Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

I have been writing this blog for just over a year.  It addresses what I consider to be the two biggest problems faced by our country at the present time.  First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse.  The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009.
CaptureThese two problems are closely related.  If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster.  Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge.  Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP.  Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy.  This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years.  As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics.  Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government.  It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others.  But this situation no longer exists.  We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries.  This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands!  Is it possible to fundamentally change our tax system to turn things around?  My next post will answer this question in the affirmative!

4 thoughts on “Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

  1. Hi Jack,This is great. I look forward to your recommendations for changing the tax system. I think it should be much higher at the top end – including people like us.

    Date: Sun, 5 Jan 2014 21:05:24 +0000 To:

  2. Thanks for your comments, Sue. The plan I will soon propose is still progressive, i.e. the well off will still have the highest rates. But at the same time our top rates on income will be much lower than they are at present. Remember, the goal is twofold: 1) to raise enough money to pay our bills and 2) to do this in a way which does not impede economic growth. Impossible? Stay tuned!

  3. You mention that our tax code is so progressive that it is not competitive with other countries. Would you give some details. Some people simply believe entreprenuers have no better tax alternatives in other countries. Steve

  4. Our corporate tax rate of 35% is one of the highest in the world. Our top individual tax rate of 39.6% is in the middle for the advanced OECD countries. One could conclude from this that we treat entrepreneurs as well as other countries do on average.
    The important point is that in our current situation with an economy stalled at 2% annual growth, we can do much better. The Graetz Tax Plan, described in my following post, would only tax incomes over $100,000. My October 24, 2013 post pointed out that all net job growth comes from new businesses less than one year old. In other words, giving the biggest possible tax break to entrepreneurs will have a huge stimulatory effect on the economy.

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