One of the ironically perverse products of the Great Recession of 2008 and 2009 is that once the economy has recovered we are almost certainly going to have to raise federal income taxes. Why? Because the stimulus package that was sorely needed to head off another Great Depression coupled with the Obama administration's aggressive attempt at "change" will bequeath a federal deficit that only tax increases can resolve.
For reasons that I have given before but lack the space to repeat here, the optimal federal deficit is greater than zero. But the current situation is out of hand. If the deficit is not brought under control as the economy recovers, the country is in for double-digit inflation and renewed high unemployment two to four years down the road. Big deficits beget big increases in the money supply which beget big inflation. Big inflation then begets big pressure on the brakes. Try not to forget the pain that then-Federal Reserve chairman Paul Volcker had to engineer in 1981 and 1982.
Our options are limited and they do not realistically include cutting federal spending by enough to get the deficit down to a reasonable level in the next three to four years, and then only if the most recent Congressional Budget Office projections turn out to be much too pessimistic. Federal programs have a life of their own. Once started the only politically feasible option is to slow their growth. Sunset almost never comes. To get the deficit down to a reasonable level we will eventually have to raise federal taxes. Sole dependence upon rapid economic growth is a dreamer's solution; ditto cutting waste.
Those are the facts, and political demagoguery designed to win election or re-election at the expense of solving the nation's long-run fiscal problems should be recognized for what it is. I have not voted for a Democratic presidential candidate since 1976, so I suppose that makes me a "conservative," but this conservative sees the handwriting on the wall. Federal taxes must be increased. The only issues are how and precisely when.
POP QUIZ: What is your response when you hear some commentator suggest a progressive consumption tax?
Most people think about a sales tax with exemptions for food and medicine. At that point the left side of the political spectrum gets all riled up because its ideologues jump to the conclusion that what is coming is another conservative plot to place more of the burden on poor folk. At the same time the right side of the spectrum gets equally riled up because its ideologues just know another liberal plot when they see one. At that point the negotiation ceases and the political bickering takes over.
Once you bring yourself to accept that federal taxes must go up, then a progressive consumption tax deserves serious consideration, if for no other reason than that it makes it possible for disparate interests to compromise in ways that many other tax options do not.
In brief, a consumption tax is an income tax with a broad-based deduction for savings. The current federal income tax is a consumption tax in part because it allows deductions for contributions to Individual Retirement Accounts, 401(k) pension plans and other similar savings accounts. A full-fledged consumption tax would greatly expand these options. A full-fledged progressive consumption tax would feature a progressive rate structure and a very generous tax break for those who consume relatively little.
This is no pie-in-the-sky proposal. It has been around for years and the administrative details are well understood and manageable. Congress needs to act but will do so only if enough voters are willing to cut it enough slack. Alaska's congressional delegation is no exception and, for that matter, neither is its rogue non-candidate for president. If politicians truly want what is best for the country they will stop arguing about whether or not Bush or Obama is to blame and get down to the serious job of compromise. The end result may not be called a progressive consumption tax, but if there is to be an effective compromise it will almost certainly look very much like one.
David M. Reaume is a Washington state-based economist who was based for many years in Juneau. His opinion column appears every month in the Anchorage Daily News.
DAVID REAUME
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