Tuesday, August 02, 2011

Counterfactuals

This handy NY Times graphic shows us what might have been.

The Grand Bargain would have kept us from having another debacle before December, and another next year over the Bush tax cuts. It would have made the tax code flatter, simpler, and lowered marginal tax rates while increasing tax revenue by phasing out tax expenditures and raising the income cap on the payroll tax (in 2013). It also would have raised the retirement age and phased out certain subsidies.

But the payroll tax increase on top incomes, elimination of certain tax expenditures, and no "balanced budget amendment" were anathema to the Right. Raising the retirement age and repealing certain aspects of "Obamacare" were anathema to the Progressives, and neither party really wants to cut Medicare/Medicaid expenditures. But I think the deal would have been pareto-efficient (everyone wins), and conservatives would have experienced the greatest of those gains.

Instead, we're basically left punting to December and asked to believe in a "super committee," and everyone loses. Hayek was right, the more your democratic government does the harder it is to reach a deal where everyone wins.

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