Tim Pawlenty's Growth Vision

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Published : June 23rd, 2011
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Category : Editorials





I have to admit, I'm impressed. It takes real vision for a leader to propose a growth strategy in the midst of recession or even economic disaster, when most economists are saying that taxes need to rise. Tim Pawlenty's tax reform plan is just about right for the U.S.' long-term success.

The best solution here and now is lower taxes and less spending. Combined, ideally, with stable money.

Lower taxes doesn't mean that federal tax revenue as a percentage of GDP should fall from its average around 18% over the past sixty years. You probably couldn't make it go down if you tried. Out of ten governments that introduced "flat tax" systems since 2000, with top rates typically under 20%, four had a small decline in revenue/GDP in the first year of the new tax system, compared to the last year of the old system. Six had an increase in revenue/GDP.

When you combine that stable ratio with the fact that nominal GDP tended to grow strongly after the introduction of the flat tax system, the tendency is for total tax revenues to rise. Only one government, the Czech Republic, had lower nominal tax revenue in the first year of their flat tax system. After the top income tax rate fell from 32% to 15%, revenues of the Czech Republic's central government fell 0.5% from a year earlier. Even this decline is explained by the fact that the year of introduction was 2008, a rather bad year for economies worldwide.

If this type of strategy is such a proven success, then why the resistance? I would think long and hard about this.
Criticisms that the Republicans are unfairly favoring certain moneyed interests are not entirely incorrect, in my opinion. First, I would consider some sort of adjustment for those with average or lower incomes. This could take the form of an increase in minimum taxable incomes, for example. Make the first $20,000 of income per adult tax-free. Add another $10,000 per child, so that a family of four would enjoy the first $60,000 tax-free.

As Pawlenty suggests, a simplification of the tax code, eliminating many special-interest handouts, should be undertaken. This becomes politically much easier when the corporate tax rate is 15%, rather than 35%. The highest corporate tax rate in the world soon leads to the highest levels of corporate tax avoidance.

If tax revenues are around 18% of GDP, then a plan to eliminate deficit spending must bring spending down to about 18% of GDP.

In general, I would focus more on eliminating corporate welfare, graft and theft from spending plans. The Republican party needs to be seen to be doing something about the incredible looting by Wall Street and others, taking place right now. This is entirely in line with conservative principles.

The first thing that needs to be cut is military spending. A nice 50% should do it. All forms of corporate welfare--especially banker welfare--are next. Bring back Glass-Steagall, a rare example of an almost perfect regulatory framework.

A basic principle of capitalism is to channel activity undertaken for self-interest into the benefit of the society as a whole. Making oneself wealthy also makes the society wealthy. Typically, this means bringing valuable new goods and services to market, at a competitive price.

When activity that is not beneficial to the society is rewarded, then the arrangement becomes self-destructive. This could be predatory lending, environmental destruction, outright theft from the government, overtly criminal behavior that goes unpunished, and any time failure is rewarded by making the failed even stronger and more dominant than they were before.

Federal spending can't be controlled without some sort of reform to entitlement programs. However, Republicans will find they get no support for this--chopping programs for the least advantaged--until they take some meaningful steps to cease the ever-increasing plundering by the most advantaged.

Among the entitlement programs, an excessive focus is placed upon Social Security. Social Security is the one federal program that actually gives money to mostly low-income people. Future deficits of 1% of GDP are relatively small compared to the amounts being spent on health care-related programs, which end up as revenue for the medical-industrial complex, or defense expenditures, which end up as revenue for the military-industrial complex.

Health care spending needs to come down. However, Republicans should start to think about how they can combine lower spending with improved results for the least advantaged. A Medicare block grant idea could be part of this plan.

Singapore is considered one of the most libertarian and business-friendly places in the world. The top income tax rate is 20%, and the corporate rate is 17%. Total health care spending in Singapore is about 3% of GDP, compared to about 17% in the U.S. The U.S. federal government spent 5.4% of GDP in 2010 on Medicare and Medicaid alone. To this is added another 2.1% of GDP spent by state governments.

Singapore has universal health care, ranked sixth in the world based on outcomes regardless of price. It has a combination public/private system, with ten government-operated hospitals and thirteen private ones.

Hong Kong, another libertarian leader, also has universal health care. The city-state has thirty-eight government hospitals, and thirteen private ones. The government spends 3% of GDP to provide health care to all Hong Kong citizens.

Republicans should begin to think about how they can take away Democrats' biggest selling point--universal health care--and implement it while also reducing government health care spending dramatically.

This could even be done within a context of increasing state autonomy. It would be wonderful to see fifty different experiments in how to provide vastly improved health services, including universal access, while keeping expenditures to around 6% of GDP. For some, like Texas, this could mean a wholly private arrangement. For California, it might be a Singapore-like public/private system. For Massachusetts, it could be a Hong-Kong-like system of government hospitals. Let the best system win.

A word of warning: the most successful system might be the Hong Kong-style government-operated one. This might rankle libertarian ideologues. So what.

A similar focus can be brought to the topic of excessive compensation for government employees. We want to reduce the cost of providing services, while actually improving the services rendered. How can any voter complain if they're better off afterwards?

How about the environment? To say that there is no problem at all is, in my opinion, pure denial. However, many Democratic solutions cause at least as many problems as they solve.

Some sort of tax on natural resource use – a carbon tax, plus perhaps taxes on other resources ranging from copper to lumberwould not be a bad solution, when paired with other tax reforms. Could we combine a rather high resource tax with the elimination of payroll taxes on the lowest incomes? The nice thing about a resource tax, for those with low incomes, is that you can easily avoid it.

It would be good to think about other ways of eliminating the payroll tax on the lowest incomes, perhaps as part of an overall income tax reform. Helping the least advantaged has always been problematic, but at the very least, don't take their money.

Lastly, a word about Stable Money: Historically, this has always meant a gold standard system. Ben Bernanke used to be known as an "inflation target" advocate. Is that what you want? To paraphrase George Bernard Shaw: you either go with gold, or you make it up as you go along. We've been making it up for forty years, and you can see the results.

The conservative vision needs to expand beyond lower corporate taxes and chopping programs for the least advantaged. If Republicans could find superior solutions to the Democrats' biggest concerns, while cleaning up the corruption in their own ranks, the Democratic party would be obsolete.

Nathan Lewis




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Nathan Lewis was formerly the chief international economist of a firm that provided investment research for institutions. He now works for an asset management company based in New York. Lewis has written for the Financial Times, Asian Wall Street Journal, Japan Times, Pravda, and other publications. He has appeared on financial television in the United States, Japan, and the Middle East.
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