A New Tax Proposal
Wince and Nod has a suggestion for a new tax
I want a new tax controlled by the Fed. It could even be several taxes: like a small property mill levy, a 0 to 5% progressive income tax, a 0 to 5% capital gains tax and a 0 to 1% sales tax. When the economy heats up, instead of raising rates and making our deficit worse by paying more interest on the debt, which I’m very tired of, the Fed temporarily raises taxes a little. And it doesn’t give my former party an excuse to raise taxes, increase spending and then never cut taxes. When the economy cools off, instead of it being an excuse for my fellow Republicans to cut taxes but not spending and then never raise taxes, the Fed cuts them temporarily.
The basic idea sounds quite a bit with what many might consider Keynesian macroeconomic policy. Basically smooth out the business cycle a bit, keep the government from running a deficit (or reduce it at least) and help keep interest rates from being the primary tool for macro policy.
There are a number of possible criticisms. The first is that this is a discrtionary policy. Discretionary policies are time inconsistent.1 Another is that what do you do with the money? As soon as you do something with the money, it will create an incentive on the part of those benefitting from that spending to try and control how that money is spent. Granted, the Fed chairmen is not beholding to voters, but he does have to be confirmed by the Senate and Senators are beholden to voters. Finally, suppose this tax actually does do what it is supposed to do and it raises $x revenue that is applied to the deficit. What is to stop the politicians from increasing spending by $x dollars? This last one is what I see as the biggest drawback to this proposal. Politicians sometimes talk a good game about the deficit but neither side is really serious about the rhetoric.
1Well technically optimal discretionary policies are time inconsistent, and by time inconsistent I mean the following. An optimal policy if believed, will result in the situation where deviations from that policy (if people believe the policy will be adhered too) will result in greater social benefits. This in turns means that forward looking agents wont believe the policy will be adhered too and the resulting outcome is sub-optimal. While this sounds like so much gibberish, one could make a pretty strong case that the stagflation of the 1970’s was due to time inconsistency.