The Economy Needs Structural Changes, Not Gimmicks

The Washington Post reports, “Several senior White House officials have begun discussing whether to push for a temporary payroll tax cut as a way to arrest an economic slowdown, three people familiar with the discussions said.”

The discussions follow a budget deal that sent spending upward by $320 billion and ensured trillion-dollar deficits for the foreseeable future, vehement calls by the president for the Federal Reserve to cut interest rates further, and even a push to embark on a new program of quantitative easing.

Like a doctor injecting a sick, lethargic patient with uppers, the policies aimed to jump-start the economy may temporarily infuse life into the convalescent. They do not do anything to cure the underlying condition.

The national debt fast approaches $23 trillion. This burden, substantive and psychological, weighs down the economy. The structural fiscal problems, involving both taxes and spending, and pressure on monetary policy to keep rates artificially low, not only ensure an eventual downturn but limit short-term palliatives as well.

Out-of-control federal spending comes directly as a result of out-of-control health-care spending. The federal government spent about one in 20 dollars on health care a half century ago. Today, the federal government spends almost one in three dollars directly on health care. This response to medical inflation also fuels it. A half century ago, health care amounted to about 7 percent of the American economy. Today, it accounts for about 18 percent. The more the government commits itself to subsidize the medical bills of individuals, the more it necessarily spends. And this inevitably grows worse. By the middle of the next decade, the Centers for Medicare and Medicaid Services estimates, health-care spending grows from 18 percent of GDP to over 20 percent ($5.6 trillion). Taxpayers, because of Medicare Part D, Obamacare, and much else, pay a large portion of this amount.

Rather than act to rein in spending, Republicans punt, and many Democrats seek to increase commitments as though not costs but coverage stands as the primary problem.

Federal revenue, almost wholly stagnant for several years, amounts to about $3.4 trillion this year after hovering around $3.3 trillion for the last four years. A real restructuring of the tax code would achieve higher revenues as it grants Americans greater freedom.

Taxes on U.S. corporations amount to about 1.5 percent of GDP. Whereas corporate taxes account for about 10 percent of federal revenues today, they constituted 40 percent at their peak point in 1943. In just a few generations, a massive shift in the tax burden took place in which individuals paid what corporations once did. Part of this involves a welcome reduction in onerous corporate rates. A more nefarious part of this involves a byzantine code that invites manipulation from massive corporations, such as Amazon, which received a refund for the most recent year, that can afford an army of clever accountants and lawyers. A clearer, less complex code would result in higher revenues without the need for a rate hike.

To reverse the trend toward inequality, opportunities for employees to own part of the business where they work should receive encouragement. Many private businesses use limited liability companies (LLCs) to avoid double taxation. But LLCs limit opportunities for employee ownership. LLCs would not be used if dividends from C-Corporations, entities taxed separately from its owners, got credit for taxes paid by C-Corps. Employees would only be subject to taxes where C-Corps paid dividends. Moving from LLCs to C-Corps will make federal taxation more efficient and raise more revenue. LLC income is taxed at owner’s tax rate. Dividends from C-Corps would also be taxed at owner’s tax rate but with credit for tax paid at the C-Corp level. Revenue loss to the federal budget would be minimized since much of the ownership is not taxed, e.g., pension funds, endowments, and foundations. Management of public and private C-Corps would be motivated to increase dividends. All employee owners will benefit from increased dividends. Other solutions will not make as much progress on inequality as employee ownership and management focus to increase dividends.

The economy requires structural changes to the tax code and to spending obligations, as well as incentives to check health-care inflation, to cure what ails it. Gimmicky stimulants, such as rate reductions by the fed, massive deficit spending, and a payroll tax cut, may work to enhance the president’s re-election chances. They do little positive, and much negative, for the long-term soundness of the economy.

Hunt Lawrence is a New York-based investor. Daniel Flynn is the author of six books.

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Author: Hunt Lawrence and Daniel J. Flynn

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