Kindly reconsider your taxing position 

Tax increase groupthink has seized the blogosphere. From the New Yorker, to The Atlantic and beyond, smart people are under its spell. Let’s see if we can help shake our friends out of this linear thinking.

Clive Crook says taxes should go up and that spending cuts “won’t do,” particularly because the Rs won’t politically be able to reform entitlements a la Paul Ryan’s Roadmap. Then, of course:

You cannot hold Medicare and social security unscathed, oppose all tax increases and close the fiscal gap. The big entitlements plus defence and interest amount to some 80 per cent of federal spending. With those off the table, there is not enough left to cut.

Atlantic colleague Andrew Sullivan grudgingly supports Nate Silver’s proposal to soak the rich:

I don't like raising taxes on anyone, and I sure don't like the stigmatization of the successful. But we've got to find the money somewhere - and that's where most of it is.

While I appreciate the intellectual honesty in the face of massive, mounting deficits, consider the following.

Take the dynamic view of the economy and entrepreneurship. When you do, you’ll recall that the the rich and the middle class are the wealth creators. Punishing them with new taxes will likely lead to reduced productivity, less available capital and Laffer phenomena in which the rich are faced with greater incentives to seek tax loopholes, offshore accounts and Greek tax avoidance 101. In short, growth through entrepreneurship has to be a primary driver to get us out of the rut. To mix metaphors: let’s neither hobble the drivers nor the growers. Taking a static view of the economy may lead one to conclude that higher taxes is a good idea. But it is not.

Consider entitlement reform incrementalism. Maybe it’s Paul Ryan’s plan. Maybe it isn’t. Whatever our future overseers do, they’ve got to make tough choices in the entitlements area. Perhaps they can make those choices in piecemeal fashion--slowly pulling off the bandages, rather than ripping them off. When finally they do, we’ll get positive benefits that feed into the dynamic growth I alluded to in the bullet above.

Voucherize everything--especially for the poor. Yes, I said the “V” word. Whether we’re talking “refundable tax credits” in healthcare (an option in lieu of Medicaid), or education “scholarships,” we can introduce new sectors and new efficiencies by voucherizing things government currently provides. Such makes for increased competition, reduced spending and new economic activity that will generate revenues for the Treasury.

Military cuts may be necessary. If one must risk angering conservatives, I’d suggest modest cuts in military spending, like maybe Milpork.

Look at the 20 percent of the budget that is not entitlements or military. You just can’t argue that 1/5 of the U.S. budget is small potatoes. There’s plenty there to be cut, despite the throwaway line from Crook, cited above. In fact, despite the protestations of our Education Czar, we could probably do without an Education Dept at all. We could certainly do with its budget being halved. Something similar can be said for most any department in Washington, DC.

Create a spending-cuts machine out of the bureaucracy itself. I’ve written elsewhere: “For every dollar a federal department saves taxpayers relative to a reasonable budget baseline, those employees get [x] percent of that savings directly in their paychecks (according to pay grade). This would encourage bottom-up and top-down departmental efforts to tighten up. To prevent artificially bloating budgets the following years in order falsely to reward these functionaries, you’d have to set up a baseline to avoid political gaming of the system. Such may only be possible with a TABOR-like provision. I agree that the devil would be in the details.”

Simplifying the tax code and lowering corporate taxes would go far, as well. Instead of any big, sweeping measure, I guess I’m proposing growth and deficit-reduction by a thousand reforms. As cynical as it sounds, it may be time to take advantage of the voting public’s rational ignorance (as the left has in healthcare). One usually does that by doing a lot little things--and not all at once.

Speaking of a static view of the economy, Sullivan refers to Nate Silver who writes:

That doesn't mean that we wouldn't eventually need to consider middle-class tax increases as well, although my preference would be to achieve them by means of a carbon tax, which would fall fairly heavily on the middle class if it weren't offset, rather than an increase in marginal tax rates.

When I read the full post, I realized the idea traces back to James Suroweicki, who is famous for denying the dynamic view of the economy--especially as it has been set out by supply-siders.

It seems as if all these tax increase proposals - particularly a carbon tax - are being thought of as minor inconveniences for people--but inconveniences that don’t have deleterious effects on growth. Taxes are like causally inert neutrinos, or something. But it’s growth that is likely to increase revenues that will reduce the deficit. And taxes hinder growth.

Now, it may very well be that Obama and the Democrat Congress have gotten us into such a deep, deep rut that it is virtually impossible to grow out of it in the foreseeable future. But that doesn’t mean we shouldn’t take seriously the possibility that tax increases would be a sure-fire exercise in foot-shooting. It may be that we have to grow out of the deficits slowly, but - I believe - less slowly than we would if we increased taxes now (even if we really did see signs of a recovery).

A dynamic and holistic understanding of the economy cannot be gained through a “back-of-the-envelope sketch,” as Nate Silver blithely suggests. I doubt it can even be gleaned through the so-called “dynamic” scoring of any legislative proposal. Instead, we have to get back to a theoretical commitment to the idea of the economy as a complex system--one that is rife with all manner of causes and effects that can escape the models, CBO measurements and (of course) linear thinking.

We need to get back to the fundamentals -- that is, to shoring up the institutions that are growth enhancing (i.e. that reduce transactions costs). We certainly need to forget about all the patches, band-aid solutions and stimulus plans that politicians offer like bread and circuses.

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