Sustainable taxation

This Week in Pie Making awarded a "double face-palm" to a deal that could potentially buy your pie maker a really nice bike and all the cold weather gear he could want. What's wrong with that? Has P&P "gone lib", supporting Big Government for its own sake and a radical redistributionist agenda?

Hardly. It is entirely possible to live below US poverty line and still make a pie every week (especially if you can move in with family, friends or to a lower cost of living). Outside the US, a farming village that meets its basic needs is effectively a PMCIN=1 society, and the history of any attempt at large-scale wealth distribution from the rich to the poor generally ends badly. So, P&P does not have a strong stance on the merits of a progressive, regressive or "fair" tax code with one huge caveat: it must be fiscally sustainable.

What we saw two weeks ago, and are actively discussing this week (there's a few NYT op-eds by Krugman and Brooks that are also worth reading for those with subscriptions) is that fiscal sustainability is not even on the agenda. This is troubling for three reasons:

(1) The United States cannot leave the era of "kicking the can down the road." Despite passing "landmark" health care reform legislation, we're still kicking a massive pay-cut for doctors under Medicare down the road. There is chronic uncertainty over the research and development tax credit (and some other Dem-favored goodies) that makes it tough for any company to invest in long term R&D. Ongoing uncertainty over pollution, energy and climate policies prevents companies without government backed loans from expanding or maintaining generating and transmission capacity.

Whatever the reason for this, it encourages stasis in the domestic economy and acrimony abroad. It is generally better for business to have draconian, certain regulation than substantial uncertainties between years, except in finance, where regulatory arbitrage counts as innovation. Capital intense industries, such as heavy manufacturing, are almost guaranteed to move abroad to countries whose laws are more stable.

(2) The narrative of taxes as an unalloyed evil was strengthened. This is incredibly bad because taxes are how we as a country pay for the promises that we as a country make. Since we as a country decided to pay less in taxes, we've added two countries with their populations to the administrative burden of the US (is Iraq able to pay its own way yet?), passed the largest expansion of the Medicare program (and any comparable social welfare program in the nation's history) and absorbed substantial portions of the debts of almost every major financial institution in the world. The original tax cuts were unaffordable before those expenses, now we're supposed to believe another two years is okay?

Meanwhile, the "off-balance sheet" liabilities of the USG are growing. State governments in the US find themselves in a situation very similar to European states, now that federal stimulus dollars are receding, and it's hard to imagine a state default not impacting the Federal government. Even after the US presence in Afghanistan winds down, there will be billions in veterans' benefits to cover. Norfolk, VA is sinking, the Metrodome collapsed and the massive drought that's broken the assumptions about rainfall in California continues. The longer this attitude of stasis lasts, the less likely it is that the next generation will enjoy a quality of life comparable to our own.

(3) It encourages willful intellectual blindness. This is perhaps the most damaging aspect, since what gets lost is a sense of objective history and agreed upon facts. If James P. Pinkerton can continue to get paid for saying the GOP's goal is to "starve the beast", one has to wonder how he explains how the GOP-run Congress and Presidency presided over the largest ever expansion of government during their last tenure. Meanwhile, Obama's supporters argue, earnestly, that they "won" the negotiation with Senate Republicans because they got a numerically larger tax cut, in addition to the temporary extension of some key benefits. All seem to have faith in Technological Progress, suggesting that the massive productivity gains of the last twenty years will be sustained. Given troubles with immigration, network security and wildly inconsistent energy policy, this is a tenuous hope at best.

Will these groups, which actively resist the deficit commission's recommendations and facts, actually be able to address comprehensive tax reform? Your pie maker would not let such people into his kitchen lest he be liable for someone intentionally believing that knives do not cut or ovens can't burn.


Unfortunately, I think Grover Norquist is right, and that the current view on taxation will have exactly the effect he desires. Unfortunately, the mechanism is going to be unpleasant and directly opposed to many other Redcoat Republican objectives. The empirical evidence today is that the best way reduce the government spending is actually to allow a tax increase on one's own constituents while demanding cuts to another's spending, but that's a really unpopular viewpoint. Gonna be an interesting couple of years . . .