Talk at University of Louisville Law Review Symposium on Deficit Reduction

This past Saturday (Oct. 22), during a lightning appearance in Louisville to participate in a conference on federal deficit reduction that was sponsored by the University of Louisville Law Review, I presented my paper, previously linked and available here, entitled "Tax Reform Implications of the Risk of a U.S. Budget Catastrophe." This is a kind of short interplanetary grand tour through previous work I've written that has a bearing on how concern about the long-term fiscal gap might affect our thinking about tax reform. It also briefly addresses why we face a long-term default risk. I use the analogy (also in several previous talks that I have linked here, but not previously in any of my published work) to the nesting Russian "Matryoshka" dolls, one inside another. I posit that, while the outermost doll is the fiscal impact of rising life expectancy plus the baby bust plus the current path of healthcare technology, the fact that this could in principle easily be addressed means one has to look to the next doll inside (U.S. political economy problems), and then to the doll inside that (potentially malfunctioning and discontinuously responding financial markets).

For a pithy overview of the already somewhat pithy paper, a pdf version of the PowerPoint slides that I used for my talk is available here.

Among the things I'm sorry to have missed at the conference, which I had to leave early, were the afternoon talks by Daniel L. Thornton, who is Vice President and Economic Advisor at the Federal Reserve Bank of St. Louis, and UNC law prof Greg Polsky. Although I suspect I would have disagreed with a lot in Thornton's talk (addressing how we have arrived at the current fiscal situation), I am sure it was interesting and provocative. And Polsky's talk on cutting tax expenditures is certainly a topic of interest to me (and I suspect I would have agreed with a lot of his analysis).

Another interesting talk that I missed was by GW law prof Neil Buchanan, arguing against ever fully paying off the U.S. national debt. Once again I suspect I would have agreed a lot, although I'm not convinced we'll be dealing with this problem any time soon. Buchanan and I appear to agree more than we used to about budgetary issues. He might argue that I've moved a bit towards him, and maybe he'd have a point. But I might respond that current events have pushed me towards a terrain where we always agreed to a considerable extent. I probably remain more favorably inclined than he is to adopting (under appropriate circumstances) policy changes that curtail the rate of growth of existing entitlement programs, with these changes to be announced ASAP and to begin being implemented as soon as the macroeconomic climate permits. I believe in "smoothing" expected long-term changes to the entitlement programs, based on the best available fiscal estimates of what will be necessary, and I am quite willing to reduce expected benefits to the better-off members of current retirees - again, subject to the macroeconomic climate and to this being part of a good overall package that includes, e.g., needed tax increases.

I did get to hear Penn State law prof Sam Thompson's interesting paper, arguing that Social Security and Medicare benefits should be phased out fairly rapidly for high income retirees, whose capital income might suggest that they have substantial wealth. Thompson had a powerful rhetorical point to the effect that, if you give retirement benefits to an individual who will be leaving a bequest, and if this means that the bequest ends up being larger than it would have been otherwise, one could view this as something not far from a federal match or supplement to the bequest. I could imagine this point being politically significant, and it is also reasonably intellectually defensible.

One concern I had with Thompson's proposal was that, by rapidly phasing out retirees' Social Security and Medicare benefits as their income increases, it operates as a powerful work disincentive. Even people who have retired from their prior full-time jobs and begun claiming retirement benefits often do some work on the side, and the empirical evidence suggests that they are quite tax-responsive. Such individuals do not necessarily have the wealth and expected bequest profile that Thompson assumes when arguing for his proposal, and I see no good reason, even with high unemployment, to discourage work by seniors. But in the limited time we had, we didn't get to discuss this issue more fully.

In response to my paper and talk, Berkeley law prof David Gamage argued that what he called my "let's preserve revenues" model for evaluating how concern about the fiscal gap should affect tax reform thinking - a fair enough label, I'll concede - doesn't take the next step that one ought to take in thinking about these issues. He proposes analyzing much more fully than I as yet have the question of how a given change (even a small one) that is adopted today might influence the likely long-term political equilibrium, assuming that the political chicken games do indeed eventually give away to a negotiated solution. Two examples he noted: (a) 1986-style tax reform, with base-broadening plus rate reduction, might grease the skids for raising the rates again in the future, (b) once a VAT is enacted, Congress's ability to raise revenue easily by boosting the rate becomes much enhanced, compared to when one doesn't have a VAT in place. I suppose there might be analogues for entitlements changes as well.

This may be a good next-stage framework for thinking about tax reform in relation to the long-term fiscal situation, albeit going beyond the relatively modest tasks I set for myself in recent writing about the issue, but certainly worth consideration. (Whether or not by me depends on where my interests take me over the next few years.)