArcherDanielsMidland, while raising the cost of food and doing nothing to increase energy independence or lower the cost of fuel. They’re a lose/lose for consumers/voters.
If you got rid of these distorting exemptions, you could lower overall tax rates (which are already at historical lows for the US) and increase the tax take at the same time. It’s a win for everyone except the vested interests and their lobbyists, which, not so incidentally, is why it will be so hard to make it happen.
Cutting spending and/or raising taxes is possibly the greatest false choice presented in US politics today. There is another way.