The Fiscal Commision
Greg Mankiw has an interesting post at his blog, about the bipartisan fiscal commission being thought up on Washington.
The answer 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. President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it. That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.
But what if you are conservative? This is harder. You can try to stick to your no-tax-increase position. The problem is that doing so would require spending cuts larger than are politically realistic. If I were king, I bet I could find sufficient spending cuts. But I am not expecting to be anointed any time soon. If the fiscal commission is going to succeed, tax increases will have to be part of the deal.
I pretty much agree with everything Dr. Mankiw said. Democrats do want to increase taxes, of course they say only on the “rich.” Medicare is broken and underfunded. Social Security is going to be broke by 2017 (CBO estimate) unless something is done soon. The choices are decrease benefits (politically unpopular), increase eligibility age (politically unpopular) or raise taxes (politically unpopular).
It’s a real catch-22. I would like to see the age requirement indexed to life expectancy rates, Mankiw thinks this is a good idea as well. When SS was the life expectancy for an average male was 56 years old, women were 60 years old. Now in 2009, the average life expectancy is 77 years old for males (Don’t know for females, sorry ladies). Not only that but the standard of health for the elderly is much greater than it was in the 1930s.
Does it really make fiscal (not moral) sense for a person to work ~45 years, retire at 65 and live off the dole for another 12 plus years? I know it sounds heartless but people can work nowadays until they are in their mid 70s, and many already do. Of course we can’t forget opportunity costs, there will be an increase in unemployment as the jobs the older generation keep will not be able to go to the younger generation. And in an appeal to emotion, won’t someone please think about the children! That was meant as a joke in a half hearted way. Yet, there is the simple fact that SS will not be available to the younger generation at all, unless something is done now.
Personally, I like the idea of letting people opt out of SS and Medicare. As it is right now, I’m paying into a SS system and I now I’m never going to see any bit of that money. Let me at least take a third of what I’m already paying into and let me do with it as I please. Call it pro-choice. =) I’ll gladly stick it into gold stocks, cause you know the dollar is going to tank soon anyway and those SS checks won’t be worth the paper they are printed on when that happens anyway. Of course, a lot of people in Washington, both Democrat and Republican, do not want to see the people have any choice anyway. They’d all rather have your money so that they can spend it rather than you, you really don’t know what’s best for you anyway. /snark
The second part of Mankiw’s post deals with a VAT tax. The VAT stand for value added tax and it’s a consumption tax. You pay a tax on everything component of everything you buy, the taxes of each component add up and are added as a tax at the check out line. So if you buy the new iPad, which has lets say 10 components, you pay a tax on each component, lets say 10% each. So if the cost to make an iPad adds up to $200, your going to pay $20 in taxes added onto the sales tax of 7.25% (here in Little Rock).
I agree with Mankiw that it is the best of bad ideas, but for different reasons. It’s good only if they repeal the income tax as well. So that the sole tax colected by the Federal government is the VAT. Keep corporate taxes at 20%, to keep companies from off shoring.
The reason I like the VAT rather than a flat tax, which would be 1000 times better than what we have now anyway, is that the VAT will reduce consumption. The opposite of consumption is savings. So for every purchase that the VAT reduces, due to people like me thinking twice if the actual price is on the order of 20% higher than the sticker price, more money goes into the savings account.
That increase amount of savings will increase investment in the Economy and get the economy growing again. Both Keynesians, through the Solow Model, and Austrians know that investment and growth relay on savings. Of course savings is more important to Austrians than Keynesians but that’s for a different post.
As it is now, with our tax system, companies buy failing companies to operate at a lose for the sole purpose of using it as a tax shelter. Resources are wasted on a company that should be bankrupt because of the perverse nature of our tax system. Something has to change either way.