Last week, amid all the chatter about tax day, the AP moved a story pointing out that nearly half of U.S. households don't pay any income tax at all.
Glenn Reynolds, the blogger at Instapundit.com, fired off an item saying, "Everyone should pay at least some income tax. And everyone's tax bill should go up or down whenever federal spending does."
Don't hold your breath waiting for that to happen, but it got me thinking. Like everyone else, politicians respond to incentives, and the incentives they face are disastrously perverse.
When they cut spending, they're penalized; their chances of re-election sink. When they open up the Treasury, their chances of re-election rise.
Is there a way to more closely align politicians' incentives with the nation's long-term financial interest? It's a lot tougher than it sounds, because the incentives facing voters are perverse as well.
The problem is highlighted by a branch of economics called public choice theory, which analyzes the way people behave while making collective decisions, as opposed to how they behave in the marketplace.
The main difference is that choices in the marketplace are decisive; you choose the red car rather than the blue one, and that decision stands. Choices in the political arena are highly diluted; one vote rarely determines the outcome.
Because the costs of becoming well-informed are much greater than the weight of one person's vote, voters who don't follow politics closely are acting rationally. They know their chances of solely deciding an outcome are close to zero.
They have little incentive to closely monitor the decisions of politicians, except perhaps during times of crisis when the stakes are high, as they are today.
At the same time, politicians usually derive no direct reward for opposing powerful interest groups. Even if they make an effort to thwart a loophole or quash an earmark, many of the people they intend to benefit may not even be aware of what’s been done for the general interest, at the expense of the particular interest.
Yet when politicians do things to benefit special interests, the recipients are keenly aware. They offer support, money and volunteers.
Reynolds' idea about taxes fluctuating with spending would be one way to encourage voters to monitor their elected leaders more closely. Lawmakers would know that if they spent recklessly, they'd be more likely to get an earful from the folks back home.
As a matter of fact, that's how it works in most states, which have to balance their budgets.
But another part of the problem is our skewed tax system.
When so many people are freed from a significant tax burden, they have even less reason to pay attention to politics. And elected officials are likely to be even more attentive to special interests, because of the greater rewards they offer.
In such a system, there's a real danger of "free-riding," said economist Chris Kuehl of Armada Corporate Strategies, in Kansas City, Kan.
"The people getting taxed are the minority," he said, "and the people getting the benefits are the majority."
It's sobering to reflect that only three years ago, the federal deficit was $160 billion — a pittance relative to the humongous numbers being thrown around today. This year's deficit is expected to be $1.6 trillion. Next year's is projected at $1.3 trillion. These are dangerous, unsustainable deficits.
Why not just raise taxes? Sorry: A study by the center-left Tax Policy Center concluded that merely shrinking the deficit from 9 percent of gross domestic product to 3 percent would require a 40 percent increase in tax rates.
What about jacking up rates on the rich? The tax center said that would mean doubling the two highest brackets, which would take the top rate to 77 percent — back to the stagflation era of Jimmy Carter. It's not do-able politically, and it would be disastrous for future growth.
Obviously, any long-term solution would entail big changes on the spending side. A real change in Washington's spending culture requires a mechanism that changes politicians' incentives, something that more effectively balances those inclined to spend, and those inclined to cut.
I e-mailed Reynolds to see whether he had any ideas along those lines. He wrote back, "Honestly, I don't know — I'm the idea man, that's implementation!”
So I'd say the floor is open for ideas.