4 Ways To Reform Tax Code For Growth

Posted by Jeff Carter
on September 27th, 2012

There is a lot of talk about taxes these days. That happens when you have a 16 trillion dollar budget deficit and the highest government spending to Gross Domestic Product (GDP) ratio in history. Turn on the news and there is coverage of riots in Spain and Greece because both governments are broke and have no way out of their messes.

Spain and Greece went about fixing their problems the wrong way. They each increased taxes, increased fees, and decreased government spending. They were only a third correct in their approach. The result is a vice like grip on economic growth. The government cuts kill transfer payments to citizens that relied on them. The higher taxes and fees disincentivize any person or company with productive assets to expand operations so they can’t possible employ the disenfranchised citizens.

There are many more problems in each economy than just that.

In America, we have a plethora of productive resources that have been sidelined by uncertainty, government spending and stimulus, and regulation. America is a powder keg at the end of a fuse that is waiting to be ignited.

Obama is the guy that refuses to light the match under any circumstances. His policies are the cause of the stranglehold on economic growth. Republicans have offered up some ideas, but they have stalled in the Senate. The failed stimulus proves government spending cannot possibly lift us into a consistent 3%+ GDP growth track.

US Real GDP Growth data by YCharts

What should the next President and Congress do?

1. End loopholes in the tax code. There are all kinds of tax breaks that different constituencies have lobbied for. For example, your mortgage deduction is a tax break that subsidizes housing. There are plenty of others. End them all.

2. Lower marginal tax rates. Combined with cutting loopholes, lowering the rate that people pay actually brings in more money to the federal government, along with having the simultaneous effect of encouraging economic expansion. Taking the top tax rate from 39% to 20% while ending all loopholes would have the affect of increasing the amount of tax the wealthy paid. Why? Because the effective rate would be higher. Check out Romney’s taxes. Everyone is up in arms that he paid an effective rate of around 13%. End the write offs, and his effective tax rate would be higher. Obama’s plan would allow the rich to escape higher tax rates. Only the middle class and upper middle class would be ensnared in them because the rich have ways avoiding tax that are unavailable to less wealthy people. For example, timing the recognition of income, or recognizing income in ways that have cost offsets to make it look like no income was actually earned.

3. Cut corporate taxes. Slash corporate taxes and at the same time have a one time deal where companies could repatriate assets held out of the US for tax reasons and pay either limited or no tax on them. This encourages productive capital to be invested in the US, creating jobs here. The US has the highest corporate tax rate in the western world.

4. Slash government spending. Cut all kinds of government spending. Shrink the size of government and make room for the private sector. Government is borrowing so much right now the private sector has trouble getting a loan. Government spending’s multiplier effect on the economy is 0.

That’s how you light the fuse to get things going. It’s not hard, but some hard choices would have to be made. To continue down the present path we are on is futile. Just look at Europe, and you will see our eventual future.

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