Tag Archives: tax reform

A Breath of Fresh Air

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U.S. Representative David Camp (R, Michigan), Chair of the House Committee on Ways and Means, has just introduced the “Tax Reform Act of 2014” and describes it in a column in yesterday’s Wall Street Journal, “How to Fix Our Appalling Tax Code”.  This legislation, developed over the past three years by the committee he chairs, has lots of attractive features.  Mainly, however, it would give the economy a substantial boost.  Congress’s Joint Committee on Taxation estimates that it would increase GDP by $3.4 trillion over the next ten years and create 1.8 million new jobs.
CaptureIt will accomplish this goal by trimming or eliminating tax breaks and loopholes for the wealthy in order to reduce tax rates for almost everyone.  For example, the home mortgage deduction will be cut, for new homeowners, from the current value of $1,000,000 to $500,000.  The deduction for state and local taxes will be eliminated.  The charitable deduction will only apply for contributions in excess of 2% of income.  The middle class is protected by raising the standard deduction to $11,000 per individual or $22,000 per couple.  This means that 95% of taxpayers will be able to avoid itemizing.
The two basic tax rates would be 10% up to $75,000 in income, then 25% up to $400,000.  Over $400,000 there would be a 10% surcharge on salaried or “non-production” income.  The corporate tax rate would be cut from 35% to 25%, again by eliminating special exemptions and loopholes.
All of these features add up to a dramatic simplification of our tax code which will save an estimated $168 billion annually in preparation fees.
But always keep in mind the larger purpose of broad based tax reform like this.  In the words of the economist Glenn Hubbard, it is “a policy shift in favor of mass prosperity – dynamism and inclusion.”  It will do more for the poor than raising the minimum wage because it will actually create new jobs and better paying jobs.
This legislation represents a fantastic starting point for a national discussion on pro-growth tax reform.  Let’s get on with it!

Invested in America

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The Business Roundtable, an association of chief executive officers of leading U.S. companies, has just issued a new report, “Invested in America: A Growth Agenda for the U.S. Economy”, describing four actions which policymakers can take to rejuvenate the U.S. economy.
CaptureThey are:

  • Restore Fiscal Stability: constrain federal spending in a manner that reduces long-term spending growth, making both Medicare and Social Security more progressive and less expensive.
  • Enact Comprehensive Tax Reform: adopt a competitive, pro-growth tax framework that levels the playing field for U.S. companies competing in global markets.  Several studies estimate that cutting the U.S. corporate tax rate by 10 % (e.g. from 35% to 25%) would boost GDP by 1% or more.
  • Expand U.S. Trade and Investment Opportunities: pass updated Trade Promotion Authority legislation and use TPA to complete many new trade agreements which are already pending.
  • Repair America’s Broken Immigration System: increase the number of visas for higher skilled workers and provide legal status for the millions of undocumented immigrants currently living in the U.S.

These are the same “big four” policy changes which many progressive business leaders as well as evenhanded think tank experts often recommend.  They are really just common sense ideas which reasonable people should be able to come together on.
Isn’t it obvious that we’ll soon be in big trouble if we don’t get our enormous budget deficits under control?  And that controlling entitlement spending is key to getting this done?
Isn’t it just as obviously commonsensical that even U.S. based multinational corporations will try to avoid locating business operations in countries like the United States with very high corporate tax rates?
Isn’t it likewise obvious that foreign trade is just an extension of domestic trade and that the world is better off with as much trade as possible?
Finally, the secret of a vibrant, growing economy is to encourage as much initiative and innovation as possible.  Who take more initiative than the immigrants who figure out how to get here in the first place?
We don’t have to accept a sluggish economy, high unemployment and massive debt!  But we do need to take intelligent action to extricate ourselves from the predicament we are in!

What Is the State of the U.S. Economy?

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On the eve of the President’s State of the Union address, the New York Times gives an answer to this question in today’s paper, “Obama’s Puzzle: Economy Rarely Better, Approval Rarely Worse”.  The charts below do show the basic trends all moving in the right direction.  But is this good enough?
CaptureThe unemployment rate is moving steadily downward but it is still a high 6.7% almost five years after the recession ended in June 2009.  And this is with a labor participation rate of only 58.6%, which is historically very low.
The budget deficit is dropping but is still unsustainably high.  In the five years, 2009 – 2013, deficits have totaled $6 trillion dollars.  As soon as interest rates return to their historical average of 5%, interest on this $6 trillion in new debt alone will total $300 billion per year, forever!  Furthermore, the Congressional Budget Office, the most credible source of budget information, predicts that the deficit is likely to resume an inexorable climb within a few years as baby boomers retire in ever greater numbers, rapidly driving up entitlement costs.
Economic growth was stronger than expected in the last quarter of 2013 and this is a good sign.  But it has averaged only about 2% since the recession ended which is very low by historical standards, in a post recessionary period.
The point is, do we really need to settle for such mediocre performance: a stagnant economy, high unemployment and massively accumulating debt?  Should we just declare that in a highly competitive global economy with an ever higher premium on information and technology, that we just can’t do any better than we already are?  Isn’t there some way to make our economy grow faster in order to provide more and higher paying jobs?
I think that the answer to this last question is an emphatic yes!  In fact, this is what my blog is all about.  Just read some of the other recent posts and let me know if you disagree with what I am saying!

A Global Perspective on Income Inequality

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In connection with the annual World Economic Forum in Davos Switzerland, the World Bank has published a breakdown of income growth around the world, as reported yesterday by the Wall Street Journal in the article “Two-Track Future Imperils Global Growth”.  The key finding, as shown in the chart below, is that it is precisely the middle class in the developed nations which saw the slowest income growth in the years from 1998-2008.
CaptureIt is clear from this chart what is going on around the world.  The top 1% makes its money from capital investments and historically the return on capital exceeds economic growth.  The next 9% are both the skilled workers and the educated professionals who are benefitting from the growth of  knowledge industry.  The medium skilled middle class in the developed world, from the 75th percentile through the 90th percentiles, are the ones who are seeing the smallest income gains.  Their jobs are being eliminated by the force of globalization which is shifting lower skilled work to lower paid workers in the developing world.
The article points out, consistent with the above chart, that the income, including benefits, of the poorest 50% in the U.S. grew 23% in this same time period.  So it really is the middle class which is hurting the most in the U.S.  There are three basic ways of addressing this problem:

  • The federal government can help by taking much stronger measures to boost the economy thereby creating more jobs as well as higher paying jobs.  Tax reform, trade expansion, immigration reform and fiscal stability are what is needed to get this job done.
  • The states can help by improving our K-12 education system to make sure that everyone acquires the basic academic skills, such as reading and math, which they will need to achieve their highest potential in life.
  • All concerned and aware individuals (such as ourselves!) must constantly beat the drums to encourage young people to stay in school and take learning seriously.

America is “exceptional” because it is the strongest, freest, and wealthiest country the world has ever known.  But our future success is by no means guaranteed.  We have to constantly work for it and earn it!

Harnessing Market Forces versus Offsetting Market Forces

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The economist Matthew Slaughter writes in today’s Wall Street Journal that ’High Trade’ Jobs Pay Higher Wages. He points out that the 22.9 million Americans who work for U.S. headquartered multinational companies made an average of $73,338 in 2011 compared with the overall average wage of about $55,000 that year.  “Workers in multinational firms earn more, as global engagement fosters innovation and productivity growth.”
“There is a growing concern about stagnant or falling incomes, yet most of the measures proposed to deal with the issue – raising the minimum wage and reinstating unemployment benefits – purport to help workers by offsetting market forces.  Less attention is given to harnessing market forces.”
CaptureThis can be done by “liberalizing U.S. trade, investment, immigration and tax policies.”  In other words, we need more trade agreements like NAFTA, which has been so successful in increasing trade in North America.  We need more high skilled workers, both domestic and foreign.  We need lower corporate tax rates to encourage multinational corporations to bring their trillions of dollars in overseas profits back home.
We should always strive for a more equal society with less income inequality.  But the best single way to do this is to create more opportunity by growing the economy, i.e. by harnessing market forces.

How To Address Inequality: A Summary

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I have had many recent posts addressing the problem of income inequality in the United States and what can and should be done about it.  Below is a chart, from the Congressional Budget office, which also appeared in my December 24, 2013 post.  It shows that all income groups have made gains since 1980 but that higher income groups have gained the most.
CaptureThis means that income inequality is increasing.  The question is what to do about it.  My own attitude is to try to provide more economic opportunity for low income people.  How do we do this in the most effective way?

  • First and foremost by stimulating the private economy to grow faster and therefore to create more and higher paying jobs.  This can be done with broad based tax reform (lowering tax rates offset by closing loopholes), fiscal stability achieved by eliminating deficit spending, expanded foreign trade for a more efficient global economy, and finally, immigration reform to give legal status to undocumented workers and allow more high skilled foreigners to immigrate to the U.S.  Such measures as these require action by Congress and the President.
  • Secondly, by improving human capital, meaning fixing underperforming schools, improving rundown neighborhoods, combatting inner city crime more effectively, providing at least part-time jobs to young people and combatting teenage pregnancy. Problems such as these are best addressed at the state and local level.
  • Finally, providing more motivation for the unemployed and underemployed to find jobs and hold onto them.  A very effective way to do this is with the federal Earned Income Tax Credit.  It supplements the salary of working adults with children.  New York City is conducting an experiment to see if a similar program will also motivate childless adults to try harder to find work and stay employed.

Conclusion:  the best way to address inequality is to give people the best possible opportunity to obtain full time employment.  This means 1) creating more jobs, 2) providing better qualified workers for all jobs and 3) motivating the unemployed more strongly to find jobs and hold on to them.
Government at all levels can help people find jobs, in one way or another, and therefore become more productive citizens.  This will lead to a happier, healthier, and therefore a stronger society.  All of us will benefit from this happening!

Should Government Address Inequality Directly?

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Wall Street Journal columnist William Galston suggests in “Where Right and Left Agree on Inequality”, that both sides of the political spectrum agree that economic inequality is increasing in America and that government needs to address this problem.  “Poverty is part of the explanation, as liberals insist.  But so are parenting and family structure, as conservatives believe.”
CaptureIt so happens that we have a broadly supported federal program which simultaneously addresses both poverty and family structure.  It is the Earned Income Tax Credit program.  It provides $3,305 a year to low-income working families with one child and up to $6,143 for families with three or more children.  The U.S. spends $61 billion a year on this program and it has proven to be very successful in encouraging low-income people to find and keep jobs.  In fact, the economist, Gregory Mankiw, recommends the EITC over a higher minimum wage as a better way to increase the earnings of the working poor.
The New York Times’ Eduardo Porter reports in “Seeking Ways to Help the Poor and Childless”, that New York City is conducting an experiment to see if a locally run program similar to the EITC  will have the same positive effect in increasing employment of childless adults.  It is understood that many of the jobs being created in today’s economy are low paying service jobs.  As Mr. Porter says, “for the American market economy to remain viable, being employed must, one way or another, provide for workers’ needs.”
Conclusion:  as important as it is for Congress and the President to adopt measures to increase economic growth (e.g. tax reform, fiscal stability, expanded foreign trade, immigration reform), in order to create more and better paying jobs, government also has a responsibility to provide direct help to the needy who are trying to help themselves.  The EITC program is an excellent way to do this!

Why a High Corporate Income Tax Is So Damaging to Our Economy

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My previous post, “Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II.  The Graetz Plan”, describes a tax reform plan which establishes a 14% national consumption (VAT) tax, exempts families earning under $100,000 from paying any income tax and also reduces the Corporate Income Tax to 15%.  All of this is done in a revenue neutral manner while also preserving all of the progressivity of our current income tax system.
CaptureA recent Op Ed column in the New York Times, by the economist Lawrence Kotlikoff, “Abolish the Corporate Income Tax”, makes the case that such a proposal “might sound like a gift to the rich, but it would actually help workers. … Apple’s tax return says it all:  The company, according to one calculation, paid only 8% of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.”
Our corporate income tax rate, at 35%, is one of the highest in the world and this is what encourages American multinational companies to move their business to other countries.  Whether we abolish the corporate income tax entirely, or just reduce it to 15%, is less important than recognizing the need to overcome popular prejudice about big business and make fundamental changes in our tax structure.
Solving our country’s many problems, from rising inequality at home to projecting adequate strength around the world, requires that the U.S. have a strong economy.  An annual growth rate of 2% of GDP is not nearly good enough to end our current economic stagnation.  To accomplish this will require overcoming the strong headwinds of increasing global competition and the replacement of people with machines.  We will need innovative thinking and initiative to break out of the old ways of doing things which are holding us back.
Are the American people “exceptional” enough to accomplish this challenging task?

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems II. The Graetz Plan

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The Yale Tax Law Professor, Michael Graetz, has proposed a new tax system “100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States” which would do wonders towards straightening out the huge fiscal and economic problems now facing our country.
CaptureHow do we rev up the national economy in order to put more people back to work and, at the same time, raise the revenue needed to operate the government in the 21st century without mountains of debt?  Mr. Graetz’s basic idea is to tax consumption rather than relying totally on an income tax.  Under his plan both savings and investments will be taxed at a lower rate which will encourage more of both.  The Plan has these features:

  • A broad based Value Added Tax of about 14% is enacted on goods and services.  The U.S. is the only advanced economy without a VAT.
  • Families earning less than $100,000 are exempted from the income tax.  For incomes between $100,000 and $250,000, the tax rate would be 15%.  For income over $250,000, the rate would be 25%.
  • The corporate income tax rate is lowered to 15%.
  • The Earned Income Tax Credit (EITC) is used to provide relief from the VAT burden to low-income families by using payroll tax offsets.
  • The plan is designed to be revenue neutral as verified by the Tax Policy Center.

This plan has many advantages including:

  • Taxing consumption and lowering the corporate tax rate to 15% from its current level of 35% would dramatically encourage investment in the U.S. thereby stimulating the economy and creating both new jobs and higher wages for American workers.
  • It would eliminate more than 100 million of the 140 million U.S. tax returns.
  • With many fewer Americans paying income taxes there would be far less temptation for Congress to use income tax exclusions, deductions and credits to try to address social and economic problems.
  • The plan retains all of the progressive features of our current tax system whereby higher income earners pay higher tax rates.

The point of describing the Graetz Plan in some detail is not to suggest that it is the best way to implement tax reform but rather that here, at least, is one attractive way to do it.  The purpose is to move the discussion forward.  We badly need to make changes along these lines!

An Optimistic View of America’s Future!

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In the latest issue of Barron’s, Frederick Rowe, the managing partner of Greenbrier Partners Capital Management, asks in “More Than a Sugar High?” , “Can you imagine a country that is managed in an economically rational manner, creating the wealth that’s necessary to take proper care of the citizens who get left behind? … What if our economic recovery is more than a sugar high?  What if there is more here than insanely stimulative monetary policy from the Federal Reserve?  What if the U.S. has already begun to steer an economic course to a period of unprecedented and genuine prosperity, achievement, and problem solving?”
Here are eight factors which Mr. Rowe gives to point us in the right direction:

  • North American Energy Independence (already on the horizon).
  • Sensible Immigration Reform: encouraging our most enterprising and hard-working people to become citizens rather than chasing them away.
  • Repatriation of Corporate Income: if a company domiciled in the U.S. makes money in Argentina and wants to invest it in the U.S. we double-tax the daylights out of it.  It would be hard to imagine a more counterproductive tax policy.
  • Changing Directors and Their Thinking: the once unthinkable mindset of corporate directors acting on behalf of long-term owners (rather than the CEOs with whom they play golf) is actually gaining traction.
  • Lowering Corporate Taxes: the tax-writing committees in Congress are working on this.
  • Increasing Technological Leadership: the most dynamic technology companies in the world are domiciled in the U.S. Technology, in the short run, displaces workers.  But eventually workers catch up because new technology creates new kinds of jobs that were never imagined before.
  • Americanization of the World: more than three billion people around the world will soon be able to afford to live much more like the 300 million Americans do.  So companies which make it big here have an automatic global opportunity.
  • Obamacare:  Even this bureaucratic catastrophe provides a large opportunity for economic opportunity.  Think of Jimmy Carter’s failures which led to Ronald Reagan’s successes.

“Let your imagination run and consider all the things that can be accomplished by an energy-independent, cash-generating, cash-repatriating country that is a hotbed of technological innovation.”
I can’t possibly say it any better than this!