BUDGET and TAX POLICIES
A – Budgeting and expenditures must be carried out on a sound long term basis for government to be successful in the long run. Short of war or inability to keep internal order the surest way for a democracy to get in trouble is to overspend and particularly to overspend in the wrong areas.
Government costs and activities are so hard to control because usually only the proponents are represented when legislation and spending are considered. Although the public is on the side of controlling expenditures it is not at the table when the legislation is actually considered. The bias is always to increase government cost and to increase what government does. The very nature and structure of democratic government makes it so difficult for government to avoid doing things it shouldn’t and spending more on them than it should. The majority of witnesses at congressional hearings where program budgets are considered are employees of various levels of government. Most of the rest are lobbyists for industry or other institutions seeking government subsidies or favorable legislation.
The incentive for politicians to control current expenditures is far greater than that to avoid obligating government to future expenditures that will occur on someone else’s watch. Democratic government has an almost fatal bias toward creating entitlement programs whose promised benefits decades hence become financially unsustainable.
Though it is extraordinarily difficult to design a system of government without a built in bias toward increasing both the scope of its activities and their costs, the more clearly this bias is understood the better the chances of resisting these tendencies and the more likely that effective rules, procedures and practices can be designed and implemented to minimize this bias.
A Constitutional Amendment to limit federal expenditures (except in time of major war or major national emergency) to no more than 20% of GNP, with a specific limit of no more than 10% of GNP for entitlements and transfers, would greatly improve the budgeting process. A carefully limited exemption should be allowed for debt service as a safety valve.
The federal government budgeting process should eliminate the automatic increase mechanism (baseline budgeting) and require accrual accounting in addition to cash budgeting so that future obligated costs are included.
The federal budget process itself should be redesigned to produce more rational results.
For the federal government to regain fiscal responsibility an actuarially sound accrual method of accounting is required in addition to the current cash accounting system.
Calculation, projection and publication of costs on all federal government mandates for state and local government should be required.
The CBO and the GAO should be required to project each year estimated annual costs for the following 50 years of each entitlement and welfare program and to show separately such costs for any proposed new programs or modifications of existing programs.
The CBO should be required to test the validity of future projections for proposed entitlement programs against the past experience of similar entitlement programs, particularly by comparing the future cost estimates of those programs (at inception) with the actual results over the decades. Ideally an independent entity would prepare a separate analysis so an objective comparison is created. Heritage, AEI and Brookings could joint venture to subcontract with the government for these independent analyses. AEI’s OSPC policy tools might be useful in such an analysis.
The CBO should be given sufficient control over assumptions to make realistic cost estimates for proposed new programs rather than being required to accept assumptions designed to produce deceptive results supportive of proposed legislation. The assumptions made for ObamaCare guaranteed that the answers would be deceptively skewed in favor of the legislation.
B –Tax policies that raise revenue efficiently so as to minimize negative incentives to enterprise, investment and savings, and structured to minimize cheating, are a key component of successful economic policy and successful government.
How critical to a country’s economic success is the structure of its tax system! The design of the tax system, assuming it is well administered, has an enormous influence on the productivity and functioning of an economy. Most people are aware that the rate and type of taxation affects their own economic decisions, but they are not really conscious of what a huge effect the tax structure has on the economy because of its influence on millions of individual decisions. The ideal tax system is one that efficiently raises revenue with minimal effect on the economic decisions that would be made without consideration of the tax effect. The worst systems are those that most distort economic decisions and that encourage evasion and wasteful economic activity designed to reduce the tax burden. Tax policy should be designed to spread the burden broadly.
Taxation on capital gains is confiscation by the government to the extent that the taxes are applied to the inflationary component of the gain.
Taxation that encourages borrowing and discourages saving and investment is a drag on the growth of productivity.
The tax system that is most transparent, easiest to collect, and least susceptible to fraud and evasion is some form of consumption tax. The drawback is that it is so easy to collect that it encourages excessive government spending.
Note: Dynamic scoring for all proposed tax legislation should be required.
Note: Broad-based consumption taxes are the easiest of all taxes to raise and the most efficient from the standpoint of minimizing negative incentives for economic activity and increasing productivity. The problem is they are so easy to raise that they provide an irresistible temptation to politicians to increase government spending. If we had a fresh start progressive consumption taxes would make more sense than progressive income taxes and would less negatively impact economic activity. They’re probably not practical now because of the legacy problem. It’s not fair to tax people progressively on consumption when they’ve already paid taxes on the income. However with the left wing of the Democratic Party proposing wealth taxes and punitive progressive income taxes, it would make far more sense by comparison to tax the very wealthy some sort of luxury consumption tax. It makes no sense to tax specific luxuries because it cripples those industries, far better to tax expenditures above a certain very high level. A luxury consumption tax of say 50% on annual expenditures (with exemptions for education, medical care and charitable donations) would raise a good bit of tax without materially affecting economic growth. Its greatest benefit would be political, in the sense that it would blunt the left’s push for the type taxes on the rich that could have serious negative effects on the economy. If promoted by Republicans it might blunt some of the public’s impression that the Republican Party is the party of the rich.
Such a luxury consumption tax would be somewhat complex but since it only affected a relatively small proportion of the population the complexity would not be a big drawback.
The left’s current class warfare against the rich, should they succeed politically in adopting some of the more extreme proposals, would kill the geese that are laying the golden eggs. A luxury consumption tax if properly designed and implemented might assuage the left’s extreme envy complex and appeal to their sense of fairness. Another advantage is that the wealthy would be seen to be paying a high price for conspicuous consumption.
Such a tax would need to be phased in gradually because we would not want to collapse any particular industry. A gradual phase-in would allow the affected industries to adapt to the new realities.