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November 12, 2010

The Deficit Reduction Draft Proposal is the Stimulus Program We Need!

If the "Draft Proposal from the National Commission on Fiscal Responsibility and Reform"  were adopted straight from the PowerPoint slides, there would be a dramatic reduction in the role that the federal government plays in all of our lives. The second most important result would be shrinking and eventually eliminating the federal deficit and reducing the national debt. If this proposal became law, we would be much more competitive internationally; we'd have a simpler and more fair tax system; and the economy would roar forward creating private sector jobs. All of us would benefit from lower tax rates.

The proposal ups the ante on the President's proposal to cut discretionary spending and goes on to cut entitlement and military programs. It cuts the federal workforce by 10%, largely through attrition. It freezes federal wages and benefits for three years so the rest of the nation can catch up. It eliminates all earmarks.

So what's not to like? Why, beside the necessity of having more detail than just bullet points, is this report unlikely to be adopted by the whole commission and probably not going to get through Congress?

It's easy to see why Nancy Pelosi and the Left reacted with fear and outrage: they don't want the role of government diminished. But the draft plan is also under attack from the right. According to a New York Times story:

"The Web site of Americans for Tax Reform, which is led by the influential antitax activist Grover Norquist, warned Republicans bluntly, 'Support for the commission chair plan would be a violation of the Taxpayer Protection Pledge, which over 235 congressmen and 41 senators have made to their constituents.'"

To be blunt, special interests will try to convince fiscal conservative that elimination of $1.1 trillion annually of tax expenditures amounts to a tax increase of $1.1 trillion. In fact deductions and loopholes are every bit as much a government appropriation of our money as what shows up on the spending side of the budget. Each targeted deduction represents government interference with economic decisions – every bit as a much as government grant does. The report proposes using the savings from eliminated tax expenditures ONLY to reduce tax rates and to pay down $80 billion/year on the national debt. Here, from the proposal, are the reductions possible in tax rates with various level of tax expenditure reduction:

Note that this is a static analysis. In the real world the reduction in tax rates will help the economy and actually increase tax revenue.

Sure, lots of us get deductions for things we were going to do anyway, like paying the interest on our mortgages; but it is harmful to the economy and to our freedom to have the government tell us it is better to buy than to rent, better to buy a solar panel than a computer, better to buy this kind of car than that, better to use corny ethanol than gasoline etc. etc. These are choices we make better on our own than government can ever make them for us. These are choices we have a right to make on our own. Much better just to lower the rates and let us decide how we want to spend our money.

Support for tax deductions and loopholes is non-partisan. Even Republican Iowans want a tax break for corny ethanol; even Republican Realtors (and many Republican homeowners) want a mortgage interest deduction; oil drillers want depletion allowance; the renewable-industrial complex wants tax credits for solar and wind just as the nuclear industry wants various subsidies. It will be every bit as hard – perhaps harder – to cut tax expenditures out of the budget as it will be to cut direct spending. It's absolutely necessary to cut both in order to reduce government influence on the economy and unleash prosperity.

There are also some real tax increases in the proposal. The limit on salaries subject to Social Security is raised even while the retirement age is gradually lifted and benefits reduced for the wealthy – this just keeps the system solvent. The gas tax is raised but the revenue goes only to the transportation trust fund – ending bailouts of this fund from general tax revenues.

Given the healthy (IMHO) swing back to the fiscal right in the last election, there is a reasonable chance that opposition to this proposal from big Government advocates alone can be overcome. The greatest threat to passage of these very good proposals or something like them is opposition from those who benefit the most from tax expenditures. They will try to convince us that these are tax increases rather than just spending and government control hidden on the other side of the ledger. They will try to scare us with the prospect of lower home prices, no drilling for new oil, no more renewable energy, the end of hedge funds as we know them etc. etc. They will use justified anti-tax fervor as an excuse to keep their tax breaks (which are sometimes our tax breaks as well).

It will be a tragedy if the energy of the Tea Party and the new legislators it helped elect is used to defeat the biggest rollback of government seriously proposed in our lifetime. This is the Stimulus program we need.

Related post:

Confessions of a Stimulator

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