Thoughts on Achieving Stability and Prosperity in our economy

The discipline of Economics is a wild and woolly place were anyone with a notion can probably find data to support it.   But when you cross-check economics against history, the outlines of what tax policies a government should pursue to maximize stability and prosperity are pretty clear.  Here are a couple of basics that recent history has highlighted.

I.  Don't view Corporations as cash cows to fund all your government activities.  Corporations are fictional entities we create to encourage risk. As fictional entities they are both highly mobile and highly adaptable, so taxing corporations is rather like trying to catch a greased pig.

The way to deal with corporations is:

A.  Surcharge the products they sell as an access to markets tax.  The more they sell to us the more they pay.  Thus if they are a domestic corporation that sells mostly overseas, they pay little tax, encouraging them to stay here even if our labor costs are higher.  Domestic corporations and foreign corporations get treated equally so it is difficult for other countries to lure away our corporations by offerring lower tax rates.  

B.  Have some sort of retained earnings tax so Corporations can't stockpile huge amounts of cash.  Any cash they have been sitting on for more than two years has to be either kicked out to shareholders as dividends, paid to employee's, or they are taxed.  The longer the corporation holds funds, the higher the tax.  As we have seen since the crash a few years ago, Corporations have not been investing in new enterprises that create jobs, they have been stockpiling cash or buying back their own shares (which is really a way of paying income to the people who own their shares, or share options, without their having to pay taxes).  The lack of enthusiasm among corporations for investing in new ventures that creat jobs has been a big contributing factor to our languishing economic recovery.

C.  Stock options as a compensation for Corporate employee's should be taxed just like any other ordinary income at the value of the stock at the point it vests.  Stock options began because people thought it would motivate management to care about the long term success of the Corporation.  But it is pretty clear that generally corporate management no longer pays much attention to long term planning, everything they do is about pumping up the Corporate share price in the short term to make their options as valuable as possible because that is what is best for them personally.  

However, we should also create a mechanism where stock options could be treated beneficially under the tax law if the options go into a trust that provides the employee can't touch the principal until 7 years after the employee leaves the company.  This would make stock options a more viable tool to motivate managers to plan for the long term health of the Corporation.

D.   All of these are reasonable steps to require from Corporations in return for the huge benefit society confers by granting limited liability. Limited Corporate liability imposes major costs on society, we should be compensated for those costs and we should design tax law to shape corporate compensation schemes to guide their behavior towards conduct that benefits society, not just the owners of the Corporation.

II.  Go back to steeply graduated income tax rates.   Basic Government funding should come mostly from people.  Government should be to serve the people, the people should therefore support the government to the extent they benefit.

A simple fact is that the more assets you have the more benefits you get from government.  On top of that allowing wealth to concentrate in a few hands undermines the purchasing power that drives a healthy economy.  Concentrated wealth makes the rich relatively richer but in reality they are poorer than if the wealth is more dispersed because there is less money circulating in productive parts of the economy.

So income tax rates should meet the following criteria:

1.  Be based on computations of the mean income of a full time worker in this country.  People up to that mean pay a modest tax.  Above the mean rates should increase until they become very high on people who make a lot of money.  The wealth of the wealthy is protected by Government, they should pay the lions share of costs of the institutions that provide that protection.

2.  The mean should be adjusted every two years to reflect the most recent data, and the graduated rates should be percentages of the mean, so that both growth and inflation is computed into the system to avoid stealth taxation or stealth tax avoidance.