Three weeks ago I co-authored an op-ed for the Investor’s Business Daily with Stephen Moore, founder of the Club for Growth and former Wall Street Journal editorial board member, currently working with the Heritage Foundation. Our goal was to present a simple outline of the policies we need to pursue as a country in order to get us back to 3–4% annual GDP growth. As we note in the op-ed, Stephen and I have been engaging with a number of presidential candidates and with other economists around the topic of growth.
We spent a great deal of time going back and forth on a variety of topics, trying to get down to a few ideas that we think make the most sense. I should note that few people will read the piece below without being upset by at least one of our suggestions. The goal was to not just list the standard Republican “fixes” but to actually come up with a plan that might garner support across the political spectrum on ways to address the critical problem of how to get the country back to acceptable growth.
Part of the challenge was reducing what could have been a book to just 800 words. Today’s letter will start with the actual op-ed, and then I will expand on some of the points. Readers and friends have been pressing me to offer some ideas as to what policies I think we should pursue, so here they are. I hope the op-ed will create some thoughtful response. It would be nice if we could get a few candidates to embrace some or all of what we are suggesting, even (or maybe especially) some of the more radical parts.
(I have made a few very minor edits to the op-ed.)
By John Mauldin and Stephen Moore
The dismal news of 0.2% GDP growth for the first quarter only confirmed that the US is in the midst of its slowest recovery in half a century from an economic crisis. Could it be that at least some of the rage we've seen in the streets of Baltimore is a result of a paltry recovery that hasn't benefited low-income inner-city areas? We are at least $1.5 trillion a year behind where we would be with even an average post-World War II recovery.
While many blame a lack of sufficient demand and even insufficient government spending, our view is that the primary factors behind the growth slowdown are an increasingly intrusive regulatory environment, a confusing and punitive tax scheme, and lack of certainty over healthcare costs.
Each of these factors has contributed to a climate where growth is slow and incomes are stagnant. These are problems that cannot be solved by monetary and fiscal policy alone. To get real growth and increased productivity, we need to deal with the real source of economic progress: the incentive structure. The coming presidential race offers an opportunity for candidates to put forth concrete and comprehensive ideas about what can be done to create higher economic growth – as opposed to platitudes and piecemeal ideas that don't address the entire problem. The two of us have met with several candidates and discussed tax reform and other economic growth issues.
We offer here some solutions of our own for them to consider.
1. Streamline the federal bureaucracy.
Government has become much like the neighbor who has hoarded every magazine and odd knick knack for 50 years. The attic and every room are stuffed with items no one would miss. The size of the US code has multiplied by over 18 times in 65 years. There are more than 1 million restrictive regulations. Enough already. It's time to clean out the attic. The president, with some flexibility, should require each agency to reduce the number of regulations under its purview by 20%, at the rate of 5% a year. And then Congress should pass a sunset law for the remaining regulations, requiring them to be reviewed at some point in order to be maintained. Further, if new rules are needed, then remove some old ones. Stop the growth of the federal regulatory code. We have enough rules today; let's just make sure they're the right ones.
2. Simplify and flatten the income tax.
Make the individual income rate 20% (at most) for all income over $50,000, with no deductions for anything. Reduce the corporate tax to 15%, again eliminating all deductions other than what is allowed by standard accounting practice. No perks, no special benefits. Further, tax foreign corporate income at 5%–10%, and let companies bring it back home to invest here. This strategy will actually increase tax revenues.
3. Replace the payroll tax with a business transfer tax of 15%
which will give lower income workers a big raise. Companies would pay tax on their gross receipts, minus allowable expenses in the conduct of producing goods and services. Nearly every economist agrees that consumption taxes are better than income taxes. Further, this tax can be rebated at the border, so it should encourage domestic production and be popular with union workers since it makes US products more competitive internationally.
The article Thoughts from the Frontline: Cleaning Out the Attic was originally published at mauldineconomics.com.
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