Economics & Research Blog
Dr. Joe's Economic Recovery Plan
Since lots of people are getting into the act with the creation of economic recovery plans,
By Dr. Joe Webb
Published: January 19, 2009
Since lots of people are getting into the act with the creation of economic recovery plans, I figured why not create one myself? This tax plan is my recovery plan. The cure for our problems is investment in the goods and services producing capabilities of the economy.
Among the biggest problems of any of the plans for loans or bailouts is that they only serve the businesses that exist today. There is nothing that promotes the creative destruction that comes about through the formation new businesses and commercialization of new technologies.
There are lots of bailout plans that are directed to employment. Among them are directed tax incentives or access to low-interest loans if a business hires new people or maintains its headcount. This assumes that employment in that specific company is the only thing that matters. It's not. Let's say we give a tax advantage or loan access to an existing business if they keep their headcount at current levels. That means that the business has a disincentive to invest in new technologies that could reduce their number of workers. That sounds bad at first, but it also means that the company invented the new technology would have difficulty finding buyers for its products. Why? Because any company that would be a prospect for buying the new technology would be jeopardizing their financing or their tax situation. That means if it can't find buyers, it would not be hiring workers itself. This could create situations similar to the featherbedding of workers when computerized typesetting came to big newspapers. They had to agree to retain the hot type workers at their levels of pay even if it meant they sat around and did nothing. Which they did, until they retired.
Focusing on employment forgets that employment is the result of investment and economic activity, not the cause of it. Trying to fix employment is like taking someone's temperature and then running hot or cold water on it before you read it. You have to plant the tree before you get its fruit (see my capital gains proposal below).
If anything, now is the time that we need to stimulate the forces of creative destruction in the economy, and not the hunkering down and cost cutting that we're getting now.
None of these will be enacted, you can be sure of that, but here goes:
Eliminate “sunset” provisions on all tax plans. The supposed “Bush tax cuts” expire in 2010. I find it amazing that tax rate plans can have expiration dates, but government agencies never seem to. But that's another issue for a barstool discussion (note: I don't drink, but I know I should). It's dumb to complicate business decisions and calculations of returns based on something expiring or coming into effect. Businesses run best when they are making business decisions not tax decisions, and fiddling around with tax laws every year just makes accountants experts at tax avoidance when they should be helping businesses understand their businesses instead.
No capital gains tax. This is a killer of savings and investment. Like the saying goes, you want to tax the fruit of the tree, not cut off part of the tree, which is what capital gains does.
No more bailouts. Remind people that capitalist systems include profits and losses. Protecting businesses from losses only kills their discipline and eliminates healthy fear which is necessary to prevent risk-taking for the sake of risk-taking alone. No loss carrybacks or carryforwards. You lost the money and no one should underwrite that.
Eliminate the social security tax on workers and employees. This would mean that everyone would stop pretending that there is an account for every worker with a shoebox of their money at the Treasury Department. It would also be the end of pretending that a portion of the social security tax is paid by the employer (no it's not, it's paid by the customer, just like wages are). It's a social program, plain and simple, with a trust fund that only invests in obligations that the Treasury Department issues (which is like telling your left front pocket that your right front pocket owes it money). Admitting such would go a long way to solving its problems.
No income tax on anything under $50,000 per wage-earner. After that, its 15% up to $200,000 and then 35% over that. Do your tax return on a post card. No tax on savings or interest (sorry cities and states, you have to compete with everyone else for project funding and pay market rates). Dividends are taxable because they won't be taxed at the corporate level (see below). No more IRA or 401k programs. We tax everything, even social security income. No personal exemptions. Nothing. The $50,000 and $200,000 levels would be adjusted for inflation. There's no Alternative Minimum Tax, which is one of the biggest drains on the economy and one of the long-term reasons for our current situation.
No deductions. Period. Tax deductibility is government micromanagement of the economy and only fosters political entrepreneurship, which is entrepreneurship of the worst kind. The mortgage deduction just encourages abuses, which we have good experience with in the past couple of years, don't we? No deductibility for charities, much as that one tears at the heart strings. No deductions for state or local taxes.
All business capital investment over $1 million is depreciated in three years; anything under that is written off in one year. I might make buildings go for 20 years. But that's a quibble. One of the easiest ways to get out of our current financial funk would be to allow all businesses to write off any remaining depreciation on their equipment right at this very moment and apply for corporate tax refunds rather than choosing who gets special treatment. This is particularly needed in the printing industry. We'd be much better off if we got old equipment off the floor right now. There's lots of equipment that owners are just waiting for leases to be over, or there's no way they can afford newer equipment. Computer-based equipment is also favored now (5 years) versus mechanical equipment (often 15 years). This distorts everything. Even modern mechanical equipment becomes obsolete sooner than ever. Three years will encourage regular renewal of the productive base and not favor one category over another.
Corporation tax is 10% starting with the first dollar of profit, with no special exemptions or deductions. No special business deductions for R&D or anything else. C'mon, you're only being taxed at 10%. I'd prefer to have the corporate tax at 0%, but I'm trying to reach across the aisle on this one, since businesses are evil and should pay their “fair share,” whatever that is. (Doesn't anyone realize that business taxes are in the prices of every product we buy? I'll play the game on this one, though.) You can avoid the corporate tax by paying workers more money that year (they're called bonuses, which are on the endangered species list now). Dividends as a business expense since they would be taxed to individuals. Guess what... hardly any corporate taxes would be collected because the profits would be sent to the hands of investors and workers which are where they belong.
All duties on imported goods will be 0%. The entire U.S. would become a duty-free zone, a highly dynamic platform for the world economy, attracting investment and innovation worldwide, which will be especially critical as U.S. economic dominance naturally recedes as a result of its aging population, and the fact that the U.S. is just plain outnumbered in population. The rest of the world would have to follow suit and lower or eliminate tariffs or fall by the wayside.
The minimum wage will be eliminated. Right now, the only people who do not earn as much as the minimum wage are workers paid “off the books” and the entrepreneurs who go through months or years of negative cash flow to start businesses. There's no place in today's economy for someone to take the risk of an unpaid apprenticeship.
Finally, I'd pass a law that sent us back to the gold standard or something similar. Its dismantling was started by FDR and completed by Nixon. Over the years, I always felt the gold standard folks were wackos. No matter what the economic ill, a gold standard would solve it. Wars would stop because governments would not be able to fund them, we're told. Everything I've seen happen over the past decade or so, and especially this year, have made me realize the discipline that the gold standard would bring to markets and government behavior. I now count myself as one of the wackos in this regard.
Even if there is no gold standard, the Federal Reserve should be chartered to be hawkish about inflation. It should not care whether the economy is rising or falling; that's the job of entrepreneurs and consumers. This would make the Fed more like Europe's ECB. The latter has faltered of late, succumbing to the sins of the Federal Reserve, but we know they'll get it right once again if they're allowed to.
Total government spending (Federal, state, local) will be limited to population growth and inflation. I'd love to have the starting point be somewhere in the 1920s before government largess came into vogue, but that's just wishing way too much.
There you have it. Many of these ideas are in practice right now in other countries and in some U.S. states. Everyone will attempt to tweak each proposal for one reason or another. Sorry, it's all or nothing. No earmarks or special preferences allowed.
The only certainty of the above is that none of it will be passed any time soon. We live in a democracy, which is a bad system, but much better than all the other kinds. Thank goodness for that.