The President’s Man

Former Bush economic adviser Greg Mankiw interpreted the indicators for the President. Now he explains the President's policies to CFO.

As an advocate of private accounts, do you see a viable alternative if they’re rejected?

There are two issues. First, do we want to make a transition from the current defined-benefit structure to more of a defined-contribution structure? The second issue is how to deal with the fact that the present value of promises greatly exceeds the present value of tax revenues coming in to the Social Security system. Even if we stay with the current defined-benefit structure…the numbers don’t add up. So at some point, folks have to come together around such things as raising the retirement age, or more means-testing, or changing the indexation rules, or raising the cap on taxable payroll….

[As for alternatives,] I would like to see an increase in the age of eligibility for benefits. The progressive indexing proposal suggested by [former Fidelity Investments executive] Robert Pozen also has much merit.

If the funding gap is such a problem, why not eliminate enough of the proposed tax cuts to cover it?

This is the standard refrain from the Left: let the rich pay for it. The same answer seems to apply to saving Social Security, saving Medicare, reducing the budget deficit, giving health insurance to the uninsured, and so on. But let’s face it: if we are going to have a government do all these things with higher taxes, then we all will end up paying more taxes to finance the larger government.

What do you expect from the President’s panel on tax simplification reports?

Tax reform is an issue that can’t be avoided, because of the number of people hit by the alternative minimum tax (AMT). Once they start paying it, they’re going to say to themselves, “Why am I being taxed two different ways?” [My suggestion] is something along the lines of a consumed-income tax. I’m reticent to use the term consumption tax because people immediately think retail sales tax. What I really mean is an income-tax-like structure that shelters savings more. Imagine a world in which most or all savings gets 401(k)-like treatment. It still looks in some ways like an income tax, but it would really boil down to a tax on what you consumed. That’s because anything you don’t consume, you can put in a vehicle that wouldn’t incur extra taxes by virtue of the fact that you’re saving it rather than spending it.

What we have now really is a hybrid; a mutated consumption tax and income tax. We started out with a relatively pure income tax, and over time we’ve added things like IRAs and 401(k)s and other ways people can shelter savings. So I wouldn’t be surprised if the panel suggested that further movement in that direction is a good thing.

Former IRS commissioner Charles Rossotti has suggested that overhauling family provisions, savings accounts, and the AMT would simplify the code. Do you agree?

There are really two alternatives: move in the direction of encouraging economic growth in savings or move toward simplification, which means getting rid of a variety of deductions and loopholes—broadening the base and lowering the rate. But how much base-broadening are people willing to consider? Are people willing to consider looking at the deduction for state and local taxes? For mortgage interest? You can make an economic case for looking at those deductions. Whether it’s feasible politically, I don’t know.

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