| . You simply won’t be able to do it, even if you want to. But, after you reach dry land, all you have to do is ask politely.
Or, as it is sometimes said: “Good socialism is better than bad
capitalism.” You need good capitalism, healthy and prosperous, to
provide a meaningful alternative.
Thus, before any big reductions in government spending, you should have
a major tax reform to get the near-dead economy moving again. Steve
Forbes has proposed a combination of a 10% flat income and corporate tax rate; a 10% payroll tax; and a 15% VAT.
This is a fine strategy, and the result would be a gigantic expansion
in economic activity. It is quite possible for Greece’s nominal GDP, in
euros, to expand by as much as 300% in the decade following such a tax reform. Tax revenues, which have been falling since 2008, would expand by roughly the same amount.
It’s amazing what a quadrupling of revenue can do for a government’s finances.
At the very least, such a tax reform should be concurrent with
government slimdown efforts. There has to be at least a hope of “dry
land” in the near future, for all of those being kicked out of the
government lifeboat.
The private economy would be where all the action is. Typically, after
a crisis period, there are gigantic business opportunities everywhere,
and many would get rich with stunning rapidity. Many others would
attempt to replicate their success, in the process hiring thousands and
thousands of workers. A middle-class life in the private sector becomes
more appealing than life as a government parasite. The government’s
efforts to eliminate waste and cronyism (while maintaining valuable
services) takes on a tone of moral imperative.
Britain’s Margaret Thatcher led one of the greatest shrinkages of
government ever seen in the developed world. From 1980 to 1987, the
number of civil servants was reduced by 22.5%. Nationalized industries
in coal, iron and steel, gas, electricity, water supply, railways,
trucking, airlines and telecommunications were privatized. Public
housing was privatized, sold to tenants at bargain prices. Union
membership was made non-compulsory, and declined from 13 million in
1979 to 8 million in 1996. Many union members, and former union
members, became Thatcher supporters.
She was able to do this, I argue, because of her tax reforms, and other
business-friendly steps such as regulatory and monetary reform. This
allowed the private economy to gain enough health to serve as a viable
alternative to Britain’s socialist policy of the 1970s.
Under Thatcher’s leadership, Britain’s top income tax rate fell from
83% to 40%. An investment income surcharge of 15% was abolished. The
corporate tax rate fell from 53% to 35%. Capital gains taxes were
simplified and indexed to inflation, and the top rate fell from 75% to
30%. These tax reforms were mostly enacted at the beginning of
Thatcher’s term, and the various privatizations followed later.
A fluke? In the last five years, Britain has reduced the number of government workers by 16%, falling from 6.3 million to 5.3 million. Another 650,000 reduction in government headcount is expected in the next five years.
This is a little amazing. We know how hard it is to cut the government at any level in the U.S. How did they do it?
It is no surprise to me that Britain’s Tory government has paired this
slim-down with some meaningful tax reforms. The corporate rate fell to 20% from 28%;
the top income tax rate fell to 45% from 50%. (The VAT has risen to 20%
from 17.5%, however.) These are not big changes–nothing like a
“10:10:15” reform in Greece—but at least they are in the right
direction, away from Continental “austerity” including big tax rate
increases.
We know that major tax reform is not going to be possible in Greece,
for as long as it is begging week-to-week with foreign creditors for
another “bailout” to allow the government to pay the interest on the
last bailout. Hardly any of the money ever reaches the Greek people.
These “bailouts” (as if putting Greece’s government still further into
debt is a “bailout”) come with strings attached – horrible “austerity”
programs including still more self-defeating tax increases.
Thus, the steps to take are now clear. First, the default. Second, tax
reforms, and other regulatory reforms to make Greece a good – nay, a
great – place for business. Third, eliminating all the corruption and
rot inherent in the government’s present spending patterns, while
preserving important services and welfare programs.
Just follow the plan–1,2,3–and Greeks could be wealthier than Germans within twenty years. If they play their cards right, it might take less than ten.
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