One of the podcasts I regularly listen to is the Economist’s Audio Highlights. (Free iTunes version here.)The most recent Editor’s Highlights (July 28) starts off with a discussion of how Obama and Romney are starting to touch on what should be the central issue of this campaign – what should be the size and role of government in America. The Economist makes the good point that currently the American government taxes like a small government nation and spends like a large government nation. I know, we feel we have an incredibly high tax burden, and in some cases we do (e.g., corporate taxes). The Economist rightly points out that some of the gap between what the government collects and it spends has to come from increased revenues.
I strongly disagree that increased revenue means higher taxes. The Laffer Curve explains that increased tax rates will lead to decreased revenue. If we must raise revenues, then it should be by reforming the tax code. The current tax system is no longer geared to accomplishing its primary objective – raising funds for the operation of the government. Instead, it’s more geared to social engineering of the populace and rent-seeking by special interests. Personally, I would really like to see the income tax replaced with a consumption tax, kind of like the FairTax. The only people who have a right to know my income is my employer and me, not the government. (Although in my case, the government does have a right to know because they employ me.) My issue with the FairTax proponents is that they are so ready to replace the income tax, they aren’t focusing on the necessary groundwork to do it. Before we can replace the income tax, the Sixteenth Amendment must be repealed. Otherwise, we will end up like Great Britain with an income tax and a consumption tax. With that limitation, a flat tax with no exceptions would be the most preferable.
For all of you who are screaming at your monitor that we don’t have a revenue problem, we have a spending problem – YES I KNOW THAT! The question becomes are we willing to tackle the big four drivers of government spending: Social Security, Medicare, Medicaid, and Defense? Usually the same people who scream for limited government or reforming the taxation methodology are afraid to touch one of these four drivers. Yet, if we are ever going to get to a smaller government, all four must be addressed.
Social Security – Why are we asking our young and poor to subsidize our old and rich? Don’t tell me that you believe that you’ve been saving into a special account that’s due to you upon retirement. I have one of those too, and it’s called an IRA. My retirement planning does not take any “Social Security” income into account, because I can’t expect it by the time I retire. The “Social Security” system is broken and broke. It’s currently paying out more in benefits than it’s receiving in taxes. If we want a social safety net for elderly and disabled persons, then we can implement means testing and treat them like any other social welfare program. Quit making it a separate payroll tax and just roll it into the regular taxes. If nothing else, that should make it easier on employers.
Medicare – If you want to know why healthcare is so damn expensive in America, this is a big reason. Medicare pumped out $523 billion in 2012, and it accounts for approximately 20% of all healthcare spending. Anytime the government subsidizes a product, prices go up. The more subsidies, the higher the price. (Go look at college tuitions since the introduction of government-backed grants and student loans.) Medicare’s dollar cost and portion of healthcare spending can only go up as the Baby Boomers start enrolling into the program in droves. The CBO and GAO both have stated that the program is unsustainable in its current form. If we want to provide some sort of help to seniors for their medical costs, it would be better to pay a sliding voucher (higher for low income, lower for higher income) to pay for a private health insurance plan.
Medicaid – As Medicare forces healthcare prices up, Medicaid will continue to explode. Worse, because Medicaid’s price structure makes it unprofitable for a private practitioner to take on those patients, more and more private doctors are refusing to see Medicaid patients. This forces Medicaid patients to rely on the more expensive hospital emergency rooms as their primary healthcare providers. Call it a death spiral of costs. Personally, I’m more in favor of reforming Medicare and making the healthcare more market driven (letting insurance companies sell across state lines, make high-deductible plans more favorable, etc.) and using block grants to the states to handle Medicare spending. Each state faces different Medicaid challenges. Let them solve it as they see fit.
Defense – There’s a difference between defense spending and military spending. I’m all for having a strong military to protect the United States. I’ll admit to having a fondness for all toys military, from small arms to aircraft carriers. Here’s the problem, we are spending too much on non-mission essential and non-working equipment, personnel, and real property. We have too many bases that are open because of politics rather than mission need. The procurement system practically begs for corruption and graft. Like all government agencies, DOD has too many empire builders that hold on to their little fiefdoms despite whether those personnel could be re-purposed or released. Unless these are remedied, defense spending will continue spiraling out of control, just like the other big drivers.
Reforming the tax system and controlling the big drivers of federal spending are the two big steps that must be accomplished before we can even hope to shrink the size and role of government.