There are some really important points in here that I want to highlight:
( 1 )
We are in far worse shape economically than most people realize. Including only federal unfunded liabilities, federal, state, and local debt, EACH and EVERY one of us (U.S. citizens) owes around 1.2 million dollars in government debt.
1.2 million dollars EACH.
Didn't know you were 1.2 million dollars in debt? Well, now you do.
As Mauldin says:
Break down that national and state and local debt by the number of US citizens, and we find that we each – every man, woman, and child – owe over $70,000. Worse yet, the total debt per taxpayer is over $190,000 and rising fast. If you include unfunded liabilities, the total debt per taxpayer rises to around $1.2 million, give or take. (There are some analysts who would make it somewhat less than a million and others who would make it more than $2 million. Whatever, it’s a huge number.) By the way, that number does not include the unfunded liabilities at the state and local level, including the pensions that are theoretically guaranteed by the states. Add another few hundred thousand or so per taxpayer, depending on the state you live in. Trigger warning: If you live in Illinois or California, do not attempt to estimate this number without alcohol or heart medication nearby.( 2 )
We are completely contradictory and dysfunctional in what we expect from our government.
* We expect our social benefits to increase (or at least not decrease).
* We expect our taxes to decrease.
* We expect our economy to grow and provide good, high paying jobs.
You cannot have all of those desires at once. Debt loads over a certain size -- Reinhart, Reinhart, & Roghoff suggest 90% -- will slow down the growth of that country, making all of our lives and goals that much more difficult to achieve.
In a peer-reviewed study, Reinhart, Reinhart, and Rogoff demonstrated that when government debt rises above 90% it begins to have an effect on the growth of GDP. That conclusion is somewhat controversial in economic circles, as some say the critical level is higher or lower. Whatever – we’ve gone well past 90%.
Understand, RR&R are not examining some theoretical proposition; they are looking at actual debt levels and actual growth levels in scores of countries and situations over a long period of history and seeing that excess debt inhibits growth. We can argue about why that is true, but the fact is that debt at the level that has already been reached here in the US makes it far more difficult to even talk about 3% or 4% growth. So when politicians talk about growing the economy by 3% a year, they are facing very strong headwinds. That sort of growth is not impossible in our circumstances, but it would be abnormal given what we know of the history of debt and growth. To grow the economy at 3% today will require tax reform beyond anything that’s being suggested. It will require real tax reform, not just tinkering around the edges.( 3 )
We must have real, serious tax reform if we want to have any hope of fixing our problems. Enough so, that we have to be willing to consider the unthinkable. For Republicans this means considering a VAT and carbon tax in exchange for significantly lowering the income and corporate taxes.
My liberal friends are going to fall off of their chairs here; but, after reading Mauldin's logic, I am now in support of both the VAT and the carbon taxes.
They are both a form of consumption taxes which are far superior in incentivization to income taxes, and thus would produce positive benefits.
If you want more income and jobs, tax them less. So if you can substitute a consumption tax for an income tax, even if the two generate the same revenue, the incentive structure you create is superior under the consumption tax regime. I am going to be walking into territory that is considered heretical for Republicans, but I’m going to argue that we need to radically reform taxes by going to much higher consumption taxes and much lower income taxes. If we want to avoid a recession and really boost the economy and jobs, then we need to get “medieval” on income taxes. Don’t take a scalpel to them. Bring out the axes and chainsaws.Mauldin recommends we start by eviscerating the income taxes and introducing a 17% VAT and a significant and increasing yearly carbon tax on all energy inputs. I think there is a good chance this would actually work and have very positive effects for our economy and potentially help save us from certain doom that is coming if we do nothing.
Mauldin ends by reviewing his five main points:
Let’s sum up the constraints and desires mentioned above as we set out on our quest for tax reform. Admittedly, these are my constraints and desires, but sharing them will help you understand what my ultimate goal is.
1. Since too much debt at the level we currently have creates a drag on growth, we have to control the growth of debt. That’s pretty much like the admonition that when you find yourself in a hole, stop digging. At some point, maybe we could repeat the Clinton/Gingrich experience of actually paying down the debt. (Let me have my dreams!)
2. My fellow Americans want two inconsistent things: They want their entitlements and benefits to continue, and they would like their taxes to be lower. Cutting benefits will quickly result in a return to a Democratic Party-led government, and no politician on either side of the aisle has any stomach for doing more than tinkering with Social Security or really cutting healthcare.
I think Republicans will seek to find efficiencies in the way health care is delivered and thereby maybe reduce total healthcare expenses somewhat, but benefits are going to stay roughly the same. Yet somehow we need to get a handle on how to reduce the constant cost increases. So we have to figure out how to fund those benefits. And while you could probably cut $50 billion from the discretionary parts of the budget – if you include defense spending as discretionary (which would elicit anguished screams and derogatory name-calling from everyone) – we must sadly acknowledge that cutting $50 billion gets you only about 10% of the way to balancing the budget.
3. What is the appropriate size of government in the US economy? Here I am conflicted. I am truly a small-government advocate. But I also want to balance the budget and actually reduce the debt, which means (and I can’t believe I’m using these words) that we’re going to have to find additional revenues unless we are willing to take a hatchet to entitlements, which we are not.
4. We really do have to create jobs, or the future is going to get pretty bleak pretty quick. Job creation means allowing small businesses and entrepreneurs to keep more of what they make and to increase their savings. It also means radical regulatory reform. It comes down to the most basic of identity equations in economics. GDP is the sum of Consumption (C), Investment (I), Government Spending (G), and Net Exports (X – M): GDP = C + I + G + (X – M), which reduces down to Savings = Investments.
It’s more complicated than that of course, but if you want investments that will create new jobs, the best thing you can do is to stop taxing savings and income and start taxing consumption. This country doesn’t need more consumption; it needs more income. That in turn will lead to increased consumption and more jobs. This is a basic Hayek versus Keynes argument, and I come down on the side of Hayek. Which means that the vast majority of academic economists believe I am wrong.
5. We have to change the corporate tax structure to put our businesses on an equal footing with their competitors around the globe. And while we’re at it, why not make them hypercompetitive? Why not take the corporate tax rate down to 15% of everything over $100,000, with no deductions other than to comply with normal GAAP accounting principles? Really want to jumpstart things? Then allow 100% write-offs of all business investments such as research and development, equipment, and buildings (but normal depreciation on the actual land).
6. There are several types of consumption-based taxes.This is a solid plan and I think it has real potential to work to help us reverse this hole we have dug for ourselves.
a. A sales tax (which would be too high – that’s why I dismissed the concept above)
b. A border adjustment tax, which would be challenged by Europe at the WTO, and we would lose because the vote is a political vote. Further, the BAT (I’m tempted to add “Out of Hell”) would set off immediate reactions by all of our trading partners, precipitating a round of tit-for-tat changes that would quickly deteriorate into something that looks like Smoot-Hawley. A BAT would cause a global recession. Further, it would pick winners and losers here in the US. Why is an export business better than an import business? They are equally valuable to the country. And they both create jobs.
c. A value-added tax (VAT) would easily withstand a challenge at the WTO, since nearly every other country in the world has a VAT.
d. We could introduce a carbon tax on petroleum products that would gradually increase, generating significant revenues over time. As noted above, a carbon tax is just another form of consumption tax, and it has the value of making progressive Democrats giddy about doing something for the environment and climate change, which makes them more likely to go along with the real Republican goals of job creation, income tax reform, and deficit reduction.
