The United States has two fundamental economic and fiscal problems at the present time. First of all, the economy is growing too slowly to create enough new jobs. In fact, there are now 24 million people either unemployed or underemployed. Secondly, federal tax revenue is not sufficient to pay the bills. Of course, these problems are interrelated. If the economy were growing faster, more tax revenue would be generated and deficit spending would be lower.
At the same time, changes in society, such as globalization and technological progress, are creating higher levels of inequality. Economic inequality is inevitable in a free society but too much of it will create resentment. The best way to minimize such resentment is to make sure that incomes are rising for all. In other words, first speed up growth. If inequality can also be reduced, so much the better.
A few days ago my post “How to Increase Growth and Decrease Inequality at the Same Time!” presented such a plan. The idea is to enact broad-based tax reform, whereby tax rates are lowered for everyone, offset by shrinking tax deductions. The 64% of taxpayers who do not itemize deductions will receive a big tax cut. Since they are the lower and middleclass wage earners with stagnant incomes, they will tend to spend their tax savings, thereby giving the economy a boost. But this means that the 36% of (wealthier) taxpayers who do itemize deductions will, on average, end up paying higher taxes. Overall, this represents a shift from the wealthy to the less wealthy and therefore lessens inequality.
Here is a concrete example to illustrate the magnitude of what can be accomplished:
- Individual tax deductions total about $1 trillion per year.
- Let’s suppose that these deductions are cut in half to $500 billion per year.
- Let’s further suppose that half of this amount, or $250 billion per year, is cut from the taxes of the 64% who do not itemize deductions.
- If these 64% spend just 2/3 of their new income (instead of saving it or paying off debt), this will total $170 billion which is 1% of GDP.
- This would increase the rate of growth of GDP from the 2.2% average, since the end of the Great Recession, to 3.2%. This represents an enormous boost to the economy and would return average GDP growth to about its 3.3% average since 1947.
I emphasize that this is an oversimplified illustrative example to demonstrate what can be achieved with a plan of this nature. Hopefully it will be more thoroughly analyzed by an expert economist, which I am not!