Tuesday, February 26, 2013

Beyond the sequester

The Pew Center for the States published some data on the tax and grant implications of the upcoming sequester.   I have reproduced a couple of their graphs because they present some of the best data on where the reductions might take place.  They are certainly better than the Administration's terror sheets discussed yesterday.   The first shows the effects of cuts in federal grants by state (you can click on the link to see the calculations in detail.

Not surprisingly California is in the bottom third of the reductions (at 6.1%) in part because we are a donor state.   We pay more in taxes than we receive back in federal "largesse."

But the Pew data presents some other interesting projections.   California does pretty well, in part because the state suffered such a high percentage of the base closings in the 1990s we seem better prepared than the states that were able to keep bases.   You should note that the sequester was built with a substantial portion of the total cuts being taken from defense - even though defense spending amounts to only about 20% of the federal budget.

What surprises me about the Pew figures is in states where there is a substantial federal presence -some do quite well.  So between federal lands control and military bases one would expect that Hawaii and Alaska would be whacked - but according to the data - they are not.

After we get through this melodrama we need to begin to think about what changes should be done in the federal budget to make these kinds of idiotic decisions less possible.   Wonkblog published a set of eleven recommendations published by Brookings  - one would not be surprised by the proposals.   For example they tout the virtues of a carbon tax.   And they generally start with the notion that the government is bereft of revenues.   But there are some interesting proposals in the lot including a significant restructuring of the mortgage interest deduction and the idea of an automatic IRA.  There are some wrinkles in the proposal (like a cap on the rate at which 401k accounts can be used).   But if we are to ever get away from gridlock we need to begin to look at ways to restructure the budget.

From my perspective there are two immediate changes that need to be considered.  The first would limit  the percentage of federal expenditures to GDP.   From my perspective that might be in the range of one dollar of GDP in five. (20%) That would be slightly higher than the long term trend over the last couple of decades but also significantly lower than the percentage that the Obama administration would like to push us to.   At the same time, we should de-thatch the tax code for both personal and corporate taxes.   That means broadening the base and lowering rates.   The new system would actually produce more revenue, if structured correctly.   Brookings suggests a VAT (Value Added Tax) at 5% and the worry I have for such a proposal is that it would be an add on to the current income tax.   So I would be reluctant to see such a proposal adopted - but base broadening and rate reduction could be done immediately and would offer almost instantaneous results.

Most Americans realize that the Kabuki that is going on around sequester is one of those Washington games that the political class thinks is subtle and intricate and the rest of us think is idiotic.    The sooner that our hired help understands the disconnect and begins to work on the real budget problems, the better.

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