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Frank Bernheisel: The View From Here
Frank Bernheisel
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Frank Bernheisel
Posted 08.01.14
Just Outside Washington

FRANK BERNHEISEL

Reform US taxes now

Dear US Congressman,

Until 2007, the US economy grew pretty well each year with growth staying above four percent per year or so. The chart below shows clearly the impact of the Great Recession.

As we have heard from our leaders and our wonderful media the growth since coming out of the Great Recession has not been that great -- the preliminary data for 2014 shows zero (0) growth. The House of Representatives needs pass a bill to change the tax system to stimulate growth.

The Gross Domestic Product (GDP) is an accepted measure of economic growth, which shows the increase in the market value of the goods and services produced by the economy. The US Department of Commerce, Bureau of Economic Analysis (BEA) has data on GDP on its website starting in 1929.

The chart made from BEA data shows GDP in two flavors: (1) Constant Dollars, to adjust for inflation over time and (2) Chained Dollars, to adjust for changes in what people buy over time. Nobody bought televisions in 1929 or cell phones in 1960. The chart below shows the growth of the US economy by year since 1980.

chart

There are a couple of reasons why there has been lousy economic growth:

  • Many people do not have jobs and are not earning and spending money. The unemployment rate is 6.1 percent (about 10 M workers) and the civilian labor force participation dropped from 66 percent in 2007 to 63.2 percent in 2013 (that is 2.8 percent of 157 M or about 4 M workers); and

  • Low demand for goods and services persuades companies not to invest and generate corporate growth -- remember the 14 million who are not earning and spending. So companies are sitting on their profits -- about 2 trillion (GE alone has $77 billion).
Congressman, as you know, the Constitution says all tax and appropriation bills must originate in the House of Representatives. And the House has not been addressing the problem of economic growth.

Don't get me wrong, there has been lots of talk about growth and lots of blame. There has been no action. The data in the chart speaks for itself. It is the House that needs to do something because it is your job.

What should be done?

Joseph Stiglitz of the Roosevelt Institute and Columbia University has thought the problem through. In his White Paper on Reforming Taxation to Promote Growth and Equity he proposes some concrete actions to overhaul the tax system. He first addresses corporate tax actions:

    (1) Raise the corporate tax rate
    (2) Provide generous tax credits for corporations which invest in the US and create jobs here; (3) Eliminate the loopholes that distort the economy, reduce tax revenues, and create inequities
    (4) Increase taxes on monopolies and other rent-seeking economic activities
    (5) Ensure that multinationals pay their fair share of taxes, and have incentives to invest in America, including:(i) Tax multinationals on a "formulaic basis" -- analogous to the way that corporations are taxed by the states within the US, on the basis of their sales, employment and assets within each state;
    (ii) Adopt a special provision that intellectual property that can be substantially attributed to the US (e.g. as a result of research conducted in the US) be treated as an American asset
    and
    (iii) A minimum tax on global income
    (6) Increase taxes on corporate profits that are associated with negative externalities (pollution, systemic risks, etc.)
    and (7) Reduce the bias towards leverage by making dividend payments tax deductible, but imposing a withholding tax.
Stiglitz's individual tax agenda has five basic elements:
    (1) Increase the progressivity of the tax system
    (2) Create a "fair" tax system, in which speculation and the returns to capital are taxed at as high a rate as work; (3) Reduce "
    loopholes" for the rich
    (4) Broaden the tax base and lower rates, but in ways that do not reduce progressivity
    (5) Use taxes to improve the efficiency of the economic system, by taxing activities that give rise to negative externalities. This point is linked to the imposition of corrective taxes -- tax the bad stuff like carbon emissions.
(Spoiler alert, the paper contains 27 pages and presents a comprehensive program. It can be found here)

It is the House of Representatives that must take these actions because they must initiate all taxes and spending legislation. Yes, it is the function of government to tax and spend.

It is election season for the House of Representatives. And all candidates and the American public should have a full discussion of Stiglitz's proposals. After the November election, Congress needs to act to promote growth.

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