I started writing this blog in earnest a few months ago, but have felt called to write political commentary for a few years. I’ve done a lot of research and arrived at some important findings, especially regarding tax policy. I feel it’s time to share those findings with the presidential candidates. I include Jeb Bush because I really liked one of his ideas and want to give him credit.
ECONOMY AND EMPLOYMENT
1. Review the National Bureau of Economic Research working paper entitled “Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment” written by Owen M. Zidar from the University of Chicago (http://www.nber.org/papers/w21035). It will cost you $5 to purchase, but it is well worth it in order to avoid potentially catastrophic changes in income tax law. The working paper concludes that tax changes on the top 10% earners have essentially no effect on job creation or economic growth, while income tax changes have a substantial impact when directed toward the bottom 90%.
CONCLUSION: Don’t raise taxes on the poor and middle class unless you wish to slow the economy and reduce employment.
2. Jeb Bush’s idea: Change the tax code to tax capital gains for sales of stock and qualified dividends at ordinary income rates. The reduced capital gains tax rate should be reserved for capital that is used to start a business or supply it with operating funds; this provides for the greatest chance of success. There is net negative economic impact from current tax law which rewards the wealthy with lower tax rates for keeping their wealth out of play. With this tax change, there would likely be a much greater impact on economic growth and employment from the top 10% income earners.
NOTE: Sales of stock which was received by venture capitalists for investment in new companies prior to their IPOs would be taxed at a reduced capital gains rate.
3. My idea: Make the tax situation stable for businesses and the top 10% earners and use small tax changes for the bottom 90% to speed up or slow down the economy. I propose slight changes to the employee portion of Social Security and Medicare Taxes withheld to make it as easy for business as possible, while also keeping the business tax burden consistent. The trigger for these FICA tax rate changes would be an increase or decrease in the interest rates set by the Federal Reserve. This plan would keep the Fed independent, but they would have to consider the tax rate effect in their discussions before deciding on a change in interest rates.
THE LAW WOULD HAVE TO BE CAREFULLY WRITTEN: For Example, if the law is written in such a way as to trigger the tax change of X% for Y months when the Fed increases rates by 0.25%, you would also have to stipulate that a quick decrease in interest rates following an increase would not trigger a reduction in the tax. There would have to be a waiting period. This allows for the possibility of the Fed slowing the economy solely with the payroll tax increase instead of interest rates by declaring a rate increase one day and an equivalent rate decrease the following.
DEBT REDUCTION: The extra tax revenue, while collected through the Social Security and Medicare tax system to make it easiest on business, would be applied toward national debt reduction. This would improve the overall financial situation of the federal government.
4. Most of the tax proposals for the republican presidential candidates reduce taxes on the wealthy and increase taxes on the poor. According to Dr. Zidar’s paper, this would significantly reduce economic growth and employment. Keep in mind that the lowest 30-40% of income tax filers have a negative tax rate – they receive more in refundable federal tax credits than they pay in federal taxes. A change to the tax code in which they pay no tax would, in fact, be a substantial tax increase for lower income individuals and would slow the economy.
5. The tax code is too complicated and a large percentage of individuals and families must hire professionals to prepare their tax returns. Most of the country want a simpler tax code, but it would have to be done in a way to ensure that the poor and lower middle class don’t pay higher taxes. I don’t have a proposal here. There would have to be a balance between simplification and fraud prevention and that means it is likely to be complicated.
EARNED INCOME CREDIT (EIC): Most lawmakers support the refundable EIC because it encourages lower income individuals to work, but it has the potential for fraud. The amount of the credit is based on income and the number of dependents. Recipients of EIC may claim self-employment income from babysitting, for example, as a way of ending up at the very peak of the bell-shaped curve for the credit. That is where fraud can enter the system. I don’t think you would want to replace the EIC with a simpler refundable tax credit that doesn’t promote employment, but the current system is prone to fraud and so complicated that professional help is required to complete the credit.
6. Savings accounts should be encouraged for lower income individuals, but without resulting in a substantial reduction in net income which would negatively impact the economy. Perhaps a government matching program for a portion of the tax refund would be a good start. If administered by the federal government, there would be additional federal outlays to start and run the program. It would likely be a net positive, however, because the people with the savings accounts would be able to weather unexpected situations and be less likely to end up in need of federal government assistance programs.
1. I think both the Democratic and Republican political establishment are making a mistake. On the republican side, there has been subtle to overt opposition to Donald Trump. They feel that Trump is so extreme in his views that he could not possibly win a general election. I don’t think that’s true. He has certainly energized the electorate and has the potential to draw heavily from independents and even some of the democratic faithful. There is a feeling of desperation among low and middle income Americans, and when you are desperate, you’re much more willing to reach for the stars, to gamble a little. Trump would be a gamble, but I’m sure that many are thinking that he can’t be worse than the disfunction of the past several years. Some blame the president for that disfunction, but a very large number of Americans either blame Congress exclusively or spread the blame among the legislative and executive branches.
For the Democratic Party, their mistake stems from the Super Delegate system because the super delegates have nearly universally committed their support to Hillary Clinton. I suggest that this is not the year to have the establishment go against the voters’ wishes and nominate Clinton with an overwhelming majority when the actual vote count may be much closer. This is especially true since polls show a substantial portion of the electorate have a basic mistrust of Mrs. Clinton. I think it’s likely that Trump would pick up a significant portion of Sanders’ supporters if it appears that Sanders was railroaded by the establishment.
2. I have consistently been one of those people baffled by Donald Trump’s supporters and their immunity to fact checking. They believe that if Trump says he will get something done, he will do it. I always want details, so I have been skeptical. Now, however, I see a way that Mr. Trump may actually be able to accomplish his goals.
The Trump Foot Soldier Army: Because of the enthusiastic support Trump enjoys, he may be able to turn his supporters into an angry mob directed at Congress and force them to move on legislation that Trump wants. The only other candidate in the race who would have a chance to do the same is Bernie Sanders, but I think Congress would be less likely to listen to the angry people on that side of the political spectrum. I may be wrong though, if Sanders were elected, he may acquire some of Trumps’ supporters and that would give a President Sanders a broad-based angry mob.
I’ll post this and also send the link to the campaigns. I’ll let you know if I get any responses.