The Opioid Economy
This morning on CNBC, Joe Kernan pounded his interviewees on the need for massive tax cuts to stimulate the economy. He excoriated the talking head money managers about the need to drop the corporate tax from the current 35 percent to twenty percent (as described in Speaker Paul Ryan’s Better Way proposal) or even to fifteen percent as promised by then-candidate Trump on the campaign trail. When one of the talking heads (there are so many its hard to keep track all of them) had the temerity to suggest raising the top individual rate from 39% to 45% to offset reduced corporate taxes, Joe was apoplectic. He insisted we need massive tax cuts to stimulate the economy no matter what it might do the deficit and the public debt.
If you have read any of my previous essays on taxes, you will already know that I am unconvinced that low taxes can do much more than provide a temporary burst of economic activity offset by the higher risk exposure of increased debt. Increased economic growth from the famous Reagan tax cuts was insufficient to absorb increased deficits and mounting debt, which rose from $1.5 trillion in 1982 to $6.4 trillion by 1997. Even John Maynard Keynes knows that if GDP increases from $3.3 trillion (in 1982) to $8.6 trillion (in 1997) you shouldn’t have to increase debt by over 300%.
But then I thought, wait a minute! Why are we trying to stimulate economic growth by putting more money in the hands of corporations (something the Fed has been trying to do for eight years) when CEOs state that the biggest constraint to expansion is a lack of qualified workers? The Society of Human Resources Management says this is the most challenging market for finding talent in years. Today’s stock market took off when ADP and Moody Analytics announced that private sector employment grew by 263,000. The Dow just recently broke 20,000 and is still near all-time highs. Why do we need more stimulus?
The Fed believes that the economy is strong enough that it can tighten its accommodative posture by raising short term interest rates two or three times this year. In addition the Fed is planning to start reducing the size of its balance sheet, which ballooned to $4.5 trillion in a largely futile effort to boost growth.
So why the heck is everybody so hell bent on further stimulating an economy that is already hitting capacity constraints? Are we addicted to stimulus?
Hitting capacity constraints at 2.0-2.5 percent growth means that there are structural issues in the economy that need to be addressed before we can begin to grow at a more rapid rate. These structural issues include things like the regulatory environment (including financial, environmental and healthcare regulation), crumbling infrastructure and an unmotivated and untrained workforce (not to mention an unsustainable social welfare system).
The structural issues also include a complex and opaque tax system that drags down business activity. But the structure of our tax system and the level of taxation are two different issues. A tax reform can be revenue neutral and still provide substantial reform. Some might say, if it doesn’t lower my taxes why should I care about tax reform? If I can get you to overlook your own self-interest for a minute and try and see how the current tax system puts enormous burdens on our productive capacity you will understand how a thorough revision of how tax is calculated and collected would provide an enormous benefit to everyone even if the overall level of taxation remained the same.
Think of the countless hours expended on tax compliance by business owners and their tax advisors. Think of all the tortured and convoluted mergers and acquisitions that make little business sense but that provide enormous tax benefits. Think of all the innovation that could be generated when management is not bogged down filling out tax forms. And keep in mind that this tax system is more burdensome on small businesses (the ones that generate most of the employment in the US) that lack the resources of large corporations.
A reform to substantially reduce the complexity of the current tax code would have the additional benefit of providing greater transparency for the common citizen. Most people feel the tax system is loaded against them. This feeling is exacerbated by the opaqueness of the current tax code, reinforcing the lack of trust in government that is prevalent today.
The principal hurdle to a tax package is how to pay for the tax cut. Without the repeal of Obamacare the Republicans lack the funds to pay for their huge tax cuts (which also deprives the Democrats the opportunity to feign outrage at cutting off people’s health coverage in order to give tax breaks to the wealthy). Once tax cuts are off the table, Congress can focus on cutting out all the subsidies and tax breaks that make our tax code such a mess. There will wailing and the gnashing of teeth from the corporate CEOs and their lobbyists as they try and preserve their treasured benefits that aren’t available to the rest of us. The government gives away about $1 trillion in annual revenue because of all these subsidies and tax breaks. Cutting those subsidies out might leave enough room to have a little tax cut left over for the rest of us.
Through booms and busts we have had fiscal deficits in 45 of the last 50 years. It is time we go cold turkey on our addiction to stimulus!