“Most public finance experts think we need to add a VAT to our mix of taxes, and I wish, frankly, we had gone to that as a way of paying for government-funded health care (Medicare, medicaid, subsidies for private insurance). The reason is that people could really see that a particular tax was going to a particular service that they value. And if the health system began to require even more money, then people could very clearly see the tradeoff (or lack of one) between the tax and the service, and decide which way they wanted to go. It would also have allowed us to lower the payroll tax, which is regressive and, at times like this, a bit of a discouragement to job creation. And since you would be raising one tax and lowering another, it would not be as subject to the anti-tax rhetoric, even though the overall amount of money raised would increase.
I’ve talked about the changes to the income and corporate tax rates. I also think we need to put a small across-the-board tariff on all imports, along with all other trading partners, to help to pay for the employment safety net for people who lose their jobs and benefits because of the disruptions inevitably caused by increased trade.
And, of course, there is lots of money to be raised, mostly from upper income households, by reforming and simplifying the tax code and eliminate all those tax breaks and preferences that we all cherish but which are really regressive and unfair.
All in all, we need to get real. We know from years of experience trying to cut federal spending that the system demands a level of federal spending of at least 23 percent of GDP. We can afford to run a steady-state deficit of, say, 2 percent as long as we have modest productivity and population growth. That means we need to collect 21 percent of GDP in federal revenues of all sorts, which is several percentage points above where we were before the recession hit. That’s the broad-brush reality. We can stomp our feet and complain that’s too high, but so far not a single politician has stepped forward with a politically viable plan to cut the spending from the 23 percent level. Until they do, the clear implication is that we, as a democratic society, demand that level of service and should be prepared to pay for it. The “free” lunch turns out not to have been free, and in any case, it is about to end.”