Public Policy Taxes

Do we need less democracy?

In The New Republic, Peter Orzag argues that to fix our budget mess, we need less democracy.  Specifically, he argues that implementing the following four recommendations more consistently would improve the budget situation.

  1. Progressive tax code
  2. Permanently link taxes to the unemployment rate
  3. Backstop rules
  4. Independent institutions

I have my doubts…

Take less of your income when economy is bad and more when economy is good.  The degree of progressivity of the tax code, however, is an item up for much debate.  There is not one clear method to make the tax code progressive.  Further, the question is complicated by the fact that newly poor individuals receive in-kind benefits (e.g., Medicaid, TANF, food stamps) but it takes some time before these benefits arrive.

Permanently link the tax to the unemployment rate works if there is an equilibrium unemployment amount that policymakers can estimate.  In practice, however, difficult to determine if changes in unemployment are cyclical shifts around a stable equilibrium unemployment value or a change to a new equilibrium value.  Orzag’s recommendation #2 works if it is the former, but if it is the latter, taxes will consistently be too low (or too high).

Backstop rules are events that take place if Congress doesn’t act.  However, these are only effective if there is not a big lobby to fight against these default changes.  Once lobbyists are appraised of automatic changes in spending to their constituents, one can be sure that politicians will be informed of these ‘automatic’ changes and many will get reversed.  For instance, the sustainable growth rate (SGR) aims to reduce Medicare spending for physician services gradually over time. However, Congress has reversed these ‘automatic’ changes each year and thus the backstop rules—for Medicare payments at least—have been wholely ineffective.

Independent Institutions are generally a good idea when tough decisions need to be made. Orzag cites a commission that was established to close military bases in the 1980s.  The reason Orzag needs to use this example is that independent institutions are not always as independent as intended.  The recommendations of the most recent fiscal commission to reduce the deficit were largely ignored.  Further, choosing an impartial group of individuals to sit on any committee is difficult.  Once must balance the additional expertise insiders bring to the discussion against the vested interests these individuals may have.  Further, voters may not like independent institutions because they are not held accountable by voters.  Orzag also cites the Independent Payment Advisory Board (IPAB) created by health reform, by IPAB’s is so new its success cannot be judged.

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