"The New American Economy"

I recently finished reading The New American Economy by Bruce Bartlett, a former advisor to Ronald Reagan. Read it if you get the chance – it offers serious thinking from a real conservative on our current economic situation and some of his ideas to move forward. I won’t do a full book review but in it he explains the shift in economic thinking from pre-Keynes to today. As an intellectual father to supply-side economics he concludes that the original intent of the movement has been accepted into mainstream economics while the wild all-tax-cuts-are-good-and-lead-to-increased-revenues bastard child should be marginalized and left behind. It is also interesting to read a conservative defend the idea of fiscal stimulus in the face of a severe recession and liquidity trap.

A solid portion of his book deals with the entitlement crisis we face and what to do about it. He makes the case that to rein in our debt, entitlements have to be reformed and taxes have to be raised. Despite wishful thinking, even if ALL discretionary spending was cut it wouldn’t be enough to fix our fiscal deficit. Bartlett writes (p.175), “As Fed chairman Bernanke notes, we would still need to raise nonpayroll taxes by 35 percent to eliminate the deficit projected by CBO. Furthermore, the biggest component of discretionary spending is national defense. And completely abolishing every domestic discretionary program would not have been enough to eliminate the deficit in 2008.”
So even if it were politically feasible (it’s not) to cut discretionary spending by huge amounts we would still need to raise taxes. Therefore, entitlement reform is required to save us from fiscal catastrophe once the baby boomers retire. Given the political realities to reign in entitlement spending in a way that doesn’t unfairly penalize retirees taxes need to be raised somehow with spending cuts and entitlement reforms. Bartlett makes a persuasive case for a VAT.
A value-added consumption tax offers a way for the government to raise revenues in an economically efficient manner. The government must pay for spending somehow, so it might as well do it in a way that harms the economy the least. Income taxes and corporate taxes like capital gains hurt our businesses which employ workers and grow our economy, replacing them with “some sort of flat-rate consumption tax is the best way to raise revenue in a way that is least damaging to incentives. According to recent OECD studies*, taxes on consumption and real property are the least damaging to growth and income taxes are the most damaging (p. 186).”
*Barlett’s footnote: Jens Arnold, “Do Tax Structures Affect Aggregate Economic Growth? Empirical Evidence from a Panel of OECD Countries,” OECD Economics Department Working Paper no. 643, Oct. 2008; Asa Johansson et al., “Tax and Economic Growth,” OECD Economics Department Working Paper no. 620, July 2008.
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