2020 was a very difficult year and unfortunate year, but in retrospect we will look at it as a very transformative year for American economic policy. Faced with the COVID pandemic, US government performed a series of large actions which in retrospect could be compared side by side and lessons could be drawn from. We had the Pandemic Stimulus which comprised of sending every American a check by the US Treasury, the enhanced Pandemic Unemployment Assistance (PUA) which increased basic state level unemployment insurance by $600/week and we had the Paycheck Protection Program (PPP) which gave small businesses 10 weeks of employee pay (up to $100,000 per employee).
When you look at US government policy over the past 4 decades we see that it has been driven largely by extreme right-wing and left-wing ideologues. On the Right Wing, there is a religious effort underway by the likes of the Heritage Foundation, American Enterprise Institute and the Tax Foundation to flatten the progressiveness of the individual income tax code and even completely eliminate corporate income taxation. Right-wing ideologues like Stephen Moore and Art Laffer have been pushing taxes lower, particularly on corporations and richest people for over 4 decades. As levels of redistribution have declined in a material way from these FLAT TAX policies, a bigger portion of the American population find themselves in poverty and debt and as result can’t participate in the consumer economy and support strong economic growth. Levels of economic growth have declined dramatically over the years. US GDP growth peaked during the Carter years and ever since Reagan implemented tax cuts, US GDP growth has steadily declined through a series of Republican administrations – Reagan, HW Bush, W Bush and Trump. Each Republican administration has passed large tax cut legislation early in its terms and each Republican administration have found themselves constantly battling a recession by the end of their terms. Reagan oversaw 2 recessions, HW Bush oversaw the 1990 recession, W Bush brought on the Financial Crisis of 2008 and Trump brought about the COVID crisis in 2020. If you reduce levels of redistribution, the US economy weakens. It is automatic. The relationship between levels of redistribution and economic growth can be simply described in the picture below. But the correlation is pretty obvious as well. As top marginal tax rates have declined over the decades, so has economic growth. In America the argument today isn’t “capitalism vs socialism”, but “unregulated capitalism vs regulated capitalism”. Clearly regulation and redistribution is the way to go. The only way is how much regulation and redistribution results in a stable combination of good economic growth and social order.
On the Left Wing, after the fall of the Soviet Union, the argument for central command of the economy was abandoned among progressives in favor of the “Third Way” – implementing TARGETED STIMULUS measures to help the people in need. While targeted stimulus clearly hasn’t been the debacle that Republican flat tax policies have been, targeted stimulus has wrecked the body politic of the United States. People that don’t get stimulus are angry at people that do get stimulus. Targeted stimulus measures over the last 2 decades directly led to the rise of Trump. The US government constantly stimulated people that don’t work and penalized people that do work by not stimulating them. The US government never helped small business owners whose business suffer greatly during a recession. In the Financial Crisis, sales and income of small business owners and contractors declined at least -50%. Those people suffered real economic pain and couldn’t pay their bills just like people who lost their employment. Yet, there is no unemployment insurance for small businessmen. There is no government income support for them during a recession. Small business people don’t run large cloud computing companies. They run retail, Main Street stores that sell mostly discretionary spending items which are the first thing that gets cut in a recession when people only spend on necessities. During the Financial Crisis, Obama didn’t give small businessmen any help. He didn’t send unemployed small businessmen $600 checks. Instead, Obama chose to raise health insurance premiums by bundling health care services and eliminating choice. Obama’s higher health insurance premium are a tax on small businessmen. Not only did Obama not help, he and his liberal economists hurt small businessmen. His economic policies were atrocious and that is why Republicans reclaimed the House and held it for his entire 2nd term. Obama and his economists actively chose to harm America’s small businessmen and harm America’s economic engine. All of the “targeted stimulus” measures under Obama didn’t help the middle class and exacerbating wealth inequality in the country. Some Obama Third Way economists like Jason Furman to this day continue to preach targeted stimulus measures to Biden which wrecked the country and help give rise to populist ideologues like Trump. Those voices have had their way in the 2010s and don’t need to be heard from again. They failed.
One thing that people forget is that TARGETED STIMULUS needs government bureaucracy to implement the targeting. Targeted stimulus makes the government bigger and more inefficient by clogging it with paperwork. Many people in the economy who need stimulus actually can’t get it because they can’t climb over the wall of paperwork. Bureaucracy and paperwork increase economic friction. They delay and deny the distribution of stimulus. Thus targeted stimulus is really less stimulus because it doesn’t get to its target.
Over the past 40 years, when Republicans have been in power we have pursued FLAT TAX policies which reduce redistribution levels and hurt economic growth and when Democrats have been in power we have pursued TARGETED STIMULUS policies which don’t help people in need, increase the size of government and also hurt economic growth. In 2020, we actually got a real world lesson in how TARGETED STIMULUS is a failure when compared to a BROAD STIMULUS. PPP was a “targeted stimulus” measure while Pandemic Stimulus was a “broad stimulus” measure. PPP applications immediately hit with charges of fraud, big corporations like the LA Lakers or successful hedge funds were given funds ahead of small businessmen. Small companies struggled to fill out the paperwork and couldn’t get over the paperwork challenge and failed to get funds. The one program that was universally successful instead was Pandemic Stimulus every American a $1200 check. Money went out quickly, was received by everybody and we saw immediate economic boost. It was implemented through the IRS which has all the relevant financial information for all Americans and was done quickly and efficiently.
So let’s think about this with clear eyes. Instead of discharging PPP stimulus through the IRS which already has corporate financial information, we chose to discharge PPP stimulus through banks and the Small Business Administration which doesn’t have that payroll and tax information? Then we asked American businessmen to submit paperwork for information which the US government already has? That makes no sense. This is so stupid, it is actually hard to believe. So it is not a surprise that PPP program failed. PPP was so hard to implement, it’s as if the intent of PPP was to not stimulate the economy. A total disaster.
Going forward, America needs a new way of dealing with stimulus and taxation. I call this NEOCENTRIST WAY because it is not driven by left-wing or right-wing ideology. It simply looks at the issue from a practical standpoint: what is the most efficient way to generate economic growth using government resources?
The NEOCENTRIST way is to implement BROAD STIMULUS and help everybody now and then use PROGRESSIVE TAXATION to remove stimulus from people that don’t need it. The fact of the matter is rich people aren’t that many. Sending $1200 checks to billionaires is less costly than hiring an entire federal department of employees with $100,000 salaries to determine whether small businessmen in need pass the means-test. Broad stimulus gets money to people now and juices economic growth now. Later on, when you don’t have an economic emergency, you can spend the time to remove stimulus from the people that don’t need it. At tax time, the IRS can say “Jeff Bezos, your taxes have a $1200 surcharge for that $1200 stimulus check you got because you don’t need it. You make enough money already”
The NEOCENTRIST WAY also calls for using the IRS to dispense and remove stimulus from the economy because the IRS already has the financial data of American individuals and businessmen. The IRS is in the best position to see who is hurting and who is not in a recession. Instead of building IRS like functionality and duplicating it in other federal departments, we can just use the IRS. This also helps stop the proliferation of private financial data to other federal departments which are vulnerable to hacking.
BROAD STIMULUS + PROGRESSIVE TAX > FLAT TAX + TARGETED STIMULUS
Let’s hope the Biden administration learns from 2020, sidelines the failed voices from the Obama years and pursues efficient and impactful neocentrist economic policies going forward.
One thought on “Neocentrist Rethink of Taxation and Stimulus”
I 100% agree with you and have been thinking this same exact way for a long time.
Rather than tinker with spending programs, we need to make the tax structure MUCH more progressive.
My idea is a 5% or 6% payroll tax that applies to all income levels right up to billions of income per year. This keeps people and employers honest in reporting their incomes.
Then the tax rate is something like 50% or so OVER a an income level of something like $200,000 per individual (this amount would have to be calculated to verify it should not be higher or lower in order to obtain enough tax revenues). If you make $400,000 as an individual, you would have an effective tax rate of about 25%. That sounds about right and may be similar to the effective tax rate now in existence for that key level.
The only deductions are some standard deduction if you have dependents; it’s one amount no matter how many dependents you have; and state and local taxes, nothing else. NO OTHER DEDUCTIONS.
All income would be taxed in the same manner; capital gains, dividends, W2s, etc.
Finally, corporations would be taxed at a rate 50% of individual taxes, and all, credits, loopholes, etc., eliminated. Only business expenses. We could talk about the feasibility of changing to a cash basis for calculating capital expenses and carrying losses forward, etc.
Plus estate taxes should be re-addressed although I do not have solid ideas in this area other than a flat tax over a certain threshold such as 25% tax over an estate value of $10,000,000 or something like that.
Now that’s a progressive tax code.
Also, we can institute a carbon tax to stop the socialization of climate change damage. This could bring in a lot of money
The carbon tax would be offset by a $1800/month guaranteed income payment for all persons while still incentivizing people to be green. For those earning over $100,000 or so, we can have a “clawback” of the guaranteed income in the following years tax returns, as you suggested.
The other ways to redistribute income in a fair way is to have a univervsal health care system and tuitition free public unviersities or vocational training. Plus a gradual increase in the minimum wage to over $20/hour.
Thus we have a complete plan; the things needed for everyone are addressed; health care, education, a minimum wage, guaranteed income, and no one who cannot afford the taxes is being ruined.
Gerry Dantone, MBA, Finance, St. John’s U.
Economics Honor Society, Omicron Delta Epsilon