Thursday, May 13, 2010

Debt and Taxes

Now is not the time to begin deficit and debt reduction — the economy remains in precarious condition, and unemployment and underemployment remain terribly high — but it certainly is time to start thinking about working towards a more "pay-as-you-go" system of taxation and spending. Sorry, Democrats, but spending cuts are needed; and sorry, Republicans, taxes will have to go up.

A good place to start cutting is military expenditures. The Cold War is over, and America's current adversaries are incapable of launching the kinds of attacks that require more complex and more expensive weapons systems to repel. Military contracting, by the way, is not labor intensive, so job losses would be manageable.

The Bush wars in Iraq and Afghanistan created far more enemies than they eliminated, and the Obama "surge" in Afghanistan is getting nowhere because there is no legitimate government to take over an area once it has been "liberated" from the Taliban. Let's just cut our losses, and get out with all deliberate speed. While we're at it, we can also remove our bases from Japan, Europe, and the Middle East. We can deal with terrorist strongholds with small, highly mobile forces and Predator drones.

Another cost savings could come from eliminating farm price supports. Not subsidizing corn, for example, would not only save money, but enhance public health — reducing the cost of medical care.

Yes, both the savings ideas offered above would arouse bipartisan opposition. You always can count on bipartisanship when it comes to protecting sacred cows.

As for tax increases, it makes sense to look for the money where the money is — that is, look to the individuals and corporations that have the most of it. There should be no cap on Social Security deductions, and the tax should be applied to all income, not just salary. On the other hand, there should be a cap on deductions for mortgage interest — and that cap should be gradually lowered.

There has been plenty of talk lately about a value added tax, or VAT. The good thing about a VAT is that it is hard to notice, and hence does not draw as much public anger as its first cousin, the sales tax. The bad thing about a VAT is that it is a form of sales tax, and so is regressive.

A better approach, I believe, is to stick with the income tax, but to make it much more progressive by adding more tax brackets, especially at the top end. There also must be much stricter limits on deductions and credits — taxes should not be used to create social policy. Interestingly, half of all deductions for charitable contributions are for donations to churches. I cannot imagine what social goods churches provide that make them so valuable to the American people.

None of these ideas will balance the budget, of course — much more sacrifice will be required, and supply-side nostrums about rising tides lifting all boats are just dead-out wrong. Yes, a stronger economy will help, but even in full recovery, we still will have to figure out what to do with all those people in their forties and fifties who will remain structurally unemployed. The welfare state is here to stay.

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