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April 07, 2005

Ezra Klein's Transformation Continues

With any luck, in a year he'll be learnedly discoursing on alternative PAYGO proposals. But now he is merely entranced by the Bruce-Bartlett recommended Value Added Tax:

Ezra Klein: Now, why am I spending so much time on this? Readers who remember my health policy wonk-out from a few weeks back might also recall that the CAP health plan I was obsessing over wanted to pay for itself with a 3-4% VAT. And here we have Bruce Bartlett proposing a VAT to pay for health care spending. Stodgy Republican warhorse Bill Thomas (the one who judged Bush's privatization plan a "dead horse") also wants one. This, I think, is about as good as it gets for liberals. An emerging consensus on a new, dedicated revenue source to guarantee the financial solvency of health care. And if, while we're moving this through, we can't create a hybrid universal plan along the lines of CAP's proposal, we're completely useless as a political party...

I would rather have a larger (and more progressive) income tax. But the important thing is to balance the federal government's spending commitments with its revenues. For if we don't, then when the long-run arrives inflation or capital flight will. And one thing I have learned over the past decade or so is that the long run can arrive with terrifying suddenness and swiftness.

The conclusion of Barlett's op-ed is very well-written:

I am no deficit hawk. For decades I have argued that the negative effects of deficits are generally exaggerated. But unless spending is checked or revenue raised, we are facing deficits of historic proportions. It is simply unrealistic to think we can finance a 50 percent increase in spending as a share of gross domestic product - which is what is in the pipeline - just by running ever-larger deficits. Sooner or later, that bubble is going to burst and there will be overwhelming political support for deficit reduction, as there was in the 1980's and early 1990's.

When that day comes, huge tax increases are inevitable because no one has the guts to seriously cut health spending. Therefore, the only question is how will the revenue be raised: in a smart way that preserves incentives and reduces growth as little as possible, or stupidly by raising marginal tax rates and making everything bad in our tax code worse?

If the first route is chosen, the value-added tax is by far the best option available to deal with an unpalatable situation. Absent any evidence that the White House and Congress are prepared to restrain out-of-control health spending, I see no alternative.

I actually think our chances of arriving at his--preferred--conservative low-government (or not-quite-as-big-government) world are better than he thinks *if* we get congress to renew real PAYGO procedures that force it to acknowledge the link between spending and revenues in the long run. Spending increases are a lot harder to vote for if they carry tax increases with them.

Posted by DeLong at April 7, 2005 12:23 PM