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Monday, September 12, 2011

Shaviro: Tax Reform Implications of the Risk of a U.S. Budget Catastrophe

Daniel N. Shaviro (NYU), Tax Reform Implications of the Risk of a U.S. Budget Catastrophe:

Despite the demographic causes of the long-term U.S. fiscal gap, only severe dysfunction in our political system, abetted by malfunctioning and discontinuously responsive global financial markets, could lead to a U.S. budget catastrophe. Unfortunately, the risk of disaster appears to be alarmingly high. The rising danger has implications both for income tax reform and for the possible adoption of new tax instruments.

For income tax reform, the main implication is that base-broadening should be undertaken without accompanying 1986-style tax rate reduction. The threat of a fiscal catastrophe also raises concern about otherwise desirable but potentially revenue-losing reforms, such as to the rules for corporate and international taxation.

A number of tax instruments not currently used in the U.S. might be appealing even if the reform that included them was revenue-neutral overall. These include a value-added tax (VAT), a carbon tax, and a financial activities tax (FAT), although in my view a financial transactions tax (FTT) would not have comparable merit. All of these instruments potentially gain appeal if they could be used to ease the political prospects for raising overall U.S. tax revenues, and thus for reducing the risk of a budgetary catastrophe.

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Comments

"All of these instruments potentially gain appeal if they could be used to ease the political prospects for raising overall U.S. tax revenues, and thus for reducing the risk of a budgetary catastrophe."

The long-term fiscal gap, especially the higher growth rate of spending than revenue, is attributable almost entirely to government spending on health care. Therefore the only way to reduce the risk of a budgetary catastrophe is to freeze the growth in government health care spending as a share of GDP.

Shaviro discusses revenue increases that are not preceded by a credible solution to arresting growth in government health care spending. This will not avert a crisis. It might even accelerate a crisis if the markets realize that valuable resources to close the last of the gap are being squandered attempting to sustain impossible spending promises.

Change of the magnitude of repealing Medicare is necessary to avoid a crisis. Once health care spending is capped, Shaviro's ideas will reassure the markets that the risk of default has been eliminated.

Posted by: AMTbuff | Sep 12, 2011 12:31:40 PM

AMTbuff:

So, you're suggesting decreasing per capita spending on health care every year? And in a recession the decrease would be even greater? I agree that health care spending has to be controlled, but without fundamental reform, i.e. some form of single payer, your solution will devastate the elderly poor and middle class.

Posted by: GaryD | Sep 13, 2011 5:20:51 AM

A cap as a percentage of GDP would increase every year. If the GDP ever declined, the doctors would be happy for the money and not quibble about price.

If you believe that single payer will give us high quality health care at low cost, how do you explain the results of single payer K-12 public education? Education is a much simpler problem, but the result is the same one I predict for all public health systems. That is a gradual slide into wasteful yet ineffective care, with everyone who can afford it paying for the private alternative.

The patient needs to be the customer, with his own family's money at stake to a significant extent. After all, the patient's life is at stake, so what's the moral problem with putting his family's money at stake too, especially since such a system is likely to yield superior health outcomes at lower total cost?

Do you claim that private schools spending $10,000 per student are not delivering superior education to public schools spending the same? Or do you claim that the results with health care after 50 years of single payer will be different than they were for public schools?

Spending tax money is not bad. Spending it in counter-productive ways is bad. That's the problem with single payer: It sets in motion the decay and eventual destruction of the service it purports to provide.

Posted by: AMTbuff | Sep 19, 2011 12:41:17 PM