James Pethokoukis

Dealing with debt: America needs a growth experiment

May 10, 2010
Europe’s debt problems should inspire Americans to explore just how the U.S. will solve its own fiscal woes. I mean, no one is going to cut us a check like Germany and France just did for Greece. This is a topic I tackle in a piece I just wrote for The Weekly Standard. A few key points: 1) Cutting spending and raising taxes is a risky formula. It doesn’t have a great track record:
Since 1980, some 30 debt-plagued nations have tried to reduce their indebtedness through such austerity measures. In practically all cases, according to a new study by financial giant UBS, the increase in national debt was only slowed, not reversed, by such policy pain.
2) Trying to take more from rich people has its limits. Higher and higher income taxes or even wealth taxes create incentive to find tax havens and avoid productive work or capital allocation. 3) Cutting spending is better than raising taxes. Hey, I even have a study to prove it:
A 2009 study by Harvard University’s Alberto Alesina and Silvia Ardagna. It examined 40 years of debt reduction plans by advanced economies and found that “those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases.” They’re also associated with higher economic growth.
4) Less spending +more growth. This is my money graf from the piece:
But what if (a) government spending tracks current projections over the next 70 years, (b) government revenue as a percentage of GDP stays at its historic average of 18 percent, and (c) the economy were somehow to grow a bit faster than its 20th-century average, about 3.5 percent. Under those conditions, according a recent study by JPMorgan Chase, a much wealthier America (generating $100 trillion in tax revenue rather than $50 trillion) would be able to afford projected spending without raising taxes. The long-term budget gap would vanish. … Indeed, that is typically how successful countries in the UBS study managed to get their books in order; they grew their economies faster than they added debt. … Easier said than done, of course. … And there is no one policy to help make that happen. It will take a full-spectrum effort: lower taxes on companies and capital, pork-free spending on infrastructure and basic research (beyond health care), an education system that teaches students rather than feathering the nests of teachers’ unions. Every aspect of U.S. public policy will need to be optimized for economic growth.

Now here is a tax bill I like, mostly

May 4, 2010

The good folks at the Heritage Foundation alert me to a House bill proposed by Republicans Jim Jordan and Jason Chaffetz: Here is what H.R. 5209 would do: 1) Eliminate the tax on capital gains; 2) Reduce corporate income tax to 12.5 percent; 3) Kill the death tax; 4) Immediate expensing of business expenses; 5) Reduce payroll tax by half for 2010.

Wealth taxes, Washington’s next bad idea

May 3, 2010

Some Democrats seem to have no problem raising the cost of capital.  Dividend taxes rates are scheduled to triple, while capital gains rates will only increase by a mere 60 percent. But as a I poke around the liberal idea factories here in Washington, I am hearing more and more about wealth taxes on the wealthy, just like they have in Europe.

Becker vs. Posner on the VAT

April 26, 2010

The online conversation between Gary Becker and Richard Posner is one of my favorite things on the web. Currently they are taking on the the idea of the US implementing a value-added tax. First a bit from Becker, as excerpted by me:

The reality behind the VAT

April 22, 2010

Over at the very fine TaxVox blog, Howard Gleckman writes a good explanatory piece on the current VAT debate. But this one  part really struck me:

The latest on Obama and the VAT

April 22, 2010

OK, here is what President Obama said on CNBC to reporter John Harwood about a value-added tax:

Team Obama already running the numbers on a VAT

April 19, 2010

Talk about burying the lede. This from the NYTimes and my pal John Harwood:

One way to reach that 3 percent [deficit-to-GDP] goal, by the calculations of Mr. Obama’s economic team: a 5 percent value-added tax, which would generate enough revenue to simultaneously permit the reduction in corporate tax rates Republicans favor.

5 reasons why the Tea Partiers are right on taxes

April 16, 2010

Here is the new Washington Consensus: American taxes must be raised dramatically to deal with exploding federal debt since spending can’t/shouldn’t be cut. Only the rubes and radicals of the Tea Party and their Contract from America movement think otherwise. And don’t worry, the economy will be just fine.

A few thoughts on Tax Day

April 15, 2010

1) Dems have ripped the Bush tax cuts yet want to keep 95 percent of them.

2) Even the middle class ones may only be extended through the 2012 election by Congress. That will make for a nice presidential campaign issue!

After FDR’s New Deal …

April 12, 2010

The death of FDR in 1944 meant no New Deal, The Sequel. What did happen? This (via the WSJ):