Two of Washington’s top tax scholars have authored an excellent new book on overhauling the federal tax code. Alan Viard and Robert Carroll’s new book, Progressive Consumption Taxation, is a great introduction to tax reform for young policy wonks who want to understand the economics of savings, investment, tax base neutrality, efficiency, and other factors that are important in tax design.

I discussed the book at an AEI forum on Capitol Hill on Monday. The video is available here.

The X‑Tax is a compromise version of the Hall-Rabushka Flat Tax created by the brilliant former tax economist David Bradford. The Flat Tax itself is a “progressive” or graduated tax system because it has a large basic exemption, but the X‑Tax would be even more graduated. I’m a fan of more proportional tax systems, so I like the Flat Tax. But the X‑Tax would represent a huge simplification of the tax code and remove the income tax bias against savings and investment, which harms economic growth.

The X‑Tax and Flat Tax are consumption-based tax systems, which Viard and Carroll favor. In their book, they wisely reject a VAT, which is an often-discussed consumption-tax option. In my view, a VAT would be a money machine for the federal government, simply throwing fuel on the fire of overspending in Washington.

Viard and Carroll seem particularly interested in the Flat Tax/​X‑Tax idea of cash-flow business taxation. If we are going to impose a tax on business entities at all, cash-flow taxation seems to be the way to go, as I explored in this Cato paper.

Anyway, great book. My tip for readers, however, would be to substitute the word “proportional” whenever the authors talk about “progressive” consumption taxation.

Today POLITICO Arena asks:

Does Walker’s victory pave the way for the GOP in 2012?

I know it’s bad form to kick a man when he’s down, but if Paul Krugman’s initial response this morning to the Wisconsin returns is any indication, he and his side should be bracing for another boot come November, perhaps even in Wisconsin. He writes:

Obviously I’m not happy with the result; not just out of political sympathies, but because all the recent political trends have been rewarding the side that caused the very crisis from which it is now benefiting, not to mention politicians who have been wrong about everything since the crisis hit.

Taking the Wisconsin crisis first, what on earth could Krugman be talking about? Governor Walker inherited a budget that was spinning out of control, which in only two years he not simply balanced but brought into surplus — all by taking on the public-sector unions and the entrenched politicians who were themselves the cause of that mess. Thus, “recent political trends” — yesterday’s Wisconsin voters — rewarded those who cleaned up the mess, not those who caused it.

As for the broader national economic crisis, yes, the Bush administration was hardly blameless in bringing that about — and Republicans paid the price in November 2008. But when Obama and the newly elected Democratic Congress only deepened the crisis with out-of-control deficits and debt, the voters hardly rewarded them. They gave them a “shellacking,” in Obama’s memorable words. And the “establishment” politicians who’ve supported the Fed, Fanny and Freddie, the Community Reinvestment Act, and other such causes of our crisis are being weeded out by the voters as well, as recent primaries have shown.

Krugman’s basic complaint, of course, is that the politicians haven’t gone even further in the more-government direction that the repudiated 111th Congress took. If yesterday’s results are a portent of the future, voters increasingly understand that our having gone in that direction is what gave us the crisis in the first place. That’s the good sense that Krugman and his side continue to resist on this morning after.

It’s because the Justice Department has been making ridiculous arguments about extra-constitutional federal powers that don’t even get one vote at the Supreme Court. As I explain in the Wall Street Journal today:

The government’s arguments across a wide variety of cases would essentially allow Congress and the executive branch to do whatever they wanted without meaningful constitutional restraint. This view is at odds with another unanimous Supreme Court decision, Bond v. United States (2011). Bond vindicated a criminal defendant’s right to challenge the use of federal power to prosecute her. As Justice Kennedy wrote, “[F]ederalism protects the liberty of the individual from arbitrary power. When government acts in excess of its lawful powers, that liberty is at stake.”

If the government loses in the health-care or immigration cases, it won’t be because its lawyers had a bad day in court or because the justices ruled based on their political preferences. It will be because the Obama administration continues to make legal arguments that don’t pass the smell test.

Read the whole thing.

When political disaster strikes, the losers never say, “the people were against us.” No, defeat comes from the evil ones and their minions. “What [Gov. Walker’s victory] shows is the peril of corporate dollars in an election and the dangers of Citizens United,” said Dennis Van Roekel, president of the National Education Association, a school workers’ union. False consciousness strikes again.

Yet money appears to have little effect on the outcome. Begin with what was the same and what was different in 2010 and 2012. The two leading candidates for governor were the same. As Mr. Van Roekel points out, the spending was different this time: more money was spent and Walker’s allies spent more.

What was the same in 2010 and 2012 besides the candidates? Walker won in 2010 by 5.8 percent over the same opponent; he survived the recall yesterday by 6.9 percent. The money and efforts spent defending Walker increased his margin of victory by 1.1 percent which is noise in the overall scheme of things. The money had little effect on the distribution of votes.

This conclusion makes sense given that “nearly 9 in 10 people said they had made up their minds before May, according to exit poll interviews.” By the time the ads hit the airwaves, there were few undecided voters.

Yet something was different from 2010. The efforts do seem to have increased turnout significantly from (roughly) 2.1 million voters for the two major candidates to 2.5 million voters, almost a 20 percent increase. The conventional wisdom holds that “get out the vote” efforts affect turnout more than spending on advertising. It will be interesting to see what experts make of the increased turnout in Wisconsin.

The new issue of International Economy has an article by Canada’s Liberal finance minister from the 1990s, Paul Martin, who succeeded in shrinking that country’s federal government. If a new President Mitt Romney wants to cut spending in Washington, Martin has some tips for him, such as cutting spending broadly, forecasting conservatively, and aiming to eliminate the deficit in a fixed time frame and sticking to it. (I’d also advise President Obama to follow the Canadian example, but he’s issued four budgets so far and seems to be more interested in following the Greek fiscal approach).

Paul Martin says:

I tabled the 1995 Budget in the House of Commons. No department of government escaped untouched. Transfers to the provinces for healthcare and education were reduced, public sector employment was cut by 20 percent, the Department of Transport was cut deeply, historic subsidies in the Department of Agriculture were eliminated, and spending in the Department of Industry was cut by 65 percent.

These were massive cuts, far greater than anything Canada had ever seen. Nor were the cuts simply reduction in the growth of future spending as is so often the case. These were absolute cuts in existing spending, such that by the end of the process the federal government’s expenditures as a percentage of GDP were lower than they had been at anytime in the previous fifty years.

From a libertarian perspective, Canada’s cuts weren’t actually “massive,” but for a Liberal government in a country with a population that had gotten used to government coddling, it was pretty impressive. As I noted in my recent article on Canada, Martin and his team cut the budget by 10 percent in just two years.

So my suggested goal for Romney and team if elected this Fall: at least match the Canadians and push for $380 billion of cuts out of otherwise expected spending in 2015 of $3.8 trillion. And do what the Canadians did: cut everything, including entitlements, aid to subnational governments, defense, business subsidies, farm subsidies, and much more in one big push. Many in Congress will resist of course, but presidents have their most leverage in the first year. Mitt will have nothing to lose but the country into a vortex of debt and economic despair if he doesn’t at least try.

The Senate is back in session this week as the battle over military spending, and the prospect of sequestration, continues to sizzle. Last Friday the Office of Management and Budget concluded that war funding—also known as Overseas Contingency Operations (OCO)—would not be exempted from sequestration, contradicting the Pentagon’s earlier claims. Predictably, this has angered the GOP and provided fodder for those who oppose military spending cuts on any grounds.

But war funding—$88.5 billion for FY 2013—should never have been considered separate from military spending. This is a practice, gradually accepted in the past 10–15 years, that distorts the size of the defense budget, making it appear smaller. It provides the illusion that Congress and the current administration are fiscally responsible.

The irony of current flap over OMB’s ruling is that Congress could undo sequestration if it simply declared war. In today’s Cato podcast, Benjamin Friedman, research fellow for defense and homeland security studies, explains that the federal code, going back to the 1980s, holds that a declaration of war will reverse sequestration. But Congress doesn’t declare war anymore; members routinely ignore their constitutionally mandated obligation. Those who are the most vocal opponents of sequestration—Rep. Howard “Buck” McKeon (R‑CA) and others—have a tool at their disposal that they will never consider.

Listen to the podcast below to hear Friedman provide a primer on the battle over war funding (OCO), sequestration, and the defense budget bills.

“It is time for governments to borrow more money,” according to former treasury secretary Larry Summers. He is not peddling this advice to Greece and Spain, but to countries like the United States and Japan that can still sell long-term bonds at very low interest rates. Summers urges the United States, in particular, to borrow more for “public investment projects” that are presumed to raise the economy’s future output. He offers the hypothetical example of “a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economy’s capacity or its ability to innovate.”

Even if such promising projects were easy to find, however, that is not the way the current government has been inclined to spend borrowed money. Despite all the rhetoric about “shovel-ready projects,” about 95 percent of the 2009 stimulus bill consisted of government consumption (salaries), refundable tax credits, and transfer payments which, as Robert Barro notes, “dilute incentives to work.”

Summers says, “Any rational chief financial officer in the private sector would see this as a moment to extend debt maturities and lock in low rates — the opposite of what central banks are doing.” Locking-in low borrowing costs would indeed make sense if the money from selling long bonds were used to retire short-term Treasury bills, but that would not involve borrowing more as Summers proposes.

For both government and households, it is certainly more prudent to use borrowed money to finance investments that will yield a stream of income in the future—either actual income (such as toll roads) or implicit income (the benefits from living in a mortgaged home).

Apostles of the Keynesian doctrine, such as Larry Summers, Paul Krugman, and Alan Blinder, invariably use hypothetical public works examples to make the case for more and more national (taxpayer) debt. Keynesian forecasting models, used by the Congressional Budget Office (CBO) to warn of the looming fiscal cliff and defend the fiscal stimulus of 2009, likewise assume the highest “multiplier” effect from tangible government investments.

In the real world of politics, however, Congress and the White House use borrowed money to placate constituencies with the most political clout. Federal spending on investment projects has essentially nothing to do with the huge 2009–2012 budget deficits (only 29 percent of which can be blamed on the legacy of recession, according to the CBO).

The Table shows that transfer payments and subsidies account for 63.8 percent of estimated spending in 2012, while federal purchase

s account for 28.4 percent. Also, most federal aid to states is for transfer payments like Medicaid. Within federal purchases, only 7.6 percent of the spending ($152.5 billion) was counted as gross investment in the first quarter GDP report, and two thirds of that was military equipment and buildings. Net investment, minus depreciation, is smaller still.

If borrowing more for investment was a genuine political priority, rather than an academic conjecture, the government could do that by borrowing less for government payrolls, transfer payments, and subsidies. At best, Larry Summers has made an argument for spending borrowed money much differently, not for borrowing more.