Aren't you sick and tired of the spin and half-truths that corrupt the debate about the U.S. economy, taxes, spending, and the budget deficit? Do you feel that you can't believe anything that any politician or their hacks in the media say because ideological spin makes it impossible to engage in truthful, honest debate? What we need are pragmatic, centrist adults to govern our economy.
Here's the lowdown based on sound economics and facts, not politics:
1. Federal budget deficits are ok during a recession, even preferable. Economies are cyclical, because they are based on human behavior and therefore subject to greed, fear, short-sightedness, and all the foibles of humans. Maintaining federal spending while private spending and tax revenues are in decline is ok, as long as it is off-set by a corresponding surplus.
2. The problem with the federal budget deficit really comes during growth periods, not recessions, because politician do not raise tax rates during the booms and therefore run a surplus. The one exception to this rule was during the late 1990's, when tax rates were maintained or raised slightly during a period of strong economic growth. Guess what, we ran a federal budget surplus for the first time since the early 1960's! I remember people opining about what would happen to the world economy without U.S. Treasury Bonds as an investment option. Yea right!
3. There are structural issues, namely (in the order of importance) Medicare and Social Security that go beyond the cyclicality of the U.S. economy and it's influence on budget deficits. Look at what happened to companies such as GM and Chrysler, as well as governments such as Greece, and many others that don't manage their long-term commitments prudently. Structural deficits must be addressed politically, preferably by a bi-partisan commission with teeth.
An additional area that is ripe for reigning in the budget deficit is plugging the thousands of loopholes in the tax code (such as the mortgage interest deduction, which also contributed to the housing bubble, and should be known as the Bank-Handout law).
4. I propose that we establish a realistic baseline for U.S. long-term economic growth, say 2-2.5%. This would be done by economists, not politicians. If economic growth exceeds the baseline, individual income taxes and individual capital gains taxes would rise on a graded scale. The more we exceed the baseline, the higher the tax rates go (up to a maximum). If economic growth is sub-par and below the baseline, then individual income taxes and individual capital gains tax rates automatically decline.
I purposely excluded dividend taxes from this scenario because earnings are already taxed at the corporate level before they are paid out to shareholders. I also excluded corporate tax from the equation because corporate long-term planning (e.g. hiring) tends to be more sensitive to tax rates.
These proposals would make the Federal Reserve Board's job much easier because the Fed's main policy tool of raising interest rates during "excessive" growth and lowering rates during recessions would be naturally complemented by individual income tax rates. Additionally, these tax rates would naturally fight asset bubbles such as the technology stock boom and the housing boom because if people have to pay higher capital gains taxes, they may think twice about buying into a "mania." These proposals provide a natural brake on speculative activity, put our economy on a sound, long-term growth trajectory, and are fair to all our citizens.
One last thing that has to be debunked, namely this idea that lowering tax rates raises revenue for the U.S. Treasury via increased economic activity. What nonsense! There is no economic evidence for this assertion, but I hear it all the time, mainly from ideologically-oriented talking heads. To take this argument to it's natural conclusion, why not just decrease tax rates to zero, the ultimate stimulus. How much money would flow into the Treasury. Exactly ZERO!
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