The Deficit Commission: The Good and the Bad

"If I am of the opinion that it is inexpedient to assign to the government the task of operating railroads, hotels, or mines, I am not an ‘enemy of the state' any more than I can be called an enemy of sulphuric acid because I am of the opinion that, useful though it may be for many purposes, it is not suitable either for drinking or for washing one's hands." - Ludwig von Mises, Liberalism, p. 18

The Obama deficit commission voted on its proposals last week, and while it could not achieve a 14-vote majority that Congress would have to vote on, progress was made. In particular, abolishment of various tax subsidies at least puts the notion of tax simplification over tax handouts on the table.

But first, the bad.

What's bad is that government revenues, or a lack thereof, are even being mentioned as a reason for our nosebleed budget deficits. Nothing could be further from the truth.

At least in modern times we've never had deficits thanks to insufficient revenue; rather we suffer deficits because our federal government is doing way too much. Fixing the deficit doesn't require more revenues; instead it calls for the federal government to operate within its strictly set constitutional limits.

Specifically, the 10th Amendment makes plain that any powers not enumerated to the federal government within the Constitution do not exist, and as such, automatically revert to the states and to the people. In that case, everything from the Department of Energy, to Fannie Mae and Freddie Mac, to Social Security and other entitlement programs fail basic constitutional tests, and should be privatized or abolished.

The natural response from commentators who should know better is that the Constitution's "General Welfare" clause allows for extra-constitutional activity that might include Social Security benefits, universal healthcare, and anything else that might improve our wellbeing. The problem there is that the latter assumptions are a complete perversion of the aforementioned clause.

More realistically, the General Welfare clause was written to limit government; as in Washington would have to consider our general welfare before pursuing goals that fell within powers specifically enumerated to the federal government. That being the case, it's hard to imagine that the creation of a federal Ponzi scheme in the form of Social Security would accrue to our general wellness, not to mention that a federal retirement program is nowhere mentioned in the Constitution.

Considering taxes more generally, the very good in the deficit commission's plan is that it seeks abolishment of tax subsidies such as the mortgage interest deduction, child tax credits, and health insurance deductions. That housing is subsidized through the tax code is a particular negative, because rather than an economic input, housing is merely a cost.

Government tax supports of housing mean that on the margin, individuals have incentives to consume capital on property, rather than save the latter on the way to supplying it to entrepreneurs. If this is doubted, readers need only ask themselves how government supported investment in the housing space will cure cancer or heart disease, or whether a kitchen remodel paid for by a second mortgage will fund tomorrow's Microsoft.

Better yet, the abolishment of these tax subsidies will, if the deficit commission has its way, lead to lower overall federal tax rates. So while some Americans will get less of a tax break for doing what Washington deems politically correct, they'll enjoy reduced tax penalties on their actual work output. There's no economic growth without production first, and lower overall tax rates will encourage production.

More broadly, we have a problem in this country right now of too many Americans not paying federal taxes at all. Tax deductions that make the latter possible shouldn't be abolished so that Washington can raise more revenues, but instead the tax code should be scrubbed of them so that everyone - rich, middle class and poor alike - clearly understands the cost of government.

The great Nigel Lawson, Margaret Thatcher's Chancellor of the Exchequer, once quipped that if we want the government out of our pockets, we should remove our hands from the government's pockets. At least the recommendations acknowledge that too many Americans have their hands in the pockets of Washington, and more truthfully, in the hands of their fellow citizens who don't behave in ways pleasing to the tax man.

And while the lower tax rates advocated are a good thing, it's a shame that the commission leaves the cost of achieving wealth at a higher tax rate. In a rational world tax rates would fall for the most economically productive (Steve Jobs, Bill Gates and Jeff Bezos make our lives better, not worse), but absent that, the rate reductions are better than nothing.

Back to deficits, much as private businesses struggle when they expand beyond their core competencies, we presently suffer a bloated federal government that is failing at most everything thanks to it trying to do everything; a great deal of it what the Constitution explicitly says it cannot. In that sense the deficit commission fails us for mistaking a revenue problem for one of Washington hubris. Deficits aren't now, and won't be a problem in the future if our government operates within constitutional limits.

So while the commission's recommendations aren't perfect, they do at least implicitly acknowledge a problem of too few people floating the federal boat for too many others. The answer here is to follow the Bowles-Simpson proposals on tax rates and tax subsidies, while ignoring the call for more federal revenues that history shows won't fix the deficit anyway.