My view: Tax reform should focus on helping the middle class

Source: Deseret News

Economic theory is called theory for a reason. Some of Milton Friedman’s time-honored theories are being discredited. Cutting taxes to generate economic activity and supply-side and trickle-down economics are interesting theories, but we have seen repeatedly that these policies alone do not generate enough economic activity to “lift all boats” (see Reagan, Bush, Bush). At the same time, we cannot tax our way out of our problems (see Europe).

With the Trump and Clinton nominations now secured, much discussion will focus on the disappointing 1.2 percent second-quarter gross domestic product growth and the economic platitudes coming from the candidates. Each side has its mantra.

The conservative sound bite says: High taxes and regulatory “uncertainty” chill corporate investment, stunting growth. There is just one problem — it is simply not true. Apple may move profits through Ireland to reduce its taxes, but no one can suggest that it is not investing in the iPhone 7 because of taxes or regulatory uncertainty. The same is true of Tesla, Google, Exxon or your neighborhood entrepreneur.

The liberal sound bite says: We must raise taxes on wealthy Americans. Likely true, but while Warren Buffett self-admittedly needs to pay more in taxes, he alone cannot solve our problems.

While Americans may agree our tax system needs reform, we also know that it’s not as simple as raising or lowering marginal rates — particularly if the goal is to benefit the middle class. Therefore, getting people to agree on reforms is more problematic. Are corporate or marginal individual rates too high? Perhaps. But looking at those rates without considering other aspects of the tax code is misleading at best and dishonest at worst. Should we maintain a progressive or regressive system? Should mortgage interest and charitable donations remain deductible? Should certain industries receive more favorable depreciation treatment than others?

Despite the next three months of sound bites, we must focus on tax and related policies that continue to rebuild and strengthen our middle class in the wake of the Great Recession. This should be done at all levels of government. We know a president can do little more than recommend tax and related policies that will impact the economy. Implementing policies that will restore the strength of the middle class and lead to stronger economic growth is the job of all our elected officials.

Unfortunately, the U.S. and global economic systems are incredibly complex. Policymakers interested in strengthening our economy must focus on two distinct paths — reinforcing our economic backbone, i.e., the middle class (thereby encouraging demand), and providing the right incentives for responsible business investment (thereby encouraging supply). In addition, policymakers influence many other economic inputs that impact the global economic system — exchange rates, trade and tariff policies, wages, benefits and human rights protections, interest rates and more. These make for lousy sound bites.

In the wake of the Great Recession, the Fed and other central banks have maintained below-market interest rates to stimulate investment activity. Although this has born some fruit, solid growth eludes us, not because of high taxes or regulatory uncertainty, but because the American middle class has never fully recovered. Encouraging supply is only meaningful if there is a balance with demand.

We know 70 percent of GDP is driven by consumer spending and it is well documented that when the wealthy get wealthier, they spend only marginally more. Thus, the economy’s success is directly tied to the middle class. And the fact is the middle class is in trouble after 20 years of stagnant wages.

Real policy reform means moving beyond platitudes. That means acknowledging there is more to stimulating the economy than cutting taxes for the wealthiest among us. The key driving question must be whether proposed reforms directly benefit existing and prospective members of the middle class. Any policies that do not should be viewed with skepticism. Policy reforms dealing with the minimum wage, a living wage, and equal pay for equal work will go a long way toward strengthening the middle class.

When casting your November votes, go beyond the sound bites and be sure you are voting for policy reforms that will actually help those whose economic well-being is the lifeline of the U.S. economy — the American middle class.

Josh Kanter lives in Granite. He received his undergraduate degree in economics from Emory University and studied conservative law and economic theory at the University of Chicago Law School. He is the founder and board chair of the Alliance for a Better Utah.

Read the Deseret News article here.

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