The Heresy Of Mitch Daniels

Andrew Sullivan is drooling over the Republican governor of Indiana, Mitch Daniels:

As Dish readers know, Indiana governor, Mitch Daniels, seems to me the kind of man the GOP desperately needs: a real fiscal conservative, socially inclusive, open to serious tax reform and politically adult conversation to regain the center ground. Here’s why the Dish loves him so:

Let’s raise the retirement age, he says. Let’s reduce Social Security for the rich. And let’s reconsider our military commitments, too. When I ask about taxes—in 2005 Daniels proposed a hike on the $100,000-plus crowd, which his own party promptly torpedoed—he refuses to revert to Republican talking points. “At some stage there could well be a tax increase,” he says with a sigh. “They say we can’t have grown-up conversations anymore. I think we can.”

The Heresy Of Mitch Daniels – The Daily Dish

From Politico:

Daniels, once the Hudson Institute’s chief executive, described himself as an acolyte of [Herman] Kahn’s and marveled at the creative thinking evident in his 1982 book, “The Coming Boom.” Daniels recited from Kahn’s book: “It would be most useful to redesign the tax system to discourage consumption and encourage savings and investment. One obvious possibility is a value added tax and flat income tax, with the only exception being a lower standard deduction.”
Mitch Daniels open to VAT, oil tax hike – Politico

While I’m happy to see at least one Republican leader try to discuss fiscal policy intelligently, here are some problems I see with the above positions:

Increasing the retirement age has become the mantra for tinkering with Social Security formulas, from both the left and the right. As the standard argument goes, people are living longer and longer, thus they need to work longer before retirement. The problem with this idea is twofold: firstly the motivation for it is not that people are living longer, it’s that we need to shore up Social Security (or at least, there is a perception that we do). From that perspective, increasing retirement age is simply a cost-cutting measure, and should be seen as at least neutral with cutting benefits in general. Secondly, the rationalization that people are living longer does not imply that people are more able to continue working longer (much less desire to). People are living longer because of advances in medical technology for the very old, but are people at 65 healthier and more able-minded than people at 65 were ten years ago? I don’t know the answer to that, but I haven’t heard any of the proponents of this policy say so.

My second disagreement is with the idea that “It would be most useful to redesign the tax system to discourage consumption and encourage savings and investment.” Why? It might be useful at certain stages in the economic cycle, but I don’t see why it would necessarily always be useful. I would prefer the government try to reduce the distortionary effect of taxation, not use it to manipulate people into becoming consumers or investors. Let the public decide when consumption, savings or investment is right for them. From my nascent understanding, a VAT is less distortionary than the income tax, so in that respect, it may be preferable. But it’s not like we’ll have one or the other, we’d have both. With that in mind, the government should look to balance out any anti-consumption effect of a VAT with anti-savings effect of the income tax. This way, the government gets funded, and individuals are unencumbered in managing their own finances.

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