Christine Benz: Hi. I'm Christine Benz from Morningstar. I'm here at the Morningstar Ibbotson Conference with Charlie Wheelan. Charlie is a professor of public policy at the University of Chicago. Charlie, thanks for joining me here today.

Wheelan: Thank you for having me.

Benz: You've recently talked a lot about what the stalemate in Washington can mean for the economy, and in turn, individual investors. Can you share your thoughts on that topic?

Wheelan: Sure. I have no idea where the market is going tomorrow or next week or anything like that, but I'm somebody who has watched Washington and the state capitals, and even international things like Greece and other situations, where investors are watching carefully, and I know that politics and policy bleed over into the investment community.

And I think what you're seeing in a lot of places, whether it is California, whether it is the federal level, whether it is again Greece, there seems to be a political stalemate. It's very clear what we need to do from an economic standpoint, and there seems to be a political inability to get it done.

And although it's only anecdotal, it does seem to be worse than it was 10 or 15 or 20 years ago. And I think that there are going to be implications, both fiscally at the government level, but also it's going to spill over from private investors if we don't muster the political will to deal with those situations.

Benz: I guess the question is, though, is the political will there to actually unlock the gridlock that seems to have taken hold?

Wheelan: I'm not seeing it, so it's very clear when you look at any of those situations, whether it's Greece, whether it's the federal deficit, whether it's California, what we need to do. You just need to match revenues with expenditures.

The problem is, there is this deep disagreement in this country over whether you want bigger government, bigger expenditures, and bigger spending, or whether you want smaller government. And unfortunately, what we've compromised on is small revenues and big spending, and that's simply not a recipe that works in the long run.

And again, you see that in all the places I'm talking about where you're running these chronic deficits. And people say they want to solve the problem, but there doesn't seem to be the political will to do the two things that would make that situation work.

One is to cut spending. And everybody, of course, is in favor of cutting spending in the abstract. But when you say, "All right. Does that mean you support raising the retirement age from 65 or 67.5 to reflect an aging population?" Well, no, I'm not in favor of that. But those are the kinds of things you need to do to rein in where we're really spending money, particularly on the entitlement side.

Do you want to make sacrifices in health care? Are you willing to have your choices constrained somewhat to get fewer tests, because that's how you get cost savings? We know that is not the case, because you remember the furor a couple weeks ago when the official panel came out and said you should not be screened with mammogram until you're are 50 instead of 40.

And they had done a lot of cost/benefit analysis and people were up in arms and said, "Boy, we are not willing to give that up." But of course, that's what you have to do if you want to save money.

So on the spending side, we say we want to curtail government, but we don't act that way. And then of course on the revenue side, there's an unwillingness to raise taxes. Now as an economist, I think we should focus more on what kind of taxes we're using and less on the size of government.

So economists say taxes raise revenue. They also change behavior. If I tax cigarettes, you're going to smoke less. If I tax capital, you're going to invest less. Which of those is a better outcome?

So I think we ought to pay a lot more attention to where we get the revenue. And I would propose a broad-based carbon tax, because I think that it would have positive environmental effects. It would raise revenue. And if you're conservative, you can get a lot of that money back. But I think we ought to pay more attention to the tax mix.

In either case, you've got to deal with the spending, deal with the revenue side, and there is not the political will. And it is not just the politicians. You don't see it at the grassroots level. There's not the will to solve that problem.

Benz: So do you have a thought on investment-related tax cuts? Some of the Bush-era tax cuts will be expiring at the end of this year. Do you have any thoughts on where investors might expect that to go?

Wheelan: I don't. I can't predict how the tax code is going to shape up. What I can say as a policy person is what I would like to see is just a much flatter, simpler tax code, fewer of the carve-outs that we're all so fond of, which is I'm going to reduce taxes for people who invest in equine investments here and certain kinds of alternative energy, but not other kinds of alternative energy.

What you need to do is kind of do what they did in 1986, which is clean out the stables with all these little special carve-outs. And by doing that, you can raise a lot of revenue by getting rid of the loopholes and bring taxes down across the board on a wide range of investments. Do less cherry-picking and create a more predictable, transparent, better investment environment in all areas.

Benz: Simpler. Well, thanks, Charlie, for the insights. It has been great talking to you today.

Wheelan: Thank you very much.

Receive $20 off a one year subscription for an Annual Premium Membership at Morningstar for Equedia Members!