EconomistMom.com

Call me an optimist, call me “intoxicated,” or even call me someone trying to make fiscal responsibility ”sexy“–I think the current economic crisis is providing the entire nation with a useful “wake-up call” that we’ve been living beyond our means.  The Washington Post’s Ruth Marcus shares a bit of my wishful thinking in her column today, speculating on how President McCain or President Obama might become the president who presides over the “New Sobriety”:

For starters, a President McCain would revert to the straight talk of Senator McCain, circa 2001, and acknowledge that the nation cannot afford to continue all of President Bush’s tax cuts. A President Obama would emerge from a grim meeting with his top economic advisers, much like president-elect Clinton did in 1993, and announce that his additional $85 billion a year in tax cuts for the middle class and seniors are similarly unaffordable.

Next, either president would seize the opportunity of a fiscal crisis to provide for more honesty in budgeting. No longer should the Social Security surplus, which is pledged to pay for benefits in the future, be used to obscure the true size of the operating deficit. No longer should candidates — or presidents, for that matter — be allowed to pretend, as both John McCain and Barack Obama do, that extending existing tax cuts does not represent an actual budgetary cost.

Most important, either president should use the moment to engage in a fundamental reexamination — first of the tax code and then, once a sensible, sustainable revenue stream is in place, of entitlement spending. Given the demands of an aging population, the country is going to need more revenue than it now collects.

The expiration of the Bush tax cuts in 2011 and the continuing, costly headache of the alternative minimum tax create an action-forcing event; the economic crisis provides extra political cover to build a more rational tax code, one that would broaden the base without raising marginal rates to growth-stifling levels. As Concord Coalition chief economist Diane Lim Rogers notes, the tax code provides for as much spending on “hidden entitlements” — provisions that give special breaks to items such as mortgage interest or employer-sponsored health care — as all discretionary spending combined.

Any president, Republican or Democrat, will face enormous pressure — from his base and from entrenched interests — in confronting this challenge. McCain has a party allergic to raising taxes. Obama has a party addicted to government spending, reflexively opposed to any benefit cuts and chafing under years of pent-up demand for new programs.

I’d have more confidence in McCain, with his history of standing up to his party, had he not so thoroughly chugged the no-new-taxes Kool-Aid. That leaves two reasons to give Obama the edge. His economic team has a proven commitment to responsible budgeting. His party, for all the leftward pressure it will exert, at least has a significant faction that believes in paying as you go…

Ruth then felt the need to close by pointing out that maybe I’m more optimistic than she is:

Still, you’d have to be a little, well, intoxicated — especially in the face of the ongoing, bipartisan binge — to believe that either, as president, will usher in a new sobriety.

So you can call me an optimist, or even a trying-to-be-sexy drunk (gee, that should get me some “hits”)… but what you can’t call me, based on what Ruth and I said about tax expenditures and tax reform, is a “neo-Hooverist.”  In a post entitled “So That’s What We’re Calling Them Now,” the Eschaton blog calls Ruth a “neo-Hooverist” for referring to tax expenditures as “hidden entitlements,” quoting the paragraph above where Ruth mentions me and then going on to say:

Amazing how you can just pick out the two things in the tax code which greatly benefit middle class taxpayers.

If I were creating a fantasy tax code for my Sim Nation, I would scrap the mortgage interest deduction and not have an employer based health care system. Instead I’d have very large personal deductions and standard exemptions and some sort of single payer national health care system. However given that we’re in a financial crisis which has at its foundations declining home prices, now would not really be the right time to do away with that particular deduction. And I’d prefer that before we scrap the employer based health care system we… come up with something else!

More generally, the weird disease everyone who works for the Washington Post has, causing them to obsess about the idea that maybe middle class people occasionally get a break from the government, is fascinating.

To which I respond (and can elaborate on in future posts, and have already elaborated on in earlier posts if you just search for “tax expenditures” or any of what I’ve written on “taxes” and “revenues”, really…):

First, I am a deficit hawk, but I’m a “progressive deficit hawk.”  When it comes to my “we’ve been living beyond our means” story, my solution is not to say let’s merely trim (slash?) the living.  No, I’ve always stressed that what we need to do for the longer run is increase our means so we can keep enjoying improved standards of living.  In terms of the federal budget, we need to start living within our means by paring back wasteful and less valuable spending (our “ways”)–whether it be on the tax side or the spending side of the budget–and we need to increase federal revenues as a share of our economy (our “means”). 

It’s true that the mortgage interest deduction and the exclusion of employer-provided health care are the biggest tax expenditures and hence the ones that the middle class are most likely to benefit from, but that doesn’t automatically make them worth their cost.  I believe there are more efficient ways of assisting folks with their mortgage payments and their health care, including not giving away so much money to the rich people who benefit the most from such tax deductions and exclusions (because with deductions or exclusions as opposed to credits, the subsidy rate is higher the higher one’s marginal tax rate) and yet don’t need them as much as other households may need other forms of government spending just to survive (e.g., fiscal stimulus “life support”).  It’s all about opportunity cost–what those huge tax expenditures in their current form (and however widespread their benefit) crowd out.

(And speaking of that opportunity cost, that’s what the Post’s Steven Pearlstein is getting at in his column today when he talks about taxes and reminds us (emphasis added):  “…we’re in for a lousy economy for the next couple of years requiring another big economic stimulus plan from the federal government — one that needs to be focused less on tax cuts and more on helping the unemployed, preventing cutbacks in vital state and local government services, and creating jobs directly through investments in infrastructure.”)  

“Tax reform” does not necessarily imply decreased progressivity of the tax system.  (Many people hear the term “fundamental tax reform” and automatically think “national retail sales tax.”)  “Tax reform” means moving to a system that has a broader base and a more efficient rate structure that at the same time achieves the desired revenue stream as well as the desired degree of progressivity (effect on the distribution of income).  Ideally, with a broader, more efficient (neutral to different forms of income) tax base, it’s easier to see how to make more efficient adjustments to the tax system (e.g., through new, simpler (unified) tax credits), that could lead to a system that would be just as or even more progressive than the current income tax system, would raise more revenue, and yet would impose marginal tax rates that need not be much or even any higher than the current top rates.  That’s how we can boost revenues, national saving, and economic growth through tax reform in a fair and progressive way.

So part of my wish for a “New Sobriety” with the next Administration is that they’ll take a long-overdue look at the tax system (and not just smart spending initiatives) to help them better achieve their goals for the distribution of income and economic growth.  I shudder to think anyone would consider me–just an optimistic, trying-to-be-sexy, progressive fiscal hawk–a “neo-Hooverist” for thinking so.