Friday, August 05, 2011

Whither now?

I've been run ragged the last two days doing 4 interviews for local TV news reporters interested in where the economy will head next given the recent drop in the Dow, the debt/spending non-decision, etc. Of course I point them to my Wall Street Journal Guide ... but here I want to suggest something a little deeper. As I argued in my Mt. Vernon speech a few weeks ago, I think what Congress needs to do is to pass an array of taxes that automatically kick in should government revenues prove inadequate to cover current expenditures. That will prevent the need for the government to borrow substantially more (under normal circumstances) and direct attention to where it belongs, on the expenditure side of the government's income statement. Such a policy would not require the passage of a balanced budget amendment and would be more flexible than any balance budget requirement because it could be limited in various ways. Most importantly of all, it would follow Alexander Hamilton's dictum that whenever the government incurs an obligation (be it a bond, a contract, or an entitlement) it also creates the means for paying it. Only then will public credit be secure and not subject to the political brinkmanship witnessed during the recent crisis.

What should the proposed tax panoply look like? The easiest thing would be to pass a national sales tax, the rate of which would automatically increase to cover any projected budget deficits. Once its effectiveness is proven in the real world, such a tax could replace our current income tax system, which wastes billions of dollars each year on forms, receipt management, etc. Sales taxes are inherently regressive -- they fall more heavily on the poor -- but that disadvantage could be obviated by an income policy or by charging higher RATES on higher priced goods of the same weight and class. For example, a $1 12 oz. bottle of soda might be taxed at 15% but a $2 12 oz. bottle might be taxed at 30%. Similarly, a $10,000 sedan might be taxed at 10% but a $100,000 one at 50%. In other words, progressivity can be built into sales taxes too.

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