What Republicans Ought to Bargain For

Greg Mankiw at Harvard has a really smart post, pointed out by Brooks, on what Republicans could be bargaining for if they really wanted to engage in the deficit commission.

Mankiw, who was chairman of President Bush’s Council of Economic Advisers, acknowledges that tax increases would have to be part of the deal — a view shared by almost every budget analyst in the world but denied by Republican leaders with flat-earth fervor.

But Mankiw then outlines what conservatives should demand in exchange if they were willing to compromise on taxes. And it’s a solid list of ideas:

1. Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare. Do it gradually but substantially. Then index it to life expectancy, as it should have been from the beginning.

2. Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.

3. Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives. Conservatives hate the VAT, more for political than economic reasons. They should be willing to swallow a VAT as long as they get enough other things from the deal.

4. Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.

5. Permanent elimination of the estate tax. It is gone right now, but most people I know are not quite ready to die. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

As a comparative liberal, I don’t like all those ideas. But I like a lot of them, and I could buy the whole deal if it was part of a serious package. Auctioning off 100 percent of emission allowances under a cap-and trade program would discourage greenhouse emissions, increase incentives for alternative fuels AND help stabilize the budget. Shifting to a consumption tax like the VAT — as my friend Bruce Bartlett has long championed — would encourage savings. make it easier to eliminate special tax breaks and allow for lower overall tax rates.

Those are good things. But what Mankiw’s point really highlights is how much is being lost by the Republican refusal to engage. Not only are they wasting precious time and contributing to the fiscal problem. They are squandering the opportunity to inject good conservative ideas that Democrats might either reject or ignore if left to themselves.

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