Tag Archives: tax reform

Why it’s So Hard to Get the Long-term Unemployed Back to Work

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Earlier this month the economist Edward Lazear had an op-ed column in the Wall Street Journal “The Hidden Jobless Disaster”, pointing out that, even though the unemployment rate has been dropping for the past four years, the employment-to-population ratio has stayed stuck at 58.5%.  This low labor participation rate means that many workers have dropped out of the labor force and stopped looking for work.  In fact the disability rolls have grown by 13% since 2009 and the number of people receiving food stamps has grown by 39%.  These disincentives help to explain why the proportion of long-term unemployed is still so very high at 37%.
The WSJ reported in April, “Workers Stuck in Disability Stunt Economic Recovery”, that the federal disability rolls have jumped from 7.1 million in December 2007, when the recession started, to 8.9 million today, which is 5.4% of the civilian workforce.  This exodus to disability costs 0.6% of GDP, a sizable chunk when GDP is only growing at an annual rate of about 2%.  Furthermore only 0.5% of federal disability recipients return to work in a given year compared to 20% for private, employer sponsored, disability recipients.
Two conclusions can be drawn from this data.  First of all, the federal government should be much stricter in establishing and enforcing work requirements for all public welfare recipients, including those on disability.  This should be noncontroversial but it won’t happen unless Congress and the President take the initiative and make it happen.
But even more important, our national leaders need to get far more serious about boosting the economy to get many more millions of the unemployed and underemployed back to work.  Fundamental tax reform would help the most but targeted deregulation and expanded foreign trade would also help a lot.  The Republicans have the strongest, free market, argument on this basic and high priority issue and they should hammer away at any Democrats, including the President, who are dragging their heels on it!

Who is Responsible for the Sour Economy?

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In yesterday’s New York Times the columnist Ross Douthat with “The Great Disconnect” makes a good case that the Washington to Boston corridor, i.e. the national elite, is disconnected from America’s most pressing problems.  Instead of concerning themselves with jobs and the economy, healthcare costs and entitlement reform, fighting poverty and reforming the tax code, which are the real priorities of the American people, the issues getting the most attention by our national leaders are rather gun control, immigration reform and climate change mitigation which represent much lower public priorities.
Of course there is a political logjam between the two parties.  The Republicans want to use free market incentives to improve the economy such as tax reform and the elimination of onerous regulations.  The Democrats want more government stimulus which is controversial because it will increase the deficit.  As far as Mr. Douthat is concerned both parties are pretty much equally to blame for the stalemate because of their unwillingness to compromise in order to make progress on our biggest problems.
In a situation like this there is really only one person who has the clout to make a difference.  It is the President.  Presumably he is motivated to improve the economy more quickly because lack of progress will be a blot on his record and a drag on the chances of his party in the next presidential election.
The problem is that his liberal ideology, which got him elected and then re-elected, is at odds with the one single measure which would most improve the economy.  I am referring to pro-growth, broad-based tax reform where rate reduction and simplification would be offset revenue-wise by eliminating deductions and closing loopholes.  If such tax reform includes the elimination of the tax deduction for employer provided health insurance (again, offset with lower tax rates!), the cost of healthcare would drop dramatically as consumers started paying attention to their own costs.  Then Medicare and Medicaid could be brought into the same framework and presto, we have entitlement reform as well.
Republicans are strong advocates of tax reform.  It’s too bad that Democratic leaders can’t see how everyone, including themselves, would benefit from doing this!

Fiscal Fixes for the Jobless Recovery

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The economist Alan Blinder has a column in yesterday’s Wall Street Journal entitled “Fiscal Fixes for the Jobless Recovery” where he deplores the apparent complacency about our stubbornly high unemployment rate of 7.6% after four years now of recovery from the Great Recession.  His solutions: 1) boost government employment with greater deficit spending, 2) offer businesses a tax credit equal to 10% of the increase of their wage bills over the previous year, and 3) offset the high 35% corporate tax rate by taxing a company’s repatriated profits at a super low rate, based on the increase of its wage payroll.
What Mr. Blinder describes as complacency about the high unemployment rate is rather just huge frustration about the likelihood of a divided Congress being able to reach agreement on any fundamental reforms which would be able to boost economic growth.  His proposals illustrate why the philosophical chasm between the two political parties is so great.  In the first place, boosting government employment by increasing deficit spending is a total nonstarter.  Our enormous and rapidly increasing national debt is a major part of the problem.  We need to decrease government spending, not increase it.
We need to simplify the tax code, not make it more complicated with a new 10% tax credit.  Lowering tax rates overall, offset by eliminating special tax preferences for the well connected, is the type of fundamental reform which will truly boost the economy, by giving everyone the same greater opportunity to create wealth.
Since Republicans think that a 35% corporate tax rate is too high and Democrats think that too many companies are able to shelter their profits abroad, then why can’t we just lower the rate and change the rules to the point where multinational corporations will want to bring their profits home, pay taxes and reinvest in America.  A new tax credit just makes things more complicated!
What is needed to break the log-jam is leadership from our elected representatives, not more ideological name calling.  There are practical solutions to our economic and fiscal problems if we simply had more leaders who are focused on finding solutions rather than scoring points on the opposition!

CBO Analysis of the President’s 2014 Budget

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The Congressional Budget Office has just released “An Analysis of the President’s
2014 Budget”.  News reports highlight that the Obama plan will decrease the deficit over the next ten years by $1.1 trillion compared with the CBO baseline and that the
deficit in 2023 will be only 2% of GDP as opposed to 4.2% of GDP in 2013.  Federal debt held by the public (on which we pay interest) would grow from 73% of GDP ($11.3 trillion) at the end of 2012, to 77% of GDP ($12.8 trillion) at the end of 2014, and then shrink to 70% of GDP ($18.1 trillion) in 2023.
It may sound good to say that the deficit will be “only” 2% of GDP in 2023.  But this still represents about $600 billion being added every year to the national debt even 10 years from now.  Right now, with very low interest rates, we are paying $223 billion per year (8% of revenue) in interest on the debt.  When interest rates return to normal at 5% or so, interest on the debt will skyrocket, reaching $900 billion by 2023, representing 18% of the estimated $5.1 trillion in revenue for that year.  Just paying interest on the debt
will become a bigger and bigger burden for American society, continuing indefinitely into the future.
Here’s another problem with the President’s budget.  Almost half of the ten year deficit reduction ($493 billion) is achieved by limiting tax deductions to 28% of income (the tax
rate on income up to $183,000).  Using a limitation of tax deductions to shrink the deficit will make fundamental tax reform that much harder.  There is a strong bipartisan consensus for broadening and simplifying the tax code which means lowering, if not completely eliminating, many deductions in return for lower tax rates.  This should be the primary focus of tax reform in order to stimulate the economy by encouraging
more investment.
What we need is a credible plan to completely eliminate deficit spending in the
short term, and to do this together with pro-growth tax and regulatory reform.  It will be a huge challenge to get this accomplished but our future liberty and prosperity depend on it!

Updated Budget Projections from the Congressional Budget Office

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The Congressional Budget Office has just released an update to its February 2013 Budget Projections.  The deficit for 2013 is now projected to be $642 billion, down from the previous $845 billion.  This is good news but its main effect will only be to delay by several months until fall serious negotiations about raising the debt limit again.  The long term outlook has changed very little.  New debt for 2014-2023 is now projected at $6.3 trillion.  The total debt this year will be 76% of GDP and in 2023 it is projected to be at 74% of GDP and rising.  Over the past 40 years total debt has averaged 39% of GDP.
Such a large debt level now and for the indefinite future obviously has very serious negative consequences.  As soon as interest rates return to more typical higher levels, interest payments will rise by hundreds of billions of dollars per year, crowding out much other spending.  We can be sure that a new crisis will occur sooner or later leaving national leaders at that time in a precarious position, unless the debt level shrinks significantly in the meantime.
This means that significant additional deficit reduction is still needed at the present time.  Realistically, it should come from reforming entitlement spending which is becoming an even bigger driver of our continuing debt explosion.  Any national leader who denies the seriousness and urgency of our current frightful fiscal condition should be considered irresponsible and held to account for this failing.
The presently high unemployment rate of 7.5% is no excuse for inaction.  The way to boost the economy, and thereby reduce unemployment, is to encourage more business investment with tax and regulatory reform.  Economic stimulation and deficit reduction are not in opposition to each other.  They can and should be addressed together at the same time.

Whither the American Economy? II

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In today’s Wall Street Journal the columnist Holman Jenkins, with “The Reinhart and Rogoff Distraction”, writes that “Washington has signally failed to enact confidence-building and growth-inducing reforms that would make its fiscal and monetary stimulus seem less reckless and more like part of a coherent therapy.  The real problem is the incentive of voters and their representatives to stonewall any serious adjustment to the status quo….Hardly has the time been riper for another reform spasm like the Carter-era deregulation efforts, Reagan’s tax overhaul, … The ill-timed Obama campaign to magnify the perversities of our health-care system epitomizes a failure of political leadership to do its part to make the global monetary Hail Mary come off.”
The Republican House can slam on the brakes to try to slow down excessive federal spending but there is not much else it can do by itself.  The Democratic Senate is showing that it can address important but less central issues like Gun Control and Immigration Reform.  But only the President can provide game changing leadership on our fundamental economic and fiscal problems.  His political base of liberals and minorities does not want either spending cuts or reduction in tax rates.  So he proposes spending increases, small adjustments to entitlements, and tax increases on the wealthy.  This amounts to a political posture in order to appear to be addressing important issues without really engaging on them.
What has Obama accomplished?  He has shown that a liberal can be elected President  but can’t govern effectively from the left.  What is the likely outcome?  A stagnant economy with a slowly dropping unemployment rate from now until 2016 when we’ll have our next chance to vote for a reform agenda.  Eventually our rapidly growing national debt will lead to a new fiscal crisis, much worse than the Great Recession which we’ve just been through.  However it probably won’t happen until sometime after 2016.  So Obama is temporarily off the hook, so to speak, but he’ll still catch much blame later on.
Oh well, what is life without challenges!

Is Faster Growth Under Our Control?

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In today’s Wall Street Journal, columnist David Wessel declares that “Faster growth relies on a bump free road”.  Mr. Wessel cites a new forecast from the International Monetary Fund that sees a “three speed recovery” with the U.S. lagging behind emerging markets and developing economies but doing much better than the no-growth Euro zone.  According to Mr. Wessel our own economic growth is so closely tied in with the rest of the world, and especially Europe’s floundering economy, that the best we can do is to avoid “overly strong deficit reduction” and hope that there are no major bumps in the road.
It is pessimistic indeed to assume that there is little if anything we can do to boost economic output.  We can lower both individual and corporate tax rates, offset by eliminating deductions and closing loopholes, in order to stimulate more private investment.  We can help small businesses grow by removing the huge burden of having to provide health insurance to their employees (this can be accomplished by changing the tax treatment of health care insurance).  We can encourage more entrepreneurial activity with targeted (but temporary) tax exemptions. Immigration reform, hopefully now in the works, will boost the productivity of our 11,000,000 illegal immigrants by giving them more economic freedom.
Twenty million U.S. citizens are either unemployed or underemployed.  Our national leaders should consider it to be their moral duty to adopt measures to put more of them back to productive employment.  In addition, as the strongest economy in the world by far, we will boost the entire world economy if we can speed up our own growth.  The benefits of faster growth are so obvious that it should be the first priority of Congress and the President to work together to get this done!