Getting To 5

Last week, Tim Palwenty laid out a policy speech in which he wants to see the US economy grow at 5%.  Now that I have had a chance to read the full text, here are my thoughts.

First of all, I disagree with Megan McArdle’s argument that 5% isn’t possible.  I mentioned recently that I consider 5% achievable.  The trick, though, would be to dismantle most of the regulatory and confiscatory State.  This probably is not going to happen in the short term (though I believe it will need to happen in the long term, as eventually, there won’t be anybody willing to finance government expenses; the official Chinese credit agency is already talking tough, stating that the US government is in “default” already), but to call it crazy is wrong.

Now, on to the details of Pawlenty’s speech.  He specifies overhauling the tax system, especially for business (corporations are ridiculously  highly taxed in the US), as well as eliminating most tax loopholes.  The problem with that latter statement is that, unless Congress is prohibited from re-inserting them later, it just won’t work.  James Buchanan has, in his work on public choice, pointed out exactly why, and the 1986 reforms show:  there are incentives to get these tax breaks in, and Congressmen make out pretty well by inserting them.  As long as they are free to discriminate (i.e., have tax breaks which apply only to certain groups of individuals), these will exist.

Palwenty’s two-tier tax system would help with this, though.  If you have two rates and no deductions, it makes it significantly easier to pay taxes.  You don’t need to hire services or spend a month collecting all of the data to try to get as many deductions as you can to reduce the tax bill.  Also, getting rid of the capital gains and estate taxes would counteract current pro-consumption policies.  Why save if the government is going to take it all away anyhow?  Instead, spend, spend, spend and live off of the dole at the end.

Pawlenty then moves on to spending, proposing a constitutional amendment to require Congress to pass a balance budget at no more than 18% of GDP.  There are some technical details which will make things difficult (such as tricks in defining GDP, defining when a budget is “balanced,” etc.), but my one real complaint against it is that the rate is far too high.  I would like to see it start at 18% and then be required to drop 1% every 2 years until it reaches 10% of GDP.  A federal government at 10% would still have enough money to perform important operations, such as building awesome stuff that blows other stuff up, but not enough to take over entire swaths of the economy.  A federal government at 18% of the economy still has the total State take-away in the 30% range, which I believe is too high for a 5% growth target.

On things he specifically mentions, I’m not opposed to them.  I still like the idea of turning Medicaid into a block grant (especially if it comes tied with a gradual phase-out provision), increasing Social Security’s retirement age (though I’d rather just have an opt-out clause), and “slowing the rate of growth in defense spending.”  And allowing a President to impound money is excellent.  It might do what a line-item veto would ideally do.  There is a problem of constitutionality, though, that would need to be addressed.

The biggest thing, though, is his “Google Test.”  I absolutely love this.  Why are governments involved in garbage collection, transportation, home mortgage underwriting, road building, and so many other things?  Pawlenty argues that they were important in a time “[w]hen the private sector did not adequately provide those services.”  I disagree—they were built during a time when governments decided that “the private sector d[oes] not adequately provide th[e]se services,” not when consumers themselves decide it.  They were examples of government over-reach, with sad stories on the lips and greedy palms in taxpayers’ pockets.  And if you can go online and find competitors, then absolutely get rid of the government alternative.  I might go even further:  there are certain cases, such as with non-parcel post, in which the government has legislated a monopoly for the government-run or -financed agency.  Get rid of those anti-competitive regulations and have a sunset clause in every government activity, forcing it to be renewed every few years.  Pawlenty does mention sunset provisions for all federal regulations, which would also be great.  I would do the same for taxes:  why are we paying surcharges to finance the Spanish-American war (of 1898) on our telephones?  Haven’t we paid that bill off yet?

All in all, this is a great platform, I think.  It hits almost all of the important notes and should be the starting point in primary debates.  Pete Spiliakos isn’t so sure, mostly because he’s concerned about federal tax revenues dropping as a result of this plan.  John Taylor, on the other hand, likes the plan.


3 thoughts on “Getting To 5

  1. You had me at “eliminate tax loopholes.” I’m not sure why high corporate tax rates are a deterrent, though, since very few actually pay their taxes anyway thanks to all the loopholes. I would argue that corporate tax rates, in particular, are just an arbitrary number. If we made their rates eleventy billion %, I’m not sure we’d see any appreciable gain in revenue. I will look at this in more detail, but it sounds good to me.

    • There are some very large and connected corporations which are able to minimize their tax payments (like the whores at GE), but think of the small and medium corporations which can’t afford teams of lawyers and accountants dedicated to finding (and making) as many loopholes as they can. Even if the corporate tax rate change were tax-neutral from the standpoint of companies, that would still be a gain because the money going to those accountants and lawyers could be spent on making products and services that people actually want, rather than services dedicated toward negotiating the regulatory State.

      Also, don’t forget that US corporate rates are very close to the highest in the world, so even with loopholes, they’re still a lot higher than in most countries.

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