Monday, October 15, 2012

Pro-growth Policies Are The Only Way Out

To get the US out of the economic and fiscal mess that we're in requires a comprehensive approach that involves a number of "moving parts". It will also be a delicate balance requiring some finesse as the economy is fragile--such is the peril a nation faces when "addicted" to debt and extreme deficit spending.  

Growth is the real goal as it's the only thing that will get us out of our mess.  Lack of growth and collapsed tax revenue is a big part of our problem right now. Business investment and hiring are depressed due to weak demand and uncertainty due to the unusual monetary policy experiments, threats of taxes, further regulation that continues to 'evolve' such as ObamaCare and DoddFrank, and a poor demographic backdrop.

But growth will not fix the budget deficit. There will have to be spending cuts and some revenue enhancements.

European-style Taxation Will Not Work
First of all, tax increases at this time, even if there were any appetite for them, will likely prove to be counter-productive. With a weak economy, there is a real risk that increased income taxes now will REDUCE revenues as growth will be stunted.  Europe is trying this now--using nearly all tax increases and very few spending cuts to try to reduce deficits--and the result is disappointing revenues leading for calls for even more taxes.  It just doesn't work in our current weak environment. It's what France is trying to do and failing.  This is also Schumer's and Obama's approach.  It won't work in a weak economy.  It would work in a stronger economy I admit.

A Comprehensive Plan--Many Parts To Make a Whole
I think the following is Romney's plan consisting of:
  1. marginal tax rate reductions across the board with reduced deductions and tax credits to try to be somewhat revenue neutral on the upper class but tax cuts on the middle class. There's got to be some kick-start from tax reductions.  We need to limit tax deductions and credits across the board.
  2. federal spending must begin to be cut; but taxes need to be reduced  (expansionary) more than spending cuts (contractionary).  The most wasteful tax credits must be eliminated or limited.  
  3. Reduced marginal tax rates for small businesses (Subchapter S businesses) also matters even when revenue is neutral as some people/businesses are paying rates on the marginal rate.  This with the other reforms below improve the hiring situation for these entities.
  4. entitlement reform that affects entitlement cost projections out in the future and eliminates some uncertainty, 
  5. Romney's plan is also to NOT let taxes rise in the fiscal cliff in addition to the supply-side tax cuts as above.
Pro-Business, Pro-Growth Agenda
A pro-business agenda from a real businessman is also required:
  1. less regulatory attack from government agencies especially EPA,  
  2. reducing counter-productive government interference in the economy by revising or reversing ObamaCare and DoddFrank to fix known flaws,
  3. corporate tax reform (lower marginal corporate rates) to help repatriate jobs and business back from Asia, less threats (and more clarity about further tax increases) from the White House.  
  4. More jobs in energy should help. Just look at what's happened in North Dakota and Texas.  
  5. I would add that we need to make reforms that focus on reducing costs in medical care now---medical costs are hurting families now.
Lower marginal corporate rates for business should help repatriate jobs and capital from Asia and elsewhere.  Romney wants improvements in the trade picture, and repatriating jobs by reducing corporate tax rates and Presidential "cheerleading" will be key.

Why not limit total deductions and credits? Why are we giving away tax credits to buy luxury electric sports cars from Tesla costing $100,000? or for $100,000 Fisker cars made in Finland? It's a subsidy for wealthy people. The mortgage interest rate deduction is essentially a subsidy to the wealthiest individuals as well.  Means-testing of Social Security and Medicare now also makes sense.  Just do it!

There's so much in play, that there needs to be one grand plan that will have to be formulated, negotiated, and compromised so that it passes.  The comprehensive plan will have to be bi-partisan.  It might need to be Simpson Bowles plan itself.

But tax reform won't work unless there's some tax reductions now. It always leads to more revenue later.  This is proven.  There can be no doubt now about the efficacy of tax cuts!  It's the only way to stimulate now.

That's my take on our difficult dilemma.

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