Recovering the Future (Part 2)

Motivation matters.

How can we get the economy out of its funk without going through a long slog? We need to unleash the entrepreneurial energy of our country.

Some European observers have noted that the US seems unusually dour. The usual can-do optimism seems lacking. And one way to change this is to change the structure of our taxes.

By altering the structure, I mean lowering the marginal tax rate while raising the effective tax rate. That way people pay more in taxes, but they also see that if they earn more they get to keep more. Look at it this way: if the total marginal rate is above 50%, you keep less than half of every extra dollar you earn. Or, if you take an unpaid vacation, the government pays for more than half of it. That’s discouraging.

That’s why there’s such a big fight about moving the top rate from 36% to 40%. With State taxes, Medicare taxes, and other items in the tax code, the total marginal is well above 50% level for folks in many states.

So how do you do this? Eliminate deductions and lower the marginal rates. You end up with less economic distortion and more economic activity. Want proof? Look at what happened in 1987 and 88: the years right after the Packwood/Rostenkowsky tax simplification. Fewer deductions and lower brackets led to a booming late-‘80s economy, so much so that Alan Greenspan had to take away the punch bowl.

Low rates with a broad base is smart tax policy. Let’s hope the next Congress can see this.

Douglas R. Tengdin, CFA
Chief Investment Officer
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