Obama has tried numerous strategies to try to gain favor and/or bad mouth Mitt Romney in the past months. It is has been mildly impressive that they have a new attack every week that is completely random, usually not true, but very distracting. However, last week President Obama got back on what appears to be one of his key messages, that the rich people need to pay their “fair share” and actually presented a policy stance: raising taxes on the “wealthy.”
President Obama said that the Bush tax cuts need to expire for those making more than $250,000 for couples and $200,000 for individuals. His proposal is a one year extension, just enough to get him through the election. One of his main arguments was that he wants to return to the same tax rates as the Clinton era.
However, in 2001 (Clinton’s last year as President), the federal budget was $1.9 trillion. In 2011, President Obama’s federal spending was $3.6 trillion. In ten years, our government has nearly doubled in size and the President’s tax plan does not get us close to a balanced budget. Further, I feel his tax plan of increasing taxes on small businesses will be a job killer. A small tax increase can take away the revenue needed to pay someone’s salary.
The Republicans and Mitt Romney argue that tax cuts are the key to recovery, based on what Reagan did. The reason it worked for Reagan is that he brought tax rates down by over 40 percentage points, which is a big change that did spur economic growth. However, all of the Republican proposals I have seen have been less than 5% points, which will not be significant enough to catapult our economy. As much as I believe in tax cuts, we need to get our spending house in order before we get too aggressive with cuts. If we cut taxes too much before reducing spending, it could hurt our deficit so much, that it will slow economic growth instead of spur it.
As I have always said, this blog is about solutions. There are a lot of things I would do such as repeal Obamacare and cut spending drastically. However, I would go after two things first that are a little less political and could have the biggest initial impact for our economy. The first thing we need to do is gain some stability, so I would try to get permanent income tax rates versus continually extending Bush tax cuts one year at a time. Permanency gives stability to small businesses, thus allowing them to plan and hire. Because this would not be easy, here’s my compromise: make the Bush tax rates permanent, but close loop holes. The rates keep taxes low, but closing loop holes increases revenues, making both parties happy. While Republicans may argue that closing loop holes are a net tax increase, I have a different opinion altogether. Loop holes are, in my mind, unintended tax breaks that lawyers took advantage of, which is not congruent with the original intent of Congress when the code was created.
The second thing I would do is permanently cut the corporate tax rate in half. Right now, the United States has the highest corporate tax in the world. Our corporate tax revenue is only 8% of the U.S. total revenues (approx. $180 billion), so it’s impact financially for the government would be small, but the impact for the businesses would be large. Cutting the rate in half does three key things:
- It reduces the cost of doing business in the United States, helping jobs come back home from overseas.
- It increases the ability to hire people and reduce unemployment. Further, when the money goes to individuals’ income vs. corporate income, it will still be taxed, thus roughly breaking even on net revenue.
- Last, this concentrated radical change would be just big enough to spur change in our economy. The tax cut would essentially increase the profitability of every corporation in the United States and help the stock market as well.
The key to problem solving is to start with high impact, low effort solutions (i.e. my two ideas). Afterwards, you look for high impact, high effort solutions (i.e. solving social security and healthcare). The two simple ideas I proposed would be easy to understand, quickly implemented, and highly effective in spurring economic growth.