Category Archives: tax reform

Ending America’s Slow Growth Tailspin II. What It Will Take.

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One of the biggest problems facing the U.S. today is the slow growth of our economy, averaging just 2.1% per year since the end of the Great Recession seven years ago, well below the 3.5% average from 1950 – 2000.
Capture11My last post introduced an excellent Wall Street Journal Op Ed by the Hoover Institution economist John Cochrane.  He says that “the U.S. economy needs a dramatic legal and regulatory simplification.”  In particular:

  • Tax reform. Instead of arguing over tax rates, what’s really needed is deep tax reform, cleaning out the insane complexity and cronyism.
  • Social programs. Rather than arguing over whether to increase or cut spending, what’s needed is a thorough overhaul of the programs’ pernicious incentives. For example, Social Security disability (almost 9 million beneficiaries in March 2016) needs to remove its disincentives to work, move or change careers.
  • Education spending. Rather than arguing about the level of public spending, America needs the better schools that come from increased choice and competition.
  • Over-regulation. Most of all the country needs a dramatic legal and regulatory simplification. Middle-aged America is living in a hoarder’s house of a legal system, including state and local impediments such as excessive occupational licensing.
  • Growth-oriented policies will be resisted. Growth comes from productivity which comes from new technology and new companies. These displace the profits of old companies, and the hefty pay and settled lives of their managers and workers.
  • The presidential frontrunners are not championing economic growth. But the House of Representatives, under Speaker Paul Ryan, is doing exactly this. Perhaps economic policy leadership can be transferred from the Presidency to Congress.

After two disappointing presidencies our economy is lagging far behind where it could and should be. This is the reason for the rise of Bernie Sanders and Donald Trump.  Regardless of the outcome of the 2016 presidential election, there is hope for better days ahead!

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Why Faster Economic Growth Is So Important II. Replacing Factory Jobs

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Populists such as Bernie Sanders and Donald Trump are doing so well in the 2016 presidential primaries because the middle class is suffering from the slow economic growth of the past 15 years.
Capture2My last post is based on the report of a typical victim.   Today’s post is based on an article by Eduardo Porter in yesterday’s New York Times discussing the loss of U.S. manufacturing jobs.  Says Mr. Porter:

  • Fifty years ago, 45,000 workers were employed in California to harvest 2.2 million tons of tomatoes. Now, with mechanization, it only requires 5000 workers to harvest 12 million tons.
  • In 1950, 24% of nonfarm jobs in the U.S. were in manufacturing. Today only 8.5% of nonfarm jobs are in manufacturing.
  • The same thing is true worldwide. Global employment in manufacturing is going down because productivity increases are exceeding increases in demand by significant amounts. The likelihood that we will get a manufacturing recovery is close to nil.
  • The U.S. has a trade surplus in manufacturing with the 20 countries with which it has trade agreements (which does not include China). We have an overall annual trade surplus in services of more than $200 billion.

In other words, an attempt to recover or save manufacturing jobs with smarter trade policies is simply impractical and will likely do more harm than good. What should be done instead is to:

  • Definitely do a better job of helping displaced manufacturing workers with Trade Adjustment Assistance and smarter job retraining programs.
  • Adopt policies to speed up overall economic growth from the anemic 2.1% annual growth rate since the end of the Great Recession in June 2009. Faster growth such as the 3.5% annual average from 1971 – 2001 will do wonders in creating more jobs and better paying jobs. For how to do this see an earlier post.

Our very serious economic problems can be solved if policy makers (and presidential candidates) would only get serious about it!

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What Might Fundamental Tax Reform Look Like?

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All four of the major presidential candidates have tax plans. Hillary Clinton would make small tweaks in our current tax system.  Bernie Sanders would raise current taxes substantially.  Both Donald Trump and Ted Cruz would both radically reduce the size of the federal income tax but would also greatly add to the national debt over the next ten years.
I have been trying to make the case on this blog that fundamental tax reform is the best thing we can do to get the economy growing faster in order to create more and better paying jobs.  I have also discussed a specific way to accomplish fundamental reform, namely the so-called Competitive Tax Plan proposed by the tax law expert, Michael Graetz.  It is a progressive consumption tax, a so-called Value Added Tax.
Capture2As reviewed in yesterday’s Wall Street Journal by Reihan Salam, the editor of the National Review, the Graetz Plan has these features:

  • A broad-based VAT of about 14% on goods and services.
  • Families earning less than $100,000 per year are exempt from the income tax. The tax rate would be 15% for incomes between $100,000 and $250,000 and 25% above this level.
  • The payroll tax (supporting Social Security and Medicare) would be greatly reduced for all workers earning less than $40,000 per year.
  • The corporate tax rate would be lowered to 15%, making it among the lowest in the world.
  • The Graetz Plan is revenue neutral as verified by the Tax Policy Center.

Think of the incredible advantages of such a tax plan. Of the expected 145 million tax returns for this year, 120 million would no longer be necessary.  Extravagant deductions such as for mortgage interest would have much less political support. The low corporate tax rate would bring jobs back to the U.S. instead of sending them overseas.  The rampant cronyism involved in tax breaks being handed out by Congress would be greatly reduced.
What is not to like about the Graetz Plan?

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Growing Employment, Shrinking Productivity: What Does It Mean?

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I know that I occasionally repeat myself, but I can’t help it! In my opinion there are two major problems facing our country:

  • Slow economic growth which has averaged only an anemic 2.1% since the end of the Great Recession seven years ago.
  • Exploding national debt, now the highest it has been since the end of WWII. Unless we can quickly shrink our annual deficits down to zero, and therefore stop adding to the debt, interest payments on the debt will eventually rise to horrendous levels.

 

Two recent newspaper articles address the slow growth problem. Greg Ip, writing in the Wall Street Journal, points out that (worldwide) employment growth is up while productivity growth is down (see chart below).
Capture0Neil Irwin, writing in the New York Times, explains this dichotomy by pointing out that most job growth in the last decade has been in (low productivity) services rather than (high productivity) manufacturing. In other words, the U.S. economy is now producing lots of new temporary and contract jobs which do not add very much to the overall economic growth which produces higher wages and overall prosperity.
The economist John Cochrane has clearly described  why productivity growth, and therefore overall economic growth, has stagnated in recent years.  Here is a short summary:

  • Over-regulation. The Dodd-Frank Act and Affordable Care Act, for example, are hampering growth by strangling the financial and healthcare sectors of the economy.
  • Inefficient Taxation. Growth oriented taxation would have the lowest possible marginal rates paid for by shrinking deductions. Taxing consumption rather than income and savings would be even better.
  • Illegal Immigration. Solving our immigration problem would turn millions of illegals into productive citizens. An adequate Guest Worker program and e-Verify enforcement would solve this problem without the need for amnesty.

Conclusion: There are solutions to the severe economic problems facing our country. Does our political system have the flexibility to adopt these workable policies?

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The Source of Economic Growth

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In my last post, “What the Republican presidential candidates should be saying,”  I summarized the argument by the economist, John Cochrane, that “sclerotic growth is the economic issue of our time.” Mr Cochrane shows dramatically that even small differences in the growth rate over time can make a huge difference in raising living standards.
Capture0He goes on to say that

  • There is only one source of growth. Nothing other than productivity matters in the long run.
  • The vast expansion in regulation is the most obvious change in public policy accompanying America’s growth slowdown. Most recently under the Dodd-Frank Act and the Affordable Care Act, the financial and healthcare sectors of the economy have seen radical increases in regulatory intervention. But environmental, labor, product and energy regulation have all increased dramatically as well.
  • Regulation during the financial crisis did not fail for being absent. It failed for being ineffective.
  • The best way for the government to subsidize healthcare efficiently is to give straightforward vouchers which people can use to buy insurance or to fund health savings accounts. Such vouchers should replace Obamacare, Medicaid and Medicare.
  • The basic structure of growth-oriented tax reform is lower marginal rates, paid for by broadening the base by removing exemptions and loopholes. Several additional tax principles are:
  • The ideal corporate tax rate is zero. A high corporate tax rate hurts the workers more than anyone else.
  • A growth-oriented tax system taxes consumption, not income and savings.
  • Eliminating or moving away from taxing income, would lessen the value of personal deductions such as for mortgage interest or charitable donations.
  • The estate tax is a particularly distorting tax on saving and investment. The tax code should not give strong incentives to middle-age people to stop building their businesses or investing their money.
  • Solving our immigration problem would turn 11 million illegal immigrants into productive citizens. Guest worker and e-Verify enforcement are fixable problems.

How to speed up economic growth ought to be one of the basic issues in the presidential election campaign. Here are some good ways to do this.

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Republican Congress Approves Irresponsible Budget

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Congress has adjourned for Christmas having passed a final budget for the 2016 Fiscal Year extending through next September. It puts into place for this year the two year spending agreement reached between Congress and the President in October.  However Congress started out the year by passing a ten year budget plan resolution leading to a balanced budget by 2025.  The budget just passed leads instead to a deficit of $1.1 trillion in 2025.
CaptureHere are the details as described by the nonpartisan Committee for a Responsible Federal Budget:

  • Revenue: decreased under new budget by a $650 billion (over ten years) by making various temporary tax deductions permanent.
  • Discretionary Spending: increased by $50 billion for the current budget year (by breaking the sequester cap).
  • Medicare: instead of saving $430 billion over ten years, Medicare spending is increased by $95 billion over ten years.
  • 2025 Deficit: instead of shrinking to zero in ten years, it is now projected to be more than $1 trillion in 2025.
  • 2025 Debt: currently the (public, on which we pay interest) debt is 74% of GDP. The ten year balanced budget plan would reduce the debt to 56% of GDP. Instead, the debt is now on track to reach 80% of GDP by 2025.

Granted the Republican Congress hopes to develop a tax reform plan in 2016 which would lower tax rates for everyone, paid for by closing many of the loopholes and deductions just approved last week. One very good way to do this has recently been proposed by the Tax Foundation. The TF plan would boost economic growth and thereby increase tax revenue substantially over ten years.
The problem is that real tax reform is unlikely to happen without a Republican president in office.  If a Democratic president is elected in 2016, then the dire predictions made by the CRFB (above) are likely to remain valid for the foreseeable future. Our fiscal and economic future remains quite precarious at the present time!

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Stopping Donald Trump II. Less Inequality or More Growth?

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In my last post I presented the argument that voters are often more reasonable than the populist leaders who are trying to appeal to them.  They would rather hear something more optimistic than rage against a dangerous world.
Capture0But there is a difference of opinion on how to reach these voters:

  • Leading Democratic presidential candidate Hillary Clinton endorses the Buffett Rule which calls for millionaires to pay a minimum tax of 30% on their income. Says Clinton, “I want to go even further because Warren is right. I want to be the president for the struggling, for the striving and the successful.”
  • All of the Republican presidential candidates, including Donald Trump, have tax reform plans which will grow the economy but none of which are revenue neutral. In other words, they will all add to annual deficits and therefore make our debt problem much worse than it already is.
  • The nonpartisan Tax Foundation has issued a new report, “Options for Broadening the U.S. Tax Base,” which proposes capping itemized deductions at $25,000 per individual combined with
    i)   cutting the corporate tax rate to 27%
    ii) cutting the top three ordinary income brackets by 5%, and
    iii) implementing a top capital gains tax rate of 20%.
    Such a plan would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage gain of 2.2% and a ten year dynamic revenue gain of $759 billion.

The Clinton plan would bring in up to $50 billion per year in new tax revenue but would do little to boost the economy. The Republican presidential tax plans are fiscally irresponsible. The Tax Foundation plan would boost the economy and reduce deficits rather than increase them.  Other specific reforms would boost the economy even more.
In other words there are clear cut ways to create more jobs and raise wages.  This is a message which should appeal to the angry and disaffected voters who are attracted to Donald Trump.

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Tax Reform and Economic Growth

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In a recent post I pointed out that both Republican and Democratic presidential candidates are being unrealistic with their tax reform proposals:

  • The Republican plans would stimulate the economy but at the cost of huge increases in the national debt, even taking into account the growth effects of these plans.
  • Raising the top tax rate to 50%, a Democratic idea, would bring in an additional $100 billion per year in tax revenue, but this is neither enough to make a big dent on budget deficits or appreciably lower income inequality by redistribution.
    Capture

The nonpartisan Tax Foundation has just released a new report, “Options for Broadening the U.S. Tax Base,” describing three different ways to do this:

  • Ending the exclusion of employer-sponsored health insurance
  • Removing the cap on the social security payroll tax
  • Capping itemized deductions at a fixed dollar level

Combined with marginal tax rate cuts, each of these options would lead to substantial economic growth.  However, the first option, ending the exclusion of employer-sponsored health insurance, is unlikely but rather this exclusion could be turned into tax credits as part of further healthcare reform.  Likewise, removing the cap on the social security payroll tax is more likely to be used to raise additional revenue to make social security financially sound for the long run.
However, the single measure of capping itemized deductions at $25,000 per individual could be combined with

  • Lowering the corporate tax rate to 27%
  • Cutting the top three ordinary income brackets by 5%
  • Implementing a top capital gains tax rate of 20%

Such changes would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage rate gain of 2.2% and a ten year dynamic revenue gain of $759 billion.
Conclusion:  it is possible to cut tax rates, broaden the tax base and grow the economy all at the same time and without increasing the deficit.  This is what we should be doing!

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What Defines a (Fiscal) Conservative?

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After four debates among the Republican presidential candidates, differences between them are becoming clearer.  The New York Times has an interesting article about this in today’s paper, “G.O.P. Fight Is Now a Battle Over What Defines a Conservative.”
CaptureHere are my views on the four issues discussed:

  • A Wall or a Path? We need to solve our illegal immigration problem and the key is to set up a viable guest worker program. The fact is that our economy needs foreign workers for many jobs which require hard physical labor such as in agriculture, meatpacking and construction trades. If businesses are able to bring in immigrants when sufficient domestic labor is not available, then other issues such as border security and verifying legal status can easily be resolved.
  • The U.S. Place in the World. U.S. leadership makes the world a safer place. This means we need a strong military presence all around the world as well as active alliances, trade and military, with many other countries.
  • Of Banks, Bailouts and Blame. The cause of the financial crisis was the bursting of the housing bubble, in turn caused by an unrealistic government housing policy as well as lax enforcement of existing regulations. Blaming greedy bankers is a copout. The Dodd-Frank Law is overkill which creates a drag on the economy by hampering smaller financial institutions and community banks. The best way to control large banks is to increase their capital requirements.
  • Who Should Get Tax Cuts? The main purpose of tax reform should be to boost the economy without increasing deficit spending. The way to do this is with across the board cuts in tax rates, paid for by closing loopholes and shrinking deductions. Here are some details. The 64% of taxpayers who do not itemize deductions will get an immediate tax cut and income inequality will be greatly reduced.

Getting the answers to these issues correct will have a large effect on the future wellbeing of our country.  The Republican presidential candidates should be commended for grappling with them in a productive manner.

 

I Am One of Paul Krugman’s “Very Serious People”

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There is a stark contrast between the fiscal and economic policies being proposed by the presidential candidates from the two different parties. The Democrats want to tax the rich to reduce income inequality while the Republicans want major tax reform in order to speed up economic growth.
CaptureI favor the latter approach as long as it does not increase deficit spending.  The Keynesian economist Paul Krugman mocks deficit hawks like me as “Very Serious People.”  But in my “serious” view we have a choice between two very different paths for our economic future:

  • Slow Growth. Continue on our present path of slow 2% annual growth. The official unemployment rate has dropped to 5% but slack in the economy caused by the low labor participation rate keeps raises low and millions still unemployed or under-employed. The slow economy also keeps inflation and interest rates low. This permits Congress and the President to shrug off deficit spending and debt accumulation because it’s virtually “free money,” being borrowed at very low interest rates.   Our present course not only prolongs income inequality but also allows the debt to keep ramping up indefinitely. The longer this continues, the greater will be the disruption when inflation and interest rates do eventually return to normal historical levels.
  • Faster Economic Growth.   There are many things we can do to speed up economic growth. Tax reform is first and foremost but deregulation (relax Obamacare and Dodd-Frank), trade expansion (pass TPP) and immigration reform (with an adequate guest worker program) would also help. But, contrary to what the Republican presidential candidates say, tax reform must be revenue neutral to be sustainable. That way the economic growth it produces will lower deficit spending rather than increasing it.  This is critical because economic growth will create new jobs and raise pay for existing jobs, thereby creating inflationary pressure. Inflation will lead to higher interest rates which in turn will make our debt much more expensive than it is now.

Conclusion. We can make our economy grow faster if we simply put our mind to it. But then inflation and interest rates will go up and interest payments on the debt will become an increasing burden on society.  This is why it is so important to put our debt on a downward path as a percentage of GDP.  We can make it happen if we want to.