Will Schultz’s proposed tax solutions benefit the US?

Will Schultz’s proposed tax solutions benefit the US?

Former U.S. Secretary of Labor George P. Schultz offers some common sense solutions to economic problems that beset the U.S. While most of the ideas lean toward conservative ideals, there are few that have the potential to cross bipartisan lines.

Idea #1: Simplify the tax code by limiting deductions and tax credits in return for lowering individual marginal tax rates.

If done correctly, there will be no change in tax revenue. In fact, there is the potential for a revenue increase because lower marginal tax rates will encourage more investment and risk-taking. With less funding going to the government, more can be poured into investment and job creation.

However, lowering marginal tax rates could increase inequality. One of the methods in minimizing inequality is the ‘ability to pay principle’ which suggests that high-income individuals should pay more than low-income individuals. By increasing the tax burden on the affluent, additional revenue collected from the rich can go toward funding anti-poverty programs aimed at increasing economic opportunity. There is no guarantee that loosening the purse strings of the rich will filter down to those with less skills.

Idea #2: Make similar reforms to the corporate tax code by lowering the corporate tax rate.

Currently, the U.S. statutory corporate tax rate is the highest in the world at 40 percent. It makes it hard for U.S.-based corporations to compete with multinationals. By lowering the corporate tax rate to 20 percent, we can keep more jobs in the U.S. Right now, Ireland has been very aggressive with their tax code by lowering their rate to 12.5 percent and this has resulted in many jobs for the Irish. Ironically, raising the tax rate too high can actually result in lower tax revenues as firms find ways to escape tax liability by choosing to recharter abroad. In other words, 20 percent of 100 dollars of revenue (2o dollars) is better than 40 percent of 0 dollars of revenue (0 dollars).

Still, it is distasteful to some segments of society to allow wealthy corporations to see a reduction in tax revenues when there is pressure to reduce the deficit by cutting spending in anti-poverty and entitlement programs. In an era where inequality is on the rise in the U.S., there is concern that lowering the corporate tax burden will only worsen the wealth divide.

Idea #3: Simplify the regulatory burden on businesses.

The cost of regulation is an obstacle for industry. The cost of complying to a complex web of regulations can come at the expense of jobs. Even though there might be a worthy goal of regulation in reducing the external cost of unhealthy business activity, it is possible that its benefits are outweighed by excessive regulatory costs that hinder entrepreneurship and raises costs on consumers.

A simplified regulatory system can make it easier to evade regulatory rules. If this evasion results in excessive risk-taking, then the downside risk is instability and wealth erosion. It is essential to maintain a safe and sound regulatory system to even the playing field. add to this the potential of diminished social well-being when the threat of pollution rises due to less oversight of industry behavior.

Idea #4: Conduct rule-based monetary policy while maintaining flexibility for the Federal Reserve to act in emergencies.

This will allow for greater predictability within the stock markets as they will no longer have to guess and speculate on where interest rates will go. It will also ease the threat of inflation since there will be no mechanism to excessively grow the money supply. That will keep politicians honest as they recognize the true cost of deficit spending where rising interest rates cut off consumer and business spending.

With gridlock in Congress, there is concern that society will be vulnerable to the severe fluctuations of the business cycle. Even though markets eventually adjust in the long run, to quote John Maynard Keynes, “In the long run, we are all dead.” That suggests that economists can influence economic outcomes in the short-run through aggressive monetary policy.

Idea #5: Restrain entitlement spending by finding ways to reform Social Security.

The most damaging driver to budget deficits is Social Security. Since the retiring Baby Boomers far outnumber the current and future workforce, the current system of payroll taxes funding the Social Security Trust Fund is unsustainable. Unless there are ways to reduce these obligations by either raising the retirement age or changing the calculation of benefits from average wages to cost of living adjustments, it will be difficult to sustain its viability without significantly raising taxes or gutting other government programs.

While it might be economically sound, this is not a viable political strategy. Any adjustments to the retirement age or reduction in benefits will hurt a voting bloc that is powerful and highly engaged. Advocating for this type of reform will likely send someone out of office. There is also the problem of retiring workers struggling to make ends meet when their income generating potential is limited.

Idea #6: Change the incentives of health care risk away from government to the individual.

Schultz’s goal is to emphasize flexibility through offering more low-cost, high deductible insurance plans and tax-deductible savings accounts. This is a very attractive option for young adults seeking more inexpensive choices, while also recognizing that their chances of requiring health care services are less. If Congress legislates the use of more tax-deductible health savings accounts, then this could influence more Americans to purchase health care insurance in a way that does not distort market outcomes as much.

However, changing age demographics mean market forces will drive up health care costs. Due to adverse selection, older individuals desire health care coverage more than younger individuals and this group is more expensive for health insurance companies to cover. By allowing younger individuals the ability to purchase lower cost insurance policies, this will diminish revenue streams for health insurance companies that must find ways to overcome the use of preexisting conditions. With pre-existing conditions, health insurance companies can hold down costs by denying coverage to individuals who will typically require health care services in excess of what can be collected through premiums.

When deciding whether George Schultz’s ideas are right for Americans, the US must look inward and decide where our priorities lie. Are politicians willing to pursue economic growth policies even if it results in further fraying of the social fabric of America? Can the US afford to continue subsidizing segments of society where they do not fully account for the consequences of their actions?

Neither question is an easy one to answer, but it is time that Americans recognize the tradeoffs that lie behind every policy choice.

Categories: Economics, North America

About Author

Aaron Johnson

Aaron serves as an Assistant Professor of Economics at Darton State College. He holds a M.A. in Economics from the University of Missouri-St. Louis and is a regular contributor on economic analysis for local Fox and NBC news affiliates in Albany, GA.