In a wide-ranging interview in the Wall Street Journal published on March 27, 2010 I indicated that the American people were unhappy with the state of the economy, wanted greater economic growth and more limited government, and that they would vote that way in November. Indeed, voters did give President Obama a real “shellacking” (to use his words), as Republicans gained control of the House of Representatives and the governorships of most states, and made large gains in the Senate. The common expectation is that this division will produce a political stalemate, as both parties position themselves for the presidential election in 2012. Yet, the American people need an agenda to raise the growth rate of the American economy, and cut sharply actual and future fiscal deficits. If these happen, not only would unemployment and other short-term problems would be taken care of, but also optimism would return about the longer-term prospects of the United States.
What follows is a partial agenda to raise economic growth and reduce the long run fiscal deficit. The most important step in raising the growth rate is not to increase but rather to lower taxes on capital and entrepreneurship. This implies maintaining essentially all the Bush tax cuts, including those on capital gains and dividends, and those on incomes at all levels, including quite high incomes. The estate tax on very high levels of wealth could be reinstated if politically necessary, but it will only bring in a very small amount of tax revenue, and will be more costly than it is worth. Tax reform also implies a reduction in the corporate income tax, and especially reductions in taxes on incomes of small businesses. Successful small businesses that grow to become large companies, such as Wal-Mart, Starbucks, Microsoft, and Apple, form the foundation of the American economy. They should be strongly encouraged.
One goal of such tax reform is to eliminate as much as possible taxes on capital since economic theory basically implies that economic efficiency requires that capital not be taxed in the long run. For the supply of capital in the long run is highly responsive to after-tax rates of return on capital.
Modern economies are based on the command of knowledge and information. Since knowledge is created by basic and applied research, the United States should increase the share of its GDP that is spent on R&D, a share that has been stable at a little more than 2.5%. The patent system encourages applied research, but basic research, in medicine and other fields, is not patentable, so it needs, and has received, an extra push through subsidies. While most basic research projects fail, the successes often bring enormous benefits to society. Neither bureaucrats nor scientists can predict in advance which projects will succeed and which will fail, so it is important to encourage a broad peer-reviewed approach to basic research topics and investigators.
I do not have space in this brief comment to discuss many other policies beyond taxation that are needed to speed up significantly the growth rate of an advanced country like the United States. These include a quite free approach to international trade, encouragement of immigration, especially skilled and ambitious immigrants, flexible labor and product markets, and limited regulation of most economic activities.
Since the tax cuts and subsidies I advocate will tend to reduce tax revenue, it is especially important to control government spending and the fiscal deficit. I will concentrate on the two main entitlement programs, old age retirement support and medical spending. Together they take about 45% of the total federal budget, and unless reformed, will be even more important in the future.
The drain of social security benefits on the federal budget can be reduced relatively easily. The best approach is to change from a pay as you go system to a defined contribution system. Barring such a drastic change, it would help a lot to continue to extend the retirement age for healthy men and women until it reaches age 70. Older persons live longer and in better health than their predecessors, yet social security systems have been slow in all countries in adapting retirement ages to these health improvements of the elderly.
Controlling spending on medical care is much more challenging, and requires radical changes in the present health care delivery system. The health care law passed this spring (so-called Obama Care) made matters worse rather than better, for reasons partly discussed in my post “The Health Care Bill: Progress or Retrogression?” (3/28/10). I will not repeat all the arguments in that post, and concentrate on only two major defects of both the old and new laws. Out of pocket expenses by individuals receiving care should be much higher in the United States than its average level of about 12% of medical spending. If the American system can move even half way towards the Swiss level of an out of pocket share of over 30%, substantial savings in medical spending would occur in ways that would reflect patients’ evaluations of how much the care is worth to them. In addition, the American system should be weaned from being mainly tax-deductible employer based health insurance to a more desirable system, where individuals and families can buy insurance in other ways on the same after tax terms as from employers.
Significantly reforming entitlements would greatly slow down the rate of growth in federal government spending. Despite what some elected Republican officials are saying, politically it will be impossible to actually cut government spending. However, overall cuts in federal spending are not necessary to get the main fiscal problems under control, and to reduce the effective relative size of government, as long as the economy grows significantly faster than government spending does. Speeding up the growth rate of the economy, and slowing down significantly the growth rate of federal spending, would accomplish these goals.
Are these changes likely during the next few years? I am optimistic about the tax cuts, and about extending the age of eligibility on access to social security benefits. Medical care will continue to be a tough nut to crack, but the recently expressed opposition by American voters to the new health care law might help push health reforms in the right direction.
Wow! I love this!*
Posted by: coach outlet | 11/07/2010 at 08:12 PM
"Modern economies are based on the command of knowledge and information. Since knowledge is created by basic and applied research, the United States should increase the share of its GDP that is spent on R&D, a share that has been stable at a little more than 2.5%. The patent system encourages applied research, but basic research, in medicine and other fields, is not patentable, so it needs, and has received, an extra push through subsidies. While most basic research projects fail, the successes often bring enormous benefits to society. Neither bureaucrats nor scientists can predict in advance which projects will succeed and which will fail, so it is important to encourage a broad peer-reviewed approach to basic research topics and investigators."
Modern economies still based on demand and supply. WWII need better weapon, more efficiency system for MFG, Auto jobs created because of demand for mobility in industry age. Computer is invented due to requirement of Math in both business and science (nuclear weapon for example). With basic jobs heading to oversea, the demand is lower (purchasing power is lower,even for Gov.). Without hi-tech job market, little or no drive to gain knowledge (few of the local kids actively seek Gov jobs and infrastructure jobs, such as road repair, that can not be easily exported, the medical job is so hot partly because of high demand for the health care locally. One of the bright engineer switched to become a medical doctor after telecom crash tells the story....). Basic research can only be conducted when the corp is rich, can support long term goal. Not fit with the current MBA school bean counter agenda. (heard many times: if it can not be counted, it doesn't matter).
One simple solution: a company create jobs locally, give them (a) tax benefit (b) provide grant or loan for expansion. If company export jobs, increase tax (movie industry know how to explore the system, just look at old Auto city just south of Canadian boarder, they are blooming. Money well spend on the state level. possibly will be repay in the form of income tax in the future).
Create demand by full employment (like the WWII), the system will fix itself. Forget the knowledge stuff, look at the China, Foxconn got how many employee? are they all hi-tech? check their MFG assembly line photos. It is job export followed by wealth transfer (5-8 years delay in between). Wake up. jobs, jobs,jobs.
Posted by: st | 11/07/2010 at 08:47 PM
Ha! This week our boys differ! Becker, curiously goes beyond even "Chicago school" to right wing mythology, while Posner has the more thoughtful and seemingly accurate handle on our MESS.
Posted by: Jack | 11/08/2010 at 02:15 AM
I really like this comment, if you want to buy to overflow lady adorn article, please come to this website, I bought a lot of beautiful jewelry, really very good!
Posted by: thomas sabo schmuck | 11/08/2010 at 07:02 AM
You win the Jonathan Swift "Modest Proposal" award of the week.
Posted by: Joe Linker | 11/08/2010 at 10:12 AM
This has potential. So a multibillionaire should be paying 30 million dollars plus for his/her health care. Take note, health insurance CEOs. You are not charging the rich nearly enough!
Posted by: Raymond P. Bilodeau | 11/08/2010 at 12:54 PM
The authors seem to be more or less describing the general approach of the last 30 years,or do we understand it to mean that they DID Work, for the 1% who really count in the country, and will continue to work until the Peasants get their pitchforks and put an end to it. Or at least figure out the bi-partisan scams behind "business as usual".
Posted by: shawn disney | 11/08/2010 at 06:53 PM
Hi! We are students at Smith College in Massachusetts taking a Research Seminar. We invite you to take a survey assessing gender attitudes and behavior. The survey should take between 30-45 minutes to complete and is completely anonymous. To thank you for your participation, you will be entered into a raffle for a $50 gift card on Amazon.com. Thank you in advance for your participation!
http://www.surveymonkey.com/s/NVG3CBG
Posted by: sophia | 11/08/2010 at 08:09 PM
Becker gets it right. So far as corporate income taxation is concerned, reducing marginal tax rates in the U.S. would not only free up capital here at home, but also remove the present disincentive for U.S. multinationals to repatriate lower-taxed earnings of their foreign subsidiaries. The present Administration fails to get the point and, instead, focuses on closing perceived technical loopholes in the Tax Code in a Quixotic effort to combat imaginary "abuses" that, in truth, are rational competitive responses to anti-competitive corporate tax policies here in the U.S.
Posted by: Jake | 11/08/2010 at 08:20 PM
Becker's support of extending the Bush tax cuts fails to take into accoun the difference in endowmwnts between the wealthy and the middle class. There are two points here. First, the Bush tax cuts had a small substitution effect (the driving purpose of proposing the cuts to shift income from spending to savings). The middle class has most of their non home assets in retirement accounts, which are tax deferred. Therefore, they are not impacted much by changes in dividend and interest income taxes. Meanwhile, the wealthy have the opposite situation. Even there, given the lower propensity of the wealthy to consume, the substitution effect is small, but the income effect is very large. These tax cuts gave significant after tax income gains to the wealthy. That is one reason why the gap between the rich and poor continues to widen. The second point is that even though there is more savings, the high amounts of cash held by corporations strongly indicates that the Bush tax cuts are not driving more business investment.
Posted by: James Walker | 11/08/2010 at 10:41 PM
...Indeed that the reason for the gap between the rich and poor, is because the rich pay a 15% tax on their investments while the middle class in their 401Ks pays 0.
Posted by: P.T | 11/09/2010 at 12:05 AM
Jake and others: Hmmm, any thoughts on raising (close) to enough to pay our bills?
"Don't tax me, don't tax thee, tax the guy behind the tree??"
Posted by: Jack | 11/09/2010 at 02:13 AM
Right, P.T - until they take it out of the 401(k) and pay regular tax rates that progress upwards.
Posted by: Joseph B. | 11/09/2010 at 10:11 AM
Jack can quote former Sen. Russell Long all he pleases, but it takes more than platitudes to establish economically sensible tax policy.
Posted by: Jake | 11/09/2010 at 08:48 PM
Right Joseph B.
...While the rich have also already paid the higher tax upfront too so the yearly 15% tax they pay on any growth is on reduced investment capital in the first place.
It just entertains the hell out of me to be sitting outside the US (I did my stunt in the US but saw America turning collectivist long ago and bailed out)and watch Americans abandon their principles and spiral down towards decline using pitchfork economics as their great hope. The more they hurt, the more redistribution they ask for, the more productivity drops, the more they hurt, and so on. Once in this cycle, decline will be swift - it's no longer the next generation's problem. Its here. It's started. It's unstoppable.
Posted by: P.T. | 11/09/2010 at 09:13 PM
PT.... Barnum I assume? Truth is no such thing HAS taken place here. Homework: Take a look at tax rates, wage distribution (before or after tax) and check back, OK?
Posted by: Jack | 11/09/2010 at 09:54 PM
To thank you for your participation, you will be entered into a raffle for a $50 gift card on Amazon.com. Thank you in advance for your participation!
Posted by: nike shox | 11/10/2010 at 12:30 AM
It's a very very very good article!!!
Posted by: Mortgage amortization | 11/10/2010 at 09:10 AM
Not sure about it, after saw the movie "inside job". The business school is too close to the wall street (some of them are the wall street).
http://www.imdb.com/title/tt1645089/
Posted by: st | 11/10/2010 at 11:35 PM
Thank you for sharing i really get what i was looking for, keep it the good work going.
Posted by: Penny Stocks | 11/11/2010 at 05:51 AM
This article proposes no fundamental re-examining of the fiscal problems the US faces. Further, as #Jack noted above, Becker goes off the deep end into conservative ideology. some thoughts:
-Per capita income has grown more for the bottom 4 quintiles of earners, and nearly identically for the top quintile, under Democratic administrations (assumed higher taxes) than under Republicans since WWII.
-Skill biased technological change, and the enormous gains in income for the top 1% of earners argues that a redistributional policy of slightly higher marginal tax rates for the highest earners is at worst growth neutral.
-The US spends more on Defense than the rest of the world combined. This is absurd (and unquestioned). Our foreign policy would be much stronger if the defense budget was cut from >$700B by ~$200B and our approach was not one of unilateral global power projection. Why propose cuts in Medicare and SS and not propose cuts in defense?
Posted by: Alex | 11/11/2010 at 10:07 AM
That’s right Alex,
Telling people that if they make more than $88k, starting in 2014 they will not only pay 10-20K for their own health insurance but also for someone else’s (since they will have to earn after tax dollars to pay the insurance premiums) while if they make less than 88k, someone else will pay most of their health insurance (subsidy) is going to be growth neutral…
HOPE of increased prosperity through CHANGE to lower incentives to work.
Posted by: Deeptee | 11/11/2010 at 02:31 PM
@Deeptee
I don't consider myself qualified to comment on the tax changes implied by the health insurance policy. My commentary was aimed at the debate over allowing the Bush Tax Cuts to expire, which I think they should. A 3.6% increase in marginal tax rates for the highest earners has been more than offset by the increasing returns to income that this 2% of the population has seen over the past 30 years.
Personally, I think the best reform for health insurance would be to remove the employer tax subsidy and to increase deductibles, moving health insurance towards a model of catastrophe insurance.
Posted by: Alex | 11/11/2010 at 03:09 PM
This post is a winner! Love the tips and everything you suggest.. Thanks
Posted by: christian louboutin shoes | 11/12/2010 at 02:06 AM
1) The elite who organised and implemented stuff called credit cards, credit, debt etc. They knew it would implode, and now it has.
2) Bush, greenspan, bernanke are all part of the same boys club. They do not care about anyone but themselves. When we are screaming about high cost of things, then those in charge of the NWO will have us right where they want us. Time to prepare was yesterday.
Go have a look at http://www.forecastfortomorrow.com those guys have been spot on about the elections and what is coming very soon.
Posted by: emma | 11/12/2010 at 04:19 AM