Jeffrey Miron examines both major political parties’ entrenched positions and finds them wanting:
The problem with the Democratic position is that it regards redistribution, rather than economic productivity, as the prime goal of government policy. The Democrats therefore want to address the deficit with higher taxes on “the rich,” not expenditure cuts.
This approach, however, cannot remotely address the long-term debt outlook; the available revenue from the wealthy is far too small. And higher taxes discourage economic growth, making deficits worse. Thus whatever the morality of soaking the rich, it will not work.
For Republicans, the crucial mistake is their refusal to distinguish between the tax revenue that comes from higher rates and that which comes from fixing tax loopholes that inappropriately privilege certain consumption or production.
The Republicans are correct that raising tax rates is a terrible idea. By discouraging savings, work and investment, higher rates dampen economic productivity in the long run. By reducing disposable income and corporate profits, they reduce consumption and investment in the short run. And higher rates will not raise as much revenue as initial forecasts.
But closing tax loopholes — lowering tax expenditure — is a terrific idea. Many tax expenditures distort economic decision-making and therefore slow economic growth. Crucial examples include the home-mortgage interest deduction and the preferential treatment of employer-provided health insurance. Thus Republican skepticism about explicit expenditure should apply equally to tax expenditure, regardless of the revenue implications.
He also points to the elephant in the room:
Likewise, Democrats refuse to accept that Medicare is the primary driver of the U.S. fiscal nightmare. This expenditure is growing much faster than the GDP has any chance of growing over the long haul. Unless a deal slows the growth of Medicare, nothing else matters.
A good approach to scaling back Medicare would be a substantially higher deductible. Imagine, for example, that every beneficiary paid an extra $2,000 out of pocket each year. This is affordable for most families, especially those a few years from retirement.
This one change in policy would save at least $100 billion a year.
I’m less sanguine on this approach to solving our healthcare system woes than Dr. Miron apparently is. The strategy hinges on the notion that healthcare providers are willing to take pay cuts, that they have no recourse, and that rate increases will be resisted by Congress. I believe that the buzz word used to describe this view is time inconsistency. It’s worth a try, though.
Hat tip: Amba