Attn. Trump Economic Transition Team! Here’s 9 Necessary – But Distasteful – Proposals to Correct U.S. Economic Problems (+2K Views)

This article presents 9 proposals that I think might actually solve the deficit and debt problems of the U.S., jumpstart its economy, pay for healthcare and other costs, and do so with the least damage to the body politic and economy…It is with a somewhat heavy heart that I offer these proposals, though, knowing that there will probably not be one person who doesn’t find some of them extremely distasteful – and that includes me. The simple reality, however, is that this is where we find ourselves today: we are left with distasteful choices and when you’re left with nothing but difficult choices and bad choices – and you avoid the difficult ones – you end up with only bad choices.

The comments above and below are excerpts from an article by John Mauldin (MauldinEconomics.com) which has been edited ([ ]) and abridged (…) by  munKNEE.com (Your Key to Making Money!)  to provide a faster & easier read. 

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I know for a fact that many of the people you have seen listed on the Trump economic transition team will be reading this. That is one reason I’ve been taking so long to put these thoughts to paper.

I fully realize that what I am proposing is not necessarily what they will do. In complete candor, what I’m proposing will be remarkably difficult for certain members of the Republican and Democratic Congress to countenance. It requires accepting some significant philosophical heresies that are anathema to all politicians (different heresies/anathemas for different politicians, according to their philosophical bent), but I see it as the only way forward if we want to dodge a deep recession and/or a greater crisis in the future.

The above being clearly stated I offer below what I think the Trump administration and the GOP-led Congress should do:

1. Cut the corporate tax rate to 15% on all income over $100,000. No deductions for anything. Period. A 10% tax rate on all net foreign income (with allowances for taxes paid against total income.) That will make us the most tax-friendly business nation in the world, competitive with Ireland, and stops all the financial shenanigans that try to avoid taxes. International companies will not only move their headquarters here, they will bring their manufacturing and jobs with them. Ask Ireland how that worked out for them. I can imagine a horde of global companies moving from Europe and elsewhere to take advantage of the competitive taxes. Frankly, it will put them at a disadvantage if they don’t.

The simple fact is we will collect more total corporate taxes under this plan than we do under the current system with all its deductions and loopholes. This tax plan will have the side benefit of putting out of work an army of lobbyists whose sole role is to try to get tax benefits for their clients.

2. Cut the individual tax rate to 20% (and later I’m going to demonstrate how it could even be 15%) for all income over $100,000. No deductions for anything. Period. No mortgage deduction, no charitable deductions. No nothing. Anybody who makes less than $100,000 will not pay income taxes and will not file. This will dramatically promote entrepreneurial activity and help small businesses.

So far, the above is standard Republican doctrine. Now we’re going to venture into left field.

3. I’m working under the assumption that we must make a serious effort to have a balanced budget and to fund healthcare and Social Security. That requires money, which is another way of saying that we will need to find taxes from another source. I would propose some form of a value-added tax (VAT) that would specifically pay for Social Security and healthcare. All the other parts of government are paid for from income and corporate taxes. Given the monster size of the healthcare budget, we would need somewhere close to a 15% VAT. That could change somewhat depending on various workarounds. For instance, if you drop the income tax to 15% but keep the 3.9% Medicare tax, that would leave the total tax rate under 20% but would offer a portion of payment for healthcare, which might mean a lower VAT.

I personally presented this plan to Senators Rand Paul and Ted Cruz, who later adopted a version of it that they characterize as a business tax; but I don’t care what you call it. There are multiple variations on the theme, and I only mention Paul and Cruz to point out that you can actually get serious conservatives to consider such a tax. Now, to be fair, they were against increasing the total amount of taxes taken – and that is not what I am advocating here. To pay for healthcare and balance the budget, we are going to need to generate more revenue. Not a whole lot in terms of percentage of GDP, but some.

Let me reiterate that whatever you call the VAT-like tax, it would be specifically targeted at paying for healthcare and Social Security. If you want to hold down the amount of the VAT, then Congress needs to aggressively figure out how to hold down the cost of Social Security and healthcare. This does not eliminate the need for aggressive restructuring of both of them. In fact, it would require it.

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4. Policy wonks are going to note that you would not need a 15% VAT just for healthcare. I would propose that we eliminate Social Security funding from both the individual and business side of the equation and take those costs from the VAT.

Progressive and liberals will complain that a VAT is a “regressive” tax – it falls more heavily on lower-income people since they spend much of their income on items subject to such taxes. For the truly lower-income, you could offer a rebate to even out the load, but if you get rid of Social Security taxes you give everybody a 6.2% raise and a 6.2% reduction of employment costs to businesses.

Getting rid of individual and business Social Security payments is the opposite of regressive and so balances out the cost to the working poor rather well. Those with incomes between $40,000-100,000, who had been making Social Security payments, would not be paying income taxes, so a VAT would still be a cost reduction for them.

This would be a huge stimulus to the economy. Plus, VAT taxes can be deducted by businesses at the border when they export products. This would make us competitive with every other country in the world whose companies also deduct VATs at the border.

As a general rule, most economists (even guys from Harvard and Princeton) will tell you that a consumption tax such as a VAT is better than an income tax in terms of its overall impact on the economy.

5. We need to jumpstart the economy, and both sides of the partisan divide are talking about some kind of infrastructure program. The problem with infrastructure spending is that it still adds to the national debt, which is already outsized. I do think we need infrastructure spending, as infrastructure is typically productive as opposed to nonproductive, and the program would help to jumpstart growth but I would do infrastructure a little bit differently. I would create an Infrastructure Commission that would authorize federally guaranteed bonds for cities, counties, and states. That’s not significantly different from the guarantee we extend to the $1.7 trillion in Ginnie Mae bond funds.

The guarantee would let these entities borrow at 30-year Treasury rates, which right now is around 3%. The program would allow the authorization of up to, say, $1 trillion in infrastructure bonds for projects initiated within the succeeding three years. The various political entities that issued the bonds would have to legally agree to cover the payments to retire the bonds over 30 years. I would prefer that they couch this agreement in the form of a public vote so that the citizens can see what they’re agreeing to.

Further, we could subsidize the bonds at 2% for the first 5 years and 1% for the next five years, which would mean a $20 billion per year expenditure for those first five years but also recognize that it would be highly unlikely that $1 trillion would be put to work by the end of the next four years. In the meantime, millions of jobs would be created by the process, which would generate GDP growth and tax revenue and would be very likely to produce more in terms of revenue than the program costs. Plus, our kids get something for the future – water systems, new ports and airports, roads, bridges, etc.

There could be some exceptions to the focus on state or local funding for projects that are truly national in scope. A Smart Grid (that would also hopefully be EMP-hardened to counter a potentially civilization-ending threat that few people are talking about) is a good candidate; and frankly, we could save enough in electrical costs that we could probably work the payments for the bonds into power bills as a very small-percentage add-on that comes out of the savings.

The commission itself should be composed of savvy businessmen and women who are hopefully not politicians (or who have been retired from politics for at least six years). Members from a particular state or polity would have to recuse themselves on any vote that affected that jurisdiction. The commission would be responsible not only for determining that there is local buy-in to the process, but also that the political entity issuing the bonds is capable of making the payments.

6. Roll back as many rules and regulations as possible. I would instruct every cabinet member to find, every year for four years, 5% of the rules and regulations within their purview and eliminate them. If they want to write a new rule, they have to find an old one to eliminate. Bureaucrats are like your crazy old aunt who still has every magazine she has gotten for the last 30 years just in case she might need to go back to some article and read it again. Time to clean out the attic.

In particular, I don’t want to reform the FDA; I want to replace it lock, stock, and barrel with a 21st-century drug regulatory authority that promotes innovation and allows individuals, in consultation with their doctors, to opt for potential life-changing and even death-preventing treatments if they so choose. I’m tired of having friends die of diseases for which there are cures in the pipeline, but the companies with the treatments are prevented from even making medications available to dying citizens. To withhold such aid is, to my mind, a criminal act.

That would not be a bad approach for every regulatory authority to take: Forget about the legacy rules and think about the world as it is today and how it will change, and design a regulatory system that not only enables and encourages change but that makes sure everyone benefits.

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7. Trump will have two immediate appointments to the Board of Governors of the Federal Reserve. He will have another two in another year, giving him four out of the seven governors. I would also imagine that, given the ambitions of some of the other current governors, they will opt for the much higher income available in private practice. Having a Federal Reserve that is more neutral in its policy making and that realizes that the role of the Fed should be to provide liquidity in times of major crisis and not to fine tune the economy, will do much to balance out the future. I have several names in mind that I would like to submit, but one in particular is Dr. Lacy Hunt, a former Federal Reserve economist and one of the finest economic minds in the world. Kevin Warsh or Richard Fisher might come back to the Fed if either were nominated as chairman (although it would be a large pay cut for them). Janet Yellen’s term as chairman expires in January of 2018, though she could remain on the board if she opted to. I can’t imagine anybody would want to hang around on the board after they’ve been chair.

8. Getting trade right will be tricky. It is one thing to talk about unfair trade agreements – and we have certainly signed a few – but we also need to recognize that some 11.5 million jobs in the U.S. are dependent upon exports (about 40% of which are services). Frankly, if we drop our corporate tax to 15% and work on reducing the regulatory burden, I think we will be pleasantly surprised by how many jobs are created just by those steps alone.

9. In connection with trade, as I look around the world I see other countries experiencing or getting ready to experience economic stress that is going to force them to allow their currencies to weaken against the dollar. The euro is already down by over 30%. The potential crisis in Italy (not out of the question and a topic for a future letter) could easily push the euro below parity. The value of the dollar relative to the currencies of other countries comes under the purview of the Treasury Dept., not the Fed, and I can imagine a time when we will see some strange new policies being suggested because of the competitive pressures exerted by a strengthening dollar.

A Few Final Thoughts

The central advantage of the entirety of my proposals is that they offer a path to a finance the needs of the country and at the same time allow a balanced budget. The actual increase in the total tax revenue needed will be a function of the degree to which Congress can get the various budgetary items under control, especially healthcare and Social Security. I know a lot of conservatives would like to see no increase in total tax revenue to the federal government, and if we can do that and balance the budget, I am all for it. I am decidedly in the camp that government is too large and would be more than happy to eliminate a few departments here and there.

…Voters clearly want healthcare and Social Security benefits to be paid for, along with other government services that are actually necessary (especially defense)…[so] we must figure out how to pay for those services. Simply holding government expenditures flat for four years would go a long way to solving the problem, but it won’t get us all the way there.

Boosting growth is going to be difficult. This is not the 1980s and the environment that Reagan encountered. Stock markets are at highs, not lows, as they were in his term. Today, the market capitalization is 196% of GDP, versus 40% when Reagan took office (hat tip Stephanie Pomboy). Reagan also had a falling-interest-rate environment. Plus he had a huge demographic shift to work with, from Baby Boomers coming of age. Reagan also had his recession at the beginning of his term, so the economy was coming off its lows. There was a great deal of pent-up demand, which is not presently the case. All of these factors were a great help in spurring the economy when combined with tax cuts. Those conditions all tended to boost growth, yet they don’t exist today.

We can have growth and create good jobs, but it’s not going to look like the ’80s and ’90s. Our rebuilding of the economy will have to take a different path, and a more challenging one in many respects.

Let me be very clear. If we don’t get the debt and deficit under control – and by that I mean that at a minimum we bring the annual increase in the national debt to below the level of nominal GDP growth – we will simply postpone an inevitable crisis. We have $100 trillion of unfunded liabilities that are going to come due in the next few decades. We have to get the entitlement problem figured out and we have to do it without blowing out the debt. If we don’t, we will have a financial crisis that will rival the Great Depression. Not this year or next year, and probably not in Trump’s first term, but within 10 years? Very possibly, if we stay on our present trajectory.

For investors, navigating the next few years is going to be tricky. We already have multiple markets with valuations at the upper end of their historical trading ranges. Interest rates are likely to rise, although by less than most people now assume.

OK, I’m going to close now…As always, I look forward to your comments.

Go here for an article from Mauldin replying to many of the comments that the above article generated.

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What you are about to read could give you serious heartburn, especially if you are an economist or a central banker or a retiree or just someone who has lived life playing by the rules, and now you find yourself getting no return on your savings, forcing you to save even more and work even longer.

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