Category Archives: tax reform

A Pessimistic View of America’s Future V. When Wealth Disappears

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Several of my recent posts have been pretty gloomy.  “Average is Over,” “What, Me Worry?” and “The Age of Oversupply,” for example.  Here’s another gloomy one.  The British economist, Stephen King, has an Op Ed column in last Monday’s New York Times, “When Wealth Disappears.”, based on his new book, “When the Money Runs Out.”
Our GDP grew at 3.4% per year in the 1980s and 1990s, then dropped to a growth rate of 2.4% from 2000 – 2007.  Since the Great Recession ended it has averaged barely 2% per year.  The Democrats say we just need more fiscal stimulus and monetary easing to boost the growth rate.  The Republicans say deficit reduction including entitlement reform, slashing regulations and tax reform is what is needed to revive the economy.
“Both sides are wrong,” says Mr. King.  “The underlying reason for the stagnation is that a half-century of one-off developments in the industrialized world will not be repeated.”  These one-off developments are: the unleashing of global trade after World War II, financial innovation such as consumer credit, expansion of social safety nets which reduces the need for household savings, reduced discrimination which has flooded the labor market with women and, finally, the great increase in the number of educated citizens.
What Mr. King recommends is “economic honesty, to recognize that promises made during good times can no longer be easily kept.  What this means is a higher retirement age, more immigration to increase the working age population, less borrowing from abroad (by holding down deficit spending), less reliance on monetary policy that creates unsustainable financial bubbles, a new social compact which doesn’t cannibalize the young to feed the boomers, and a further opening of world trade.”
“Policy makers simply pray for a strong recovery.  They opt for the illusion because the reality is too bleak to bear.  But as the current fiscal crisis demonstrates, facing the pain will not be easy.  And the waking up from our collective illusions has just begun.”
It is obviously time to bite the bullet, lower our expectations, and start doing the hard work needed for even incremental economic progress.

Our Dire Fiscal Situation II A Promising Solution

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As I discussed in my last post, the Congressional Budget Office has shown very clearly that the U.S. is on an unsustainable fiscal path which must be reversed in order to avoid calamity.  We are spending too much money and not taking in enough tax revenue.  In a recent Wall Street Journal Op Ed column, the economist Martin Feldstein describes “How to Create a Real Economic Stimulus”.  “A successful growth and employment strategy would combine substantial reductions in the relative size of the future national debt with immediate permanent tax rate cuts and a multiyear program of infrastructure spending…….The only way to reduce future deficits without weakening incentives and growth is by cutting future government spending.”
Mr. Feldstein proposes slowing the growth of benefits of middleclass retirees by gradually raising the full benefit retirement age for Social Security from 67 to 70 and also raising the age of Medicare eligibility to the same level.  This would create a budget savings of 1% of GDP, or $200 billion, by 2020.   Rather than eliminating such popular tax deductions as the one for mortgage interest or the exclusion of employer payments for health insurance, he recommends limiting the amount by which individuals can reduce their tax liabilities to 2% of adjusted gross income.  This single change to the tax code would, for example, reduce the 2013 deficit by $140 billion.
In addition to lowering tax rates for individuals, corporate tax rates should be cut from 35% to about 25% in order to be competitive with other industrial countries.  We should also adopt the internationally common “territorial” system which doesn’t tax foreign earnings brought back home.
In short, we decrease spending and raise revenue with entitlement reforms and a limit on tax expenditures thereby creating a framework for tax rate reductions and infrastructure spending.  These are the sorts of bold measures needed to produce a real stimulus and thereby get our economy back on track!

The Best Way to Help Working People

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The lead story in today’s Omaha World Herald, “Demand for skilled labor rising”, along with an accompanying editorial, point out that “Ours is a place where opportunity exists, to the tune of 35,000 advertised job openings counted by the Nebraska Department of Labor.”
Terry Moore, President of the Omaha Federation of Labor, predicts that demand for construction workers will only increase in the near future.
Gary Kelly, Business Manager for Local 22 of the International Brotherhood of Electrical Workers, said “It’s times of full employment that allow us to go out and organize the unorganized.”
Kirk Ahrends, Dean of Applied Technology at Metropolitan Community College, said that instructors who teach 16 different trade professions get many requests for job candidates.  “They’re knocking on the door.  Not only the students, but the industries.  They’re saying ‘Get us some graduates.’”
Nebraska is fortunate to have such a good job market, much better than the U.S. as a whole which is suffering from an unemployment rate of 7.4% and an anemic growth rate of just 2% a year.
By far the best thing the government can do to help workers is to adopt policies which will speed up economic growth.  This can be accomplished by giving entrepreneurs and investors greater incentives to take more risks.  Lowering tax rates (offset by closing loopholes) and easing burdensome regulations are the tried and true methods of getting this done.
There are twenty million unemployed and underemployed Americans who would benefit from national leaders more attuned to their need for work.

How Can We Boost Stagnant Wages?

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Today’s Wall Street Journal has a column by Neil Shah, “Stagnant Wages Crimping Economic Growth”, pointing out that the average hourly pay for non-supervisory workers, adjusted for inflation, has declined to $8.77 last month from $8.86 in June 2009, when the recession ended.  It has also been reported recently, e.g. in the New York Times, that U.S. medium household income, now at $52,100, has not nearly recovered from its prerecession peak of $55,500 and is even below its $54,500 level in June 2009, at the end of the recession.
Lower income for workers and households mean lower consumer spending.  This is a major reason for our economy’s low annual growth rate of only 2% of GDP since the end of the recession.  Of course, the high unemployment rate, currently 7.4%, as well as increasing global competition, contribute to downward pressure on wages.  But there is another factor, directly under government control, which is a major contributor to stagnant and declining wages.
Washington Post columnist, Robert Samuelson, in a recent column reprinted in the Omaha World Herald, reported that, from 1999 to 2013, wages and salaries rose 50% (adjusted for inflation) while health insurance premiums increased 182%.
Most health insurance is provided and largely paid for by employers and is therefore an indirect form of compensation.  The huge disparity between wage gains and health insurance premium increases in recent years means that wages are being held back by the rapidly increasing cost of health care.  The U.S. spends 18% of GDP on healthcare, twice as much as any other country and this is clearly out of line.
The best single thing we can do to slow down healthcare inflation is to remove the tax exemption for employer provided healthcare (and offset it with lower overall tax rates).  Employees would then pay taxes on their health insurance benefits as part of their pay. This would have the beneficial effect of making consumers far more conscious of the true cost of healthcare and therefore consumers a strong incentive to hold down these costs.
It is up to Congress to change this provision of the tax code.  Let’s insist that they get this done!

Is the Cost of Health Care Under Control?

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Today’s New York Times reports that “Health Care Costs Climb Moderately, Survey Says”.  The average annual insurance premium for a family rose 4% in 2013 compared with a 1.1% overall rate of inflation, according to the Kaiser Family Foundation which conducted the survey.  Since 1999 health insurance premiums have increased by almost 300% while consumer prices have increased by 40%.  As insurance premiums rise, deductibles are also getting bigger.  About 38% of all covered workers now face an annual deductible of $1000 or greater.  Dr. Drew Altman, CEO of the Kaiser Foundation, refers to this “quiet revolution” as an attempt by consumers to keep the cost of health insurance from rising even more quickly.
A 4% increase in insurance costs may seem moderate, but at almost four times the rate of inflation, it is really very large.  Obama Care is unlikely to have any impact in holding down such a rapid increase and, in fact, is likely to make matters worse because of massive new health care regulations which are coming.  The basic problem is that America spends 18% of GDP overall on health care, almost twice as much as any other country.
What can we do about this?  One major step would go a long way.  We need to remove the tax exemption from employer provided health insurance.  Employers could still provide health insurance for their employees, but the cost would be added to an employee’s salary for tax purposes.  This can be offset with a lower tax rate, of course.  But it would make employees, i.e. all consumers, far more conscious of the cost of healthcare and therefore to have a direct incentive to hold down these costs.  For example, Dr. Altman’s “quiet revolution” would pick up steam as employees raise deductibles even higher in order to lower overall costs.
How can we get going in this direction?  The Employer Mandate of Obama Care should be repealed, and not just postponed for a year.  Ideally, removing the tax exemption for employer provided health insurance would become part of the broad based tax reform which is so badly needed to stimulate the economy.
Our fiscal and economic problems can be addressed with smart leadership.  We should insist that our national leaders get going on such badly needed reforms!

What Is the Best Way to Reform the Tax Code?

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In today’s New York Times it is reported that President Obama, “Obama Proposes Deal Over Taxes and Jobs”, proposes “a cut in corporate tax rates in return for a pledge from Republicans to invest in more programs to generate middle class jobs.”  Reducing the top corporate tax rate from 35% to 28%, for example, balanced by tightening tax deductions and loopholes, would raise additional revenue on a one time basis as companies switch from one tax system to another.  It is this new one time revenue which would be spent on the president’s priorities.
The President’s proposal has given a boost to Senator Max Baucus and Representative David Camp, the chairs of Congress’s tax writing panels, “Lonely Bipartisan Push to Overhaul Tax Code Finally Gets Noticed”, who are working together to construct a broad based, pro-growth, plan to reform the entire tax code, for both individuals and corporations.
Which is the better way to proceed?  What is the best way to boost the economy? Revamping only the corporate tax structure to raise new tax revenue for public spending projects?  Or by eliminating as many deductions and loopholes as possible over all in order to enact the lowest possible tax rates for both individuals and corporations?
To me the answer is obvious.  It is investment, risk taking and entrepreneurship which create the most jobs for the long term.  The best way to stimulate the private economy is with the lowest possible tax rates for all.  It is unfortunate that the President will not accept this basic economic truth and work with Congress in a bipartisan manner to move the economy forward and create more jobs.

What Is the Best Way to Help the Middle Class?

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An article in yesterday’s New York Times, “Obama Says Income Gap Is Fraying U.S. Social Fabric”, quotes the President that “If we don’t do anything, then growth will be slower than it should be.  Unemployment will not go down as fast as it should.  Income inequality will continue to rise.  That’s not a future that we should accept.”  He says that “I will seize any opportunity I can to work with Congress to strengthen the middle class, improve their prospects, improve their security.”
A recent editorial in The Wall Street Journal, “The Inequality President”, shows with a chart that median household incomes have fallen from $54,218 in June 2009 as the recession ended to $51,500 in May 2013.  As the WSJ says, “For four and a half years, Mr. Obama has focused his policies  on reducing inequality rather than increasing growth.  The predictable result has been more inequality and less growth. … The rich have done well in the last few years, thanks to a rising stock market, but the middle class and poor have not.”
There are many things that Congress and the President could do to boost the economy if they were willing to work together and compromise.  Obamacare doesn’t need to be repealed, just modified by dropping the employer mandate which is a job killer.  Broad based tax reform, with lower tax rates, paid for by eliminating tax preferences, would be a big boost to investment, risk taking and entrepreneurship.  A reasonable compromise would be to use a part of the revenue raised from eliminating loopholes for deficit reduction.
But little progress will be made unless the President is willing to show leadership by rising above partisanship.  There are all sorts of ways he could do this.  One simple way would be to show that he understands the seriousness of the rapidly growing national debt by supporting some of the many thoughtful proposals for more government efficiency.
A large majority of people want our first African-American President to be successful.  But right now he is not on track to achieve this.

Is Our Economy Truly Recovering From the Recession?

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In yesterday’s Wall Street Journal, Mortimer Zuckerman, the Chairman of U.S. News and World Report, writes that “A Jobless Recovery is a Phony Recovery”.  He points out that counting the people who want full time work and can’t get it, as well as those who have stopped looking, the real unemployment rate is really 14.3% rather than the officially reported 7.6%.  Enormous fiscal (deficit spending) and monetary (quantitative easing) stimulus has been able to stimulate an average growth rate of only 2% for the past four years since the recession ended in June 2009.  During these last four years the civilian workforce-participation rate has actually declined from 65.7% to 63.5% which has never happened before in an even slowly expanding “recovery” like we have at the present time.
Keynesians and Obama Administration apologists say that we need even more fiscal stimulus (we can worry about deficits and debt later); tax reform won’t help because tax rates are already low; massive new regulations (ObamaCare, Dodd-Frank financial regulations, EPA environmental regulations) are so important that they override negative economic effects; etc.  At some point, the sooner the better, we need to recognize that current policies are not working and are, in fact, retarding the recovery from the recession.
Tax reform is the biggest single change which would help.  Removing deductions and tax preferences, and replacing them with lower tax rates, would give a big boost to investment and entrepreneurship, and thereby be a huge stimulus to the economy.  This includes eliminating the tax exemption for employer provided health insurance.  Combining this reform with repeal of ObamaCare’s Employer Mandate would also lead to getting the cost of healthcare under much better control.  The overall cost of healthcare, 18% of the American economy and growing, is a huge long term burden and must be turned around.
The massive complexity of Dodd-Frank is a huge burden on the financial industry.  Preventing banks from becoming “too big to fail” can be accomplished by having more adequate reserve requirements along with sufficient default and liquidity insurance pools, along with otherwise minimal regulation.
Only more private investment and risk taking can make the economy grow faster and bring down the unemployment rate.  The sooner our national policy makers (and the voters who elect them!) figure this out and act accordingly, the sooner that our economy will truly begin to recover from the Great Recession.

Going On a Short Vacation!

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I began this blog last November, right after the national elections, to promote my strong view that the United States is on a dangerous fiscal course, with an already enormous, and still rapidly growing, national debt.  After four years in a row of deficit spending exceeding $1 trillion per year, the current year’s deficit is projected to be “only” $640 billion.  Far too many people, including many of our national leaders, interpret this to mean that the problem is getting solved and so we can relax.  But the already accumulated $12 trillion in public debt will cost our economy $600 billion a year, a significant fraction of total revenue, in interest alone when interest rates return to their historical average of 5%.
This is just the tip of the iceberg.  Federal spending is out of control all across the board.  Entitlement spending on Medicare and Medicaid is growing at twice the rate of inflation and is an especially acute problem.  But progress here depends on figuring out how to get healthcare costs in general under control, a huge challenge.  The much reviled sequester is working but it’s not nearly enough by itself to get discretionary spending under control.
Four years after the end of the Great Recession the economy is still limping along at 2% GDP growth and 7.6% unemployment.  And this is after enormous fiscal stimulus (deficit spending) as well as quantitative easing by the Federal Reserve.  Current policies are not working.  What we need is broad based tax reform with lower marginal rates (offset by ending tax preferences) to stimulate business investment and the private risk taking which propels the economy and creates jobs.  And, of course, faster economic growth will also increase tax revenue and therefore lower the deficit, as well as boosting employment.
This is a brief summary of what I’ve been saying for the past eight months.  To me it just seems like simple common sense, but not everyone agrees!  At any rate I’ll be out of town for the next two weeks.  I hope to be able to make a few new posts while I’m gone.  Stay tuned!

Should the Employer Mandate Be Repealed?

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In last Sunday’s New York Times the columnist Ross Douthat makes an excellent case in “A Hidden Consensus on Health Care”,  that Obamacare’s employer mandate, recently postponed for one year until January 1, 2015, should be repealed altogether.  The reason for delaying its implementation is because of the complexity of the process for the government to gather all the necessary information about a company’s employees and coordinating with IRS tax returns to verify incomes.  This is, of course, a mammoth job.
Furthermore, small and medium sized companies, near the 50 employee cutoff for mandatory coverage, will not have to immediately slow down their growth, in order to avoid the health insurance requirement.  This could help boost the economy in the short turn.
In addition, as Mr. Douthat points out, it is the tax exemption for employer provided health insurance which is the biggest impediment for getting the cost of healthcare under control.  It means that employees are shielded from the true costs involved in receiving care and therefore have little, if any, incentive to hold down the cost of their own care.
If this tax exemption was eliminated, perhaps as part of a broad based tax reform initiative, then employers could still offer an optional health insurance benefit to their employees but it would be taxed as part of their total pay.  This would give employees an interest in holding down the cost of their own insurance.  And they would also have the option to shop around on the private market, perhaps on the new exchanges, for a better deal.
The Employer Mandate is thus altogether a dead weight on our struggling economy.  It’s certainly beneficial to have it postponed for a year.  Let’s go the rest of the way and repeal it altogether!   This would be a significant step towards true healthcare reform!