In my previous column, I described the benefits of focusing on monetary velocity
to revive the economy. As this parameter increases, employment, income and tax revenue will follow — without raising tax rates and/or reducing deductions from taxable income.
Notwithstanding the aforementioned, I believe the current tax rates and deductions do not permit an optimal allocation of resources. As I mentioned last week, the key driver for economic recovery will be a large differential between corporate tax rates and personal tax rates, with corporate rates being much lower.
Further, personal tax rates on capital (dividends and capital gains) are still too low, despite the recent increase. While advising Herman Cain during his 2012 presidential campaign, I was interested to hear two high-profile investors suggest the same in a televised interview. According to William Gross, founder, managing director and co-chief investment officer of Pimco, the return on capital over the past three decades has been too high. Laurence Fink, chairman and CEO of BlackRock, echoed this sentiment by saying the financial industry has grown too large during this time period and has not added commensurate value to society. Keep in mind, these individuals probably benefited quite handsomely from the highly preferential tax treatment of capital.
I also recommend limiting deductions from taxable income to charitable contributions, state and local taxes and an amount equal to the federal poverty limit for families. Moreover, payroll taxes for Social Security and Medicare need to apply to higher levels of income.
These measures would promote more investment in long-term, sustainable businesses that foster greater employment, income and tax revenues, thereby lowering deficits and the rate of debt accumulation.
Maintaining this structure is predicated on a stable medium of exchange. This important component will be discussed next week.
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