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Brooks Wilson's Economics Blog: An Item for the Tea Party Agenda

Thursday, January 28, 2010

An Item for the Tea Party Agenda

Seismic economic events have shaken Washington.  Republicans, who were largely blamed for the crisis, were flattened in a political quake.  The victorious Democrats acted on their mandate of change but the change they enacted or proposed deepened huge deficits and did not restore full employment demanded by an angry electorate.  The Tea Party Revolt rose from the rubble to shock both parties and it is building political pressure along fault lines that may result in as big as a political quake in November 2012 as hit Washington in 2010.  The remarkable success of the spontaneously generated Tea Party has led many to suggest a course of action that they should follow.  This is my unsolicited advice. 

The Tea Party might cause Washington to sway toward fiscal responsibility, but it will not permanently alter spending habits which are firmly built on long standing foundational incentives between voters and their representatives.  One of the footings is that constituents like taxes raised in other districts spent in theirs and every politician knows it.  Using the House of Representatives as an example, nearly all the benefits of a government funded project in a district are enjoyed by those living in it while the taxes raised to fund the project are distributed more evenly between all 435 districts.  So long as a project has $1 dollar of benefit locally to $435 of cost nationally, a congressman will support it.  The story in the Senate is only slightly better where a senator has incentive to vote for a project if it has $1 of benefit in her state to $50 of cost nationally.  Stevens' bridge to nowhere and Murtha's airport to the same location illustrate the problem.  Voter support for these perverse incentives is summarized in the oft heard comment, "I don't agree with many of my congressman's positions but he really brings home the bacon”?  We love pork in our districts but we hate it in other's. 

A modification to the tax code would break this perverse incentive.  It is based on the benefit principle of taxation, the idea that those receiving the benefits of expenditures should pick up the tab. The income tax code should be modified to reflect expenditures in each congressional district with the exception of those for defense and university research. The modification should change tax rates evenly through all brackets making the tax structure less progressive in districts with high expenditure to taxes paid ratios and more progressive in districts with low ratios.  If a congresswoman brings home twice the average level of expenditures, her constituents’ tax rates should be twice the national average. A natural constituency opposing wasteful spending within each district would quickly materialize because the constituents would now pay for the pork.

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