11 November 2010

Simpson-Bowles commission presents a "Wimpy" proposal; don't give them the hamburger!

The National Commission on Fiscal Responsibility and Reform ("Simpson-Bowles Commission") has released its preliminary report on debt and deficit reduction. The report has met a mixed reaction, although on balance, it seems that Democrats are most strongly opposed to it. It's hard for me to understand why, and I mostly agree with ATR's take.

The most important thing for you to know about this "measured, bipartisan" proposal is that it boldly calls for balancing the budget in thirty years. Yes, thirty. To accomplish that, it calls for a number of measures that I still need to take some time to absorb, but let me take on one of the more alarming ones here.

The report calls for "capping" tax revenues at 21% of GDP. At a glance, I suppose, most people like any sort of cap on taxes. Here are some reasons this may be the most appalling proposal
  • Since the end of the Second World War, the tax burden has gone above 20% only twice, and only very briefly (in 2000 and in 1945.) For the past thirty years, it has averaged 18.2% of GDP. That "cap" of 21% would be the highest tax burden in American history, and nearly a 17% tax hike above the average. See here.
  • During times of recession, the burden normally appears to fall. Right now, tax receipts are about 14.2%. Under Simpson-Bowles there would still be room for a 33% tax hike. Think about that.
  • Based on track records, there is reason to believe that the "cap" would in practice become a "floor."
  • One of the many difficulties of pinning taxes to GDP is that it requires accurate forecasts of GDP, income and profits. There are no such forecasts - especially from the Congress.
  • Having a cap suggests that tax rates would automatically drop if the cap is exceeded, but there is no enforcement mechanism; tax rates don't adjust throughout the year. There is also no mechanism for a "make-up" if the burden is exceeded in any given year.
There are numerous problems with the proposed cap, not least of which is that, as I pointed out above, it would be the heaviest tax burden in our history. And in exchange for that, we'll balance the budget by the time your unborn grandchildren get married.

When I call this a wimpy proposal, I don't mean it isn't bold enough. I mean it reminds me of Wimpy: "I will gladly pay you Tuesday for a hamburger today."

Don't fall for it. Don't give them the hamburger.

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