While the Super Committee's goal is to cut the national debt by a measly $1.2 trillion out of the CBO's estimated $9 trillion increase over the next decade, low expectations exist for a solution to provide fiscal sanity. In order to put Americans back to work again, reforming the tax system should be a top priority. A simple, less obstructive tax system, such as Perry's flat income tax, would be much more efficient than our current progressive marginal tax system. Even if a new tax system would bring in a lower amount of revenue, there are very few legitimate roles for the federal government, and the level of spending should be cut dramatically.
What are the effects on economic growth and tax revenue from our current tax system? This can be explained by the Laffer Curve, which is a theoretical explanation noting the range of tax rates that disincentivizes individuals to work and prohibits economic growth. The decline in hours worked and productivity reduce the amount of income that can be taxed and therefore reduces tax revenue. The tax reforms by President Ronald Reagan in 1986 are a perfect example. In a recent article, Martin Feldstein explains that these lower tax rates in the 80s led to an increase in tax revenue, because private investment increased, more individuals were hired, and constraints on economic growth were removed.
There are a number of alternatives currently being discussed by Republican presidential candidates that would increase potential economic growth significantly more than the tax code we have today. Some are arguing that these alternatives (i.e. Perry's plan, Cain's 9-9-9 plan, and the Fairtax) will not bring in sufficient revenue to pay for current government outlays.
The problem with this argument is that it assumes that current federal government spending is at the "right" amount. There has been an insurmountable increase in government spending for quite some time, and many of the programs that are not effective should be removed and stimulus funding should not be made permanent.
Let’s let the people take the power back from the government and reduce its size and scope. We can do this by moving to a tax system that focuses on reviving economic growth by increasing economic choices by individuals and firms through market-oriented policies, which may coincide in many cases with supply-siders. Changing the tax system to one that can incentivize individuals to work and save and firms to reduce their costs of production should be a goal.
We have been going down the same road of tinkering around the edges of taxes and spending that have not been successful. These actions have made us more dependent on the government. This is apparent across our economy, and until the citizens of our great country can take back the reigns from government and allow markets to work without manipulation, we will stifle the entrepreneurial spirit that has made America an economic superpower.
I always refer back to my two favorite economists: Milton Friedman who said something similar to "an increase in government reduces individual choices and freedoms" and Hayek who may have referred to it more precisely by noting that "expansion of government makes men slaves." Do we want a government that provides an economic environment that fosters economic growth, or should it supply goods and services that some believe the private sector fails to provide? This is the dilemma that we continue to face, and it is time that we think outside the box and reform the tax code.
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The Discussion
IMO even a Keynsian would not want the stimulus permanent. This is a cylce, perhaps a really long one, but not a permanent situation.
I do think there is a fundamental debate right now about what we, as voters and citizens, think the role of government should be. There are theories on all sides.
I do agree that tax reform shold be part of that debate.
I am in favor of giving back as much power as possible to states, counties, and cities. They know what their problems are much better than the Feds do. The Federal government should concern itself only with setting the rules (the Level Playing Field), providing a safety net, and meeting the needs of groups (say, schoolkids) that can't be otherwise helped and exist all over the country (that is, no pork-barreling).
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Since when is there a lack of incentive to work?
People often mistake how supply side economics is supposed to work. The idea is not "putting money into people hands to create DEMAND", which is a Keynesian idea. In fact, it has nothing to do with recessions.
The idea is that at maximum economic capacity (full employment), that lower taxes will encourage more people to work, and to work longer/harder. That would increase the labor SUPPLY, which would push down wages until the number of jobs increased to be in equilibrium with that increased labor supply. And that would mean the economy is operating at a new higher maximum output level.
So even if it worked, it'd be rather marginal, and would do nothing to help grow out of a recession.
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Great article but one point of clarification. Under the FairTax the overall rate is lowered but the base is significantly expanded resulting in lower taxes and higher gov't revenue. In fact, a research study came out on Monday showing that if the gov't adopted the FairTax in 2009 revenue would've increased by 171B and in 2010 by 267B. Lower taxes, higher growth, lower unemployment and paying down the debt. What's not to like.
Wait. $1.2 trillion is measly? I suppose the ARRA was less than measly then? Or do you use different standards when considering cuts and spending?
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'Let the people take power back from the government?' You mean the one we gave it too? You seem too prone to rhetorical flourishes and not enough on providing sufficient evidence, for which there is none because economic evidence is like saying you have evidence that you can predict the weather years from now. To start, look at the world's most productive economies minus our own (productivity of course being defined by GDP/capita or median income) and you will see any 'fair tax' or similar program is by no means a measure of economic health. Next, reviving economic growth is a combination of many different results, not simply from some hindrance caused by government.
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Today of our $15 Trillion Economy, Local, State and Federal Spending account for basically 46% or $6.8 Trillion. Nearly a quarter of that Government Spending is allocated through Medicare/Medicaid & Social Secerity expenses.
We have nobody to Blame for this but ourselves as a nation. I do not exclude myself from the prior assertion. As a nation we have gorged ourselves on Government benefits.
With less than $300 Billion annually expensed by our nation's business in federal taxes, even 100% reduction will not cause a significant rise in hiring .
Tax Reform is important but in the Big Picture our $300 in Federal Business taxes represent less than 5% of the nation's total annual spending!
Mr. Ginn, I agree with a lot of your essay, but there certainly is no consensus that Reaganomics, or voodoo economics, or trickle down economics really works. It seems to me that if you create a favorable environment for investment by decreasing taxes and regulation, employment will increase and tax revenues will go up. Presently, anything that would benefit the affluent, even if it is good for America, is anathema to liberals. Nevertheless, tax simplification is now on the table, especially if a Republican wins the election, so maybe we can make some progress in this area.
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