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Republican debt-ceiling negotiators have taken a firm stand against any deficit reduction package that includes tax increases, even if the tax increases are modest and accompanied by large reductions in the growth of Social Security, Medicare, and other entitlement spending. Unfortunately, maintaining this stance may cause Republicans to miss an opportunity to lower Americans’ long-run tax burden.

It’s important to understand the consequences of turning down a deficit reduction package with, for example, 80 percent spending cuts and 20 percent tax increases. The additional federal debt issued in the wake of such an outcome must be serviced with future tax increases or spending cuts. Is there any reason to think that future Congresses and presidents will draw on spending cuts to finance more than 80 percent of the debt service? If not, then trying to protect taxpayers by rejecting such a package today is self-defeating. Moreover, delay has its own costs. Regardless of how the additional debt is ultimately serviced, its issuance is likely to reduce national saving and, as the economy recovers and interest rates rise, to crowd out investment.

Some may suggest waiting to tackle the fiscal imbalance until Republicans win control of the White House and both chambers of Congress, when they will have a free hand to adopt sweeping entitlement cuts unaccompanied by tax increases. Aside from ignoring the Republican Party’s track record, this strategy fails to recognize the constraints imposed by public sentiment. In view of the limited public support for large entitlement reductions, it is unlikely that one political party will ever be able to enact such reductions on its own. Real entitlement restraint is likely to be achieved only through a bipartisan agreement, for which a revenue component is the price of admission.

It is unclear whether such an agreement is feasible at this time. Every expression of flexibility by President Obama seems to be followed by an expression of inflexibility by congressional Democrats. But, if there is an opportunity to adopt a package with large entitlement cuts and modest tax increases, Republicans should seize it. Of course, they should work to limit the scope of tax increases and, as I recently discussed, shape them to be less harmful to economic growth.

The goal of permanently holding federal revenue to its historic share of GDP has an understandable appeal. As I have noted, though, the massive cutbacks in future entitlement spending required to achieve that objective are unlikely to ever win public support. It is tempting to hold out against tax increases and simply hope that the necessary entitlement cutbacks will someday magically materialize. But, we should not allow wishful thinking to block an opportunity to take the one step that can actually limit future tax increases—reaching an agreement here and now to cut entitlement spending.

The ongoing debate about the potential role of tax changes in a deficit reduction package appears to be descending into a clash between rival misperceptions. One fallacy rejects all tax increases, including measures, such as repeal of the ethanol tax credit, that level the playing field and thereby allow economic resources to be allocated by the market rather than a distortionary tax system. Some who oppose this fallacy embrace an alternative fallacy holding that any measure that broadens the tax base rather than explicitly increasing marginal tax rates must be conducive to economic growth and efficiency. In reality, as I have observed elsewhere, some base broadening provisions actually tilt the playing field and impede efficiency. In the end, of course, each proposed tax change must be weighed on its own merits.

Unfortunately, many of the tax proposals advanced by the Obama administration and congressional Democrats are misplaced. For example, the proposal to repeal last-in, first-out (LIFO) inventory accounting rests on the mistaken belief that it gives inventories preferential treatment. As I have observed, however, economic studies consistently show that inventories are already taxed more heavily than almost all other business investment. I have also previously pointed out the dangers of proposals that would single out five companies (“Big Oil”) for special tax rules based solely on the public hostility aroused by their size and rises in the price of their product.

Another questionable proposal would apply ordinary income tax rates, rather than capital gains rates, to carried interest received by managers of private equity and similar funds, even when the carried interest is an allocation of the fund’s capital gains income. Kevin Hassett and I have noted here (and again) that, despite the claims of the proposal’s supporters, the current tax treatment of carried interest is an application of general partnership tax law principles rather than a special preference for these funds. Some versions of the proposal take the even more dubious step of applying ordinary tax rates to capital gains earned by the founders of the firms that sponsor these funds.

These proposals, as well as the administration’s proposal to lengthen depreciation schedules for corporate jets, appear to be motivated by populist sentiment more than sound tax policy. Unsurprisingly, these proposals shrink from addressing any of the popular and widespread individual income tax preferences.

But, the administration is on firmer ground in proposing to limit the tax savings from itemized deductions for high-income taxpayers. Of course, one can question some aspects of the proposal, such as why the limit applies to preferences structured as itemized deductions while ignoring those structured as exclusions or credits. Tom Miller recently offered some critiques and suggestions for improvement. Nevertheless, the proposal is one way to limit some of the income tax’s prominent inefficiencies, notably its extravagant subsidy for the construction of luxurious homes. Building on ideas like this one could pave the way for a bipartisan deal that curtails inefficient features of the tax system while slowing the growth of entitlement spending.

Yesterday evening, the House of Representatives narrowly passed the “Jobs for Main Street” bill, which includes $48 billion of new infrastructure spending. If the Senate goes along in January, some of the key mistakes made in last February’s stimulus package will be repeated.

Public works are a legitimate governmental function, as Adam Smith recognized back in 1776, and the right infrastructure investments can make the economy more productive. But job creation is the wrong reason to increase infrastructure spending. In the long run, increased spending on infrastructure doesn’t create jobs; it simply moves them from some sectors of the economy to others. The same holds for other types of public and private spending; despite many claims to the contrary, job creation is not a valid long-run reason to spend more on renewable energy, national defense, or consumption.

There can be short-run job effects, which Keynesian policies often try to exploit. Boosting public and private spending during downturns and curbing spending during upturns can stabilize the economy, adding jobs and output when they are most needed and subtracting them when there is less need. But such stabilization requires delicate timing that can’t be achieved with long-lived infrastructure projects. In congressional testimony last year, I cited several economic analyses confirming this conclusion, including a Congressional Budget Office (CBO) report and a Brookings Institution study by Jason Furman (now deputy director of President Obama’s National Economic Council) and Douglas Elmendorf (now CBO director).

Congress proceeded to include a significant amount of infrastructure and other annually appropriated spending in February’s stimulus package, even though CBO predicted that the money would be spent much more slowly than the tax relief, state aid, and government benefit payments in the package. That prediction has been confirmed; the Council of Economic Advisers recently reported that only $16 billion of “government investment outlays” had made it into the economy as of late August.

At the White House jobs summit December 3, President Obama acknowledged that big infrastructure projects “may not necessarily work as an immediate, short-term stimulus. The term ‘shovel ready’—let’s be honest, it doesn’t always live up to its billing.” Nevertheless, he recommended an infrastructure package the following week and the House heeded his call yesterday. In an apparent effort to ensure that no past mistake goes unrepeated, the House bill would also extend the stimulus package’s Buy America rules to the new spending.

The only thing worse than adopting a slow-acting stimulus package during a recession is adopting one after it’s ended, as this recession probably did last summer. Although the lost jobs haven’t come back yet, they will begin returning well before the new infrastructure spending will get off the ground. If more stimulus really is needed, let’s do something that will have an impact in the next few months rather than the next several years.

Two years ago, I wrote about congressional Democrats’ efforts to put oil and natural gas production in the same tax category as adult movies. The more things change, the more they stay the same.

The issue concerns a tax break for domestic production, called section 199, that Congress adopted in 2004. In its wisdom, Congress limited the tax break to certain sectors of the economy. Manufacturing, agriculture, construction, mining, and movie production made the cut while most services did not. The IRS has valiantly struggled to implement Congress’s handiwork, explaining to taxpayers, for example, that brewing coffee at a retail shop doesn’t get the tax break while roasting coffee beans away from the shop does.

Congress struck a blow for moral virtue in one aspect of its fine-tuning. While providing section 199 to movies in general, it denied the tax break to movies that depict performers’ actual sexual conduct. With morality on the table, you might think Congress would next go after tobacco farming or alcohol distilling or firearms manufacture. In reality, though, those industries have escaped challenge.

Oddly enough, the target of choice has been oil and natural gas production. After failing in earlier years, the attacks on these industries met with some success last year. The October 2008 financial bailout law denies part of the tax break to oil and gas; when section 199 fully phases in next year for other industries, oil and gas will get only two-thirds of the normal tax break. Now, President Obama’s budget proposes to deny oil and gas any section 199 benefits, starting in 2011.

It’s not quite clear why these industries are targeted. The administration cites concern about global warming, but it doesn’t deny the tax break to coal mining. The administration also says that giving “preferential” treatment to oil and gas production encourages more investment than under a neutral system and spurs overproduction. But singling out particular industries hardly sounds like neutrality.

If we really want neutrality, let’s replace section 199 with an across-the board tax cut for all industries—goods and services, oil and gas, and even adult movies.