If you are a Republican who wants thoughtful analysis rather than slogans, read Robert Barro’s Op-Ed, “How to Really Save the Economy” in last Sunday’s New York Times. His fiscal plan hews to conservative principles but is based on respected economic theory and data. I doubt any of the current Republican candidates, possibly excepting John Huntsman, would support it. That is more of a reflection on where the GOP is right now than on respected Republican economists like Barro.
This Harvard professor is hard to pigeonhole. Some describe him as a supply-sider, though one who is far more respected among economists than the better-known Arthur Laffer. He has long has been an insightful and articulate advocate of lower tax rates and more efficient tax structures as ways to increase economic growth. And he is a consistent critic of much government spending and inefficient or unneeded regulation.
But he is not doctrinaire. Indeed, in this piece he says, “I agree that the recession warranted fiscal deficits in 2008-10.” That would damn him as a Keynesian in the eyes of many Republicans, who would also hate his advocacy of a value-added tax on consumer items to replace the corporate income tax. But if you want to know what respected Republican economists are thinking, pay attention to Barro’s essay.
He argues that, “Today’s priority has to be austerity, not stimulus,” and that the fiscal discipline must start now. The benefits of long-term fiscal stability would outweigh the short-term pain, he says. That is honest, although he glosses over the severity of near-term pain from his program.
He also argues that “stable expectations” about “tax rates, regulations and so on,” are vital to investment and economic growth. Hardly any economist across political or disciplinary spectrums would challenge that.
Temporary measures like those the Obama administration has implemented or proposed will be ineffective, Barro says.
He then suggests six steps:
“Three of them were identified by the Bowles-Simpson deficit reduction commission: reforming Social Security and Medicare by increasing ages of eligibility and shifting to an appropriate formula for indexing benefits to inflation; phasing out “tax expenditures” like the deductions for mortgage interest, state and local taxes and employer-provided health care; and lowering the marginal income-tax rates for individuals.
“I would add three more: reversing the vast and unwise increase in spending that occurred under Presidents Bush and Obama; introducing a tax on consumer spending, like the value-added tax (or VAT) common in other rich countries; and abolishing federal corporate taxes and estate taxes.”
Most of the Republican presidential candidates would agree with much of that, I think, although few are willing to be so specific about ending popular breaks for mortgage interest, taxes and health insurance.
Moreover, many would agree on abolishing the corporate income tax. (So would many economists who are Democrats.) But they would bridle at his suggestion to introduce a 10 percent VAT tax on household consumption as a substitute.
(Democrats would gleefully point out that this would increase the sum of federal taxes paid by most U.S. households. But most economists would agree this tradeoff could improve economic efficiency, the value of goods and services produced from a given set of resources.)
There are two political problems, however. First, this VAT would increase taxes from the status quo. Barro estimates it would raise revenue equal to 5 percent of Gross Domestic Product. Over the past decade, the corporate income tax has averaged only 1.7 percent of GDP. For 2011, such a 3.3 percent difference would have boosted total federal tax revenues by more than 20 percent. That would be anathema to the anti-tax crowd that currently holds sway in the GOP.
Second, simply introducing any new tax offends this group. VATs can raise large amounts of money. They are the primary revenue source in European countries with far larger governments, relative to their economies, than ours. And, because they are embodied in the retail price of goods and services, they are somewhat hidden from consumers. So Barro’s proposal is probably dead on arrival in his own party.
My own views?
First, a shift in taxation from higher-income to lower-income people should not be done lightly. Second, trillions of dollars of business investment, estate and retirement plans, etc., was structured around the existing tax codes. Barro’s changes might improve economic efficiency over the long term, but they would provoke large transition costs in the short run.
Finally, while broadening a tax base and lowering rates might marginally improve savings incentives and efficiency, those moves are not a panacea for getting out of a recession. In the decade after Reagan’s 1981 Economic Recovery Tax act, GDP and employment growth were slower and the unemployment rate higher than in the decade prior to 1981. The reasons for this are complex, but few politicians from either party are interested in nuance right now. So myths of a miraculous economic recovery in the 1980s persist, all data to the contrary.
(To learn more about Barro and his views, see the interview in the September 2005 issue of The Region magazine published by the Minneapolis Federal Reserve Bank at www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3261.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.