A Citizen's 2% Solution

How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget

The Reasons I Lie Awake at Night

The Best Kept Secret In America

Open any general interest newspaper or periodical published in the last two years and you are likely to see the same question:  “Why is this a jobless recovery?”  While professional pundits and media talking heads treat this question as a deep dark mystery, I suggest the answer is all too obvious.  It is the same reason why job growth stalled over the last two decades and the middle class stagnated while wealth and income increased its concentration at the top.  

Our tax and monetary policies have been aimed at protecting and increasing wealth, not stimulating productive enterprise.

Too-eager pursuit of Alan Greenspan’s “wealth effect” has inadvertently stimulated recurring asset bubbles and destabilized our economy.  Regardless of how well-meaning those policy choices may have been – they have been extremely damaging. 

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Conservative economists argue that incrementally higher tax rates discourage investment and work, and cause people to horde their pennies (presumably in lumpy mattresses) while they saunter off to sulk on the beach.  There is, of course, an active debate about how high is too high, and what might be an optimal balance.  But the dominant voices on both sides of the spectrum seem to me to be missing the more important and most destabilizing aspect of our existing tax structure and policies.   

The issues that keep me awake nights are –

1)      Existing structural tax preferences, intended to stimulate savings and investment, inadvertently subsidize unproductive capital allocations and stifle growth.    

  • We’ve made tax avoidance and valuation manipulation far more profitable than productive enterprise. 
  • Our tax and monetary policies have stimulated dangerous and unstable financial engineering and created recurring asset bubbles and collapses – while simultaneously subsidizing the transfer of billions of dollars in investment capital and millions of productive jobs overseas. 

2)      America is headed toward the polls in November faced with a false choice between two mutually flawed options. 

  • The hyper-partisan battle in Washington is a power struggle of bad ideas in which both sides turn a blind eye to the underlying structural flaws that have destabilized our economy. 
  • Unless we modify existing structural misincentives, higher tax rates (the liberal choice) will encourage more aggressive tax avoidance efforts and thereby exacerbate economic stagnation and instability. 
  • Doubling down on the failed strategy of tax cuts for the wealthy (the conservative choice) will accelerate wealth and income inequality, increase budget deficits, undermine social welfare programs, and eventually lead to social unrest.   

Alternative:  Evaluate and Implement Structural Tax Reforms 

  • We need to stop subsidizing unproductive capital with preferential tax treatment – so that holders of private capital will be incentivized to put their money more productively to work. 
  •  We need to eliminate the Crony Capitalism through which government focuses on protecting wealth – to allow the free workings of legitimate capitalist theory to stimulate more productive private investment and economic growth. 
  • I believe it is possible to equalize effective tax rates between labor and capital while simultaneously stimulating more productive investment. 

But political and economic theorists have abandoned capitalism’s core principle of the Invisible Hand in favor of preferential tax treatment for holders of wealth.   

If we desire to make progress toward broadly shared prosperity and growth, we need to illuminate the discrepancies between fact and dogma on both sides of the argument – and seek to reconcile the strengths and weaknesses of opposing positions.   Our investment incentives have become distorted.  We cannot simply argue about the rate schedules utilized in a flawed structure.  We need to be analyzing and evaluating structural changes that will stimulate more productive capital allocations. 

I believe the place to start that analysis is by assessing the factual misperceptions and outright distortions that characterize our current public debate and obscure the path to more equitable and efficient policies.  I urge you to consider the discussion and analysis on this topic published 6/18/12 in Tax Notes under the title Factual Distortions Derail Productive Debate on U.S. Tax Reform.  

Our rigidly polarized debate upon tax reform is built upon erroneous facts and assumptions that offer flawed options and false choices.  I invite you to consider a fresh perspective aimed at reconciling the strengths and weaknesses of the opposing arguments into a viable alternative path.  See  A Confluence of Benefits posted nearby.

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