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GOP Not Yet There on Growth
The singular economic issue of our time is the quest for more rapid economic growth. In the past century the American economy grew at roughly 3.5 percent per year. That included huge booms and even worse busts, such as the Great Depression.
But over the past 15 years that growth has slumped to roughly 2 percent per annum. This has put average Americans in a cranky mood. They want change.
Though a list of current economic wrongs could go on forever, I see three major problems: an uncompetitive business tax code that blocks investment and job creation, a burdensome state-run regulatory apparatus, and an erratic monetary policy that has undermined the value of the dollar.
So, from the debates, how do the Republican presidential candidates stack up?
Most of the GOP candidates have pro-growth tax-cutting plans that would lower marginal tax rates on personal and business income. These plans would reinvigorate the incentive rewards for work, saving, and investment. Good.
But two candidates — Ted Cruz and Rand Paul — have proposed value-added taxes (VATs) on the corporate side. I think this is a big mistake, one that opens the door to big-government mischief.
By collecting VATs from businesses, and not listing them on customer receipts, the true costs for workers and consumers are hidden. The VAT also taxes labor and capital on top of existing burdens.
You can argue that these VATs are low, at 14.5 percent for Paul and 16 percent for Cruz. But like mushrooms and mustard seeds, these rates flourish once planted. (See Europe.) The Tax Foundation estimates that more than 70 percent of total taxes would eventually come from these hidden business VATs.
Simple and low flat-tax rates are a terrific idea. But not if supported by a VAT. And down through the years I have argued that if you want a sales tax, a consumption tax, or a VAT, you need to first repeal the 16th amendment, which launched the income tax. Otherwise, in the name of flat-tax reform, I fear we’d be opening the door to an even larger Leviathan.
This is why I prefer the more straight-forward corporate tax cuts of Jeb Bush and Donald Trump. They would lower the business rate to 15 to 20 percent, below China’s 25 percent, and would permit small S-corps to pay the lower C-corp rate.
And if you added in immediate full-cash-expensing tax deductions, a low-penalty-rate repatriation of U.S. cash parked overseas, and a move to a territorial tax system, you’d do more to stimulate the economy than anything else. And if you coupled that with vastly reduced regulatory burdens, you could produce 4 to 5 percent growth for at least the next ten years.
Stable money is the next big growth issue. To their credit, many of the Republican candidates have talked about this — which is unusual for a presidential race. Some, like Cruz and Paul, have discussed restoring the gold rule. Others, like Mike Huckabee, have argued for tying the dollar to a commodity basket.
I prefer an even broader approach that would include the exchange value of the dollar and Treasury-bond-market inflation expectations. In each case you would track forward-looking inflation-sensitive market-price indicators, as was done from the mid-1980s to mid-1990s by former Fed board members Wayne Angell, Manley Johnson, Robert Heller, and Alan Greenspan — all Reagan appointees.
I’d also have no problem keeping a sharp eye on the growth of nominal GDP. But as Paul Volcker has argued, we should return to a rules-based monetary policy with international cooperation.
And as the GOP searches for a monetary rule, it should not become the party of high interest rates. (I don’t agree with Trump and Chris Christie that a zero-interest-rate political fix is in to help Obama through his final months without a recession.) Right now, with commodity indexes falling, the dollar rising, and various consumer price deflators showing zero inflation, neither the Republican party nor the Fed should panic. Domestic price stability and a steady-value dollar should be the goals.
Regrettably, in two other key growth areas — trade and immigration — the GOP is hopelessly divided. Just like taxes, regulations, and money, these are big growth impactors. And the debate has to be resolved, if only through the ballot box in the primaries.
Make no mistake: Growth is the central economic issue of the day. Not redistribution. Not inequality. Growth.
Nobelist Angus Deaton argues that growth helps solve poverty. And Princeton University philosopher Harry Frankfurt says “our most fundamental challenge is not the fact that the incomes of Americans are widely unequal. It is, rather, the fact that too many of our people are poor.” Frankfurt is a self-described progressive. But he has the story exactly right.
Growth.
Published in Economics, Politics
Disagree. The main issue is economic corruption. Without fixing that, nothing else matters.
More growth isn’t going to fix the cranky mood of Americans when economic corruption sends all the benefits to the crony capitalists.
I agree that these problems — likely the #2, #3, and #4 problems, even.
I agree 100 percent about the VAT, and for all the reasons you give. And I agree with everything that follows, up to the point where you say growth is #1. Those are good points and well stated. But growth to support more crony capitalism? No, that doesn’t fix what ails us.
Perfect image. :) :)
I don’t think Larry Kudlow and the donor class he constantly lobbies on behalf of have any clue what this country is facing or what will make the US economy thrive in the 21st century. They all still live in 1980.
A VAT is a consumption tax, not a business tax, as many including the author believe. It is entirely paid by the consumer; any remittances paid by businesses are refunded.
Any consumption tax should obviously be clearly marked at the point of sale. I think the author is assuming that the candidates want legislation that conceals the amount of tax paid. What is the factual basis for this accusation?
Are you recommending we pursue slow growth policies in the meantime?
What is it that they need to know that they don’t?
Neither party is addressing the real issues. Over the next ten years a number of reforms will have to happen (if for no other reason than the markets will force us):
And those are just the ones I can think of off the top of my head. There’s also social reforms (e.g. combating family breakdown, improving ethnic relations), and I’m sure there will be all sorts of economic reforms once the outline of the post-2020 economy becomes clear.
Either we get through all of that, or we’ll all wake up in 2020 in the Separately Sovereign Disbanded States of America.
I sometimes wonder if we should, but I think that would be a perverse way to go about it. Cuz cleaning up the corruption of crony capitalism is going to promote growth, albeit growth in which a lot more of society will participate. And it will also make it politically possible to pursue the agenda laid out by Mr. Kudlow.
Some people automatically say growth, growth, growth to the point that you might have to whack them over the head with a 2×4 to get them to think about what they’re saying (and what they’re not saying). So maybe a campaign to pursue slow growth could serve as that 2×4. But instead of doing that, I’d rather pursue an anti-crony-capitalism agenda. It’s a much more constructive way to go about it, and hopefully one in which we could join together.
No objections here. Crony capitalism certainly retards growth. The bailouts left money and resources in the hands of the same idiots that caused the problems in the first place. They should have been allowed to fail.
Larry differs with the elites on a number of things. The elites have decide that slow growth is an inevitable “new normal” that we just have to live with. Also, many of them support the weak dollar policies of the past two administrations. Larry doesn’t buy the “new normal” nonsense, and supports a sound dollar.
I don’t know where Larry stands on the bailouts, but his free market beliefs would be inconsistent with crony capitalism.
Under a slow growth, weak dollar regime, the rich are quite comfortable, but the rest of us struggle.
All good points, but the U.S. needs Big Time regulatory, statist Big Gov macroeconomic reform .. think Reagan Revolution where the federal regulations were axed wholsale.
Growth isn’t the biggest problem. Growth is a by product of economic freedom as is upward mobility, political freedom, technological development, expansion of human capital and broader flourishing of which these are part. A VAT is harder to raise than a flat tax, is more efficient, easier to collect, distorts in the right direction. Indeed if the VAT rate were made explicit, which it usually is, and tied to the flat tax it makes both harder to raise. A flat tax must kick in at some level of income and can have a variety of exemptions (as we already see with charity deductions and mortgage interest) The demagoguery of raising the income level at which the flat tax kicks in while raising the rate is inevitable, and returns us to excluding lower incomes from caring about tax rates. An explicit VAT in contrast is on every receipt and is hard to raise. Linking the rates so they must be raised together, indeed considered the same tax and imposed from the beginning at the same rate makes both harder to raise. People should look at New Zealand’s VAT. Ten percent would be sufficient to close the deficit. Cutting is essential as spending is the problem not revenue. We’ve suffered the dead weight of government on the economy for so long we have no idea how fast the economy could grow if it were unburdened from the regulatory thicket.
Cruz’s and Paul’s business tax are like VAT taxes, but not quite the same thing. Businesses aren’t refunded for business taxes that they pay when they buy from other businesses – but they do get to deduct their cost of goods. These plans while similar to a VAT are really a payroll and corporate income taxed combined into one instrument.
They are somewhat growing on me.
Another thing. I think the traditional supply-sider canard that corporate taxes are just passed onto the consume is disingenuous. If that were true, then why should businesses spend an inordinate amount of effort in accountants, lawyers, and lobbyists trying to lower their corporate income taxes?
The truth is that except for a direct transparent sales tax, any kind of corporate income or business tax is shared among the consumer, the employee income, and owner profits. Depending on the industry, company, and product that tax is shared differently among those groups and differently depending on the current economic environment.
A better way of stating it is: all taxes are ultimately paid by individuals.
Seconded. Don’t see how a VAT is any less transparent than the current fiction. Even without making it explicit on receipts (which seems like the right thing to do and easy enough), you still know the tax at a certain rate is part of the price and can get appropriately annoyed all to hell about it. It’s the rare citizen who has a glimmer of who actually pays the corporate tax (corporate customers, not corporations on their own earnings), which leads to political inanities like windfall profits taxes. Seems like the corporate income tax is an obfuscated VAT, unless I’ve got this hopelessly wrong. Hope Larry will take the time to explicate soon.
Corporations hire lawyers and accountants to work the system so their taxes will be at least as low as that of their competitors.
They hire lobbyists to fight taxes on their whole industry. But why? If you’re competitors are paying the same taxes as you, no problem. Right?
Nope. If the prices are driven up in your whole industry due to taxes, and your product or service is the least bit optional, you will lose sales.
Agree!