Two weeks ago I explained that the Central Bank has the ability to bypass Congressional gridlock and should conduct monetary activities that can help assuage market troubles. In this post, I will explain what Congress should do if able to act.
If total spending is total income, and if a small percentage of people are getting too huge of an income that does not go to the real economy, then aggregate demand is implicated. Since both those premises are economic realities, I propose several policy recommendations for the politicians to resolve this issue. This post is divided into Revenue and Government Spending.
In conjunction with increasing income taxes on the rich, the government should receive more revenue from corporate taxes. According to the Americans for Tax Fairness, although the current corporate top rate is at 35%, which is indeed on the higher end compared to 30 other OECD countries, the average effective corporate rate is around 27%, which is a little lower than the average effective corporate rate for the other 30 OECD countries. The Citizens for Tax Justice, on the other hand, found that most of the Fortune 500 companies that were profitable from 2008 to 2012 paid an average of 19.4% over that period. What this tells us is that instead of raising corporate taxes, we should eliminate tax loopholes.
In addition, the government should create tax breaks and tie the tax breaks to good corporate behavior. If corporation A, for example, employs an X amount of people, then A should receive a Y amount in tax breaks. If corporation B invests a W amount of capital into public infrastructure, then B should get a Z amount in tax breaks. This could not only incentivize corporations to stay in the US, but could also raise community confidence in and outlook on corporations. And to be sure, we can institute a corporate flight penalty and penalize those corporations that leave the US. But my belief is that most corporations would not want to leave in the first place; the US has the best legal system vis-à-vis the enforcement of contracts, one of the strongest, if not the strongest, equity markets, and is one of the most politically and economically stable countries in the world. This fertile business condition is already incentive enough for most corporations to headquarter in the US.
Among other programs like infrastructure repair, welfare programs, a public option in the now uncompetitive insurance markets under Obamacare, Congress should use that extra cash to invest in a modern work and training program that creates transition jobs towards the private sector. This can cushion international market blows that crush US labor by employing workers who lose jobs from outsourcing. Many of the jobs that are lost are within the manufacturing industry, and since our economy has become more service and technology based, we can retrain these workers to learn skills that are relevant in our modern economy. Moreover, these programs could put money in people’s pockets and create long-term investments that decrease costs and increase purchasing power. This will translate into more people buying more goods and services, which can drive profits for corporations and stimulate asset prices.