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Government Is Responsible for the Sluggish Economy; What to Do About It
Raymond Richman, 9/14/2014

To grow the U.S. economy is an imperative given the sluggish state of the economy which will soon end our world leadership. The U.S. has been for decades the world’s leading debtor nation. It has 21 percent of the labor force unemployed, underemployed, or not looking for a job since they were laid off. The wealthy have become wealthier thanks to the tax treatment of corporate income and the poor have become more numerous and dependent on government hand-outs. The blame for this malaise are a host of government policies that impede entrepreneurship and risk-taking and interferes with the efficient functioning of a free-enterprise economy.

It is time that we reduced the negative role of government in the economy. 1) We need to reform the tax system by eliminating the corporate income tax and taxing corporate earnings as the personal income of the shareholders. 2) We need to eliminate wasteful subsidies, including tax expenditures. 3) Our health care system is unnecessarily expensive and has undesirable economic effects. 4) Our trade deficits slow economic growth. We need to balance our international trade. The government’s failure to intervene to correct our chronic international trade deficits has cost millions of jobs. 5) The minimum wage should be abolished because it has created an army of unemploy, unskilled labor the value of whose services is less than the legal minimum wage. 6) Wasteful and unnecessary regulation of American business, Following are our reasons for making them.

First, tax corporate earnings as the personal income of shareholders under the more progressive personal income tax, which is the way partnership earnings are taxed. The reason given at the time the corporate income tax was adopted was that corporations should be considered as "artificial persons" because unlike partnerships and individual proprietors at the time, shareholders enjoyed limited liability. Today limited liability partnerships (LLPs) and individual proprietorshiips (LLCs) are legal in most, if not all, states. Following are sound economic reasons why the corporate income tax should be eliminated.

Economists believe that the incidence, the burden, of the corporate income tax falls only in part on the shareholders but falls also on the corporation’s customers and some believe on employees. The incidence of the tax is believe to vary from industry to industry. Why economists have kept this secret from the public, one cannot say; probably because of the uncertainly of how much is borne by each group.

  1. U.S. corporations are less competitive in international markets because the corporate income tax rates are higher in the U.S. than they are in most foreign countries. This competitive disadvantage affects our balance of trade adversely. 
  2. Because dividends are taxed at the progressive rates under the personal income tax, corporations buy back shares and avoid paying dividends, which converts dividends to capital gains which are subject to lower rates of personal income tax. Of course, this bad economic practice could be avoided by taxing consumed capital gains at the same rate of tax as ordinary income, which is a desirable policy anyway to avoid the capital gains loophole under the personal income tax. 
  3. The corporate income tax certainly lacks equity in the distribution of its burden. Shareholder of low and medium incomes pay the same rate of tax on their corporate income (35%) as do the most wealthy. 
  4. It is hard to avoid the conclusion that the failure to tax corporate earnings as the personal income of shareholders is one of the principal reasons we have so many millionaires and billionaires. 

And there are other negative economic effects of the corporate income tax too numerous to be included here. 

Second, eliminate wasteful subsidies and tax expenditures for alternative energy,   for public housing, education including student loans, and all sorts of other programs. The fact that here has been no global warming during the past two decades casts doubt on the allegation that man is responsible for the global warming that has occurred this past century and casts doubt on the wisdom of our subsidies to alternative energy, to electric and hybrid autos, etc. Especially since the subsidized practices have done so little to reduce total emissions of carbon dioxide. Moreover, another well-kept secret by economists is that the many countries will be affected hardly at all by global warming because it promises to increase crop yields. Countries in the Northern hemisphere, like the U.S., Canada, and Russia  stand to benefit. Global warming historically has benefitted humanity greatly and the U.S. particularly by making increased agricultural output possible. If we were faced by the prospect of global cooling, state intervention might be justifiable, but such problems are best solved by the private sector and private initiatives who can expected to respond to such challenges. An example is the Pittsburgh steel community’s reduction of air pollution in the 1940s and 1950s.

Third, there is surely a better way of providing universal health care than the Affordable Care Act, commonly called Obamacare. Not only does it force participants to ensure against risks they have no need or desire for, such as abortions and contraception, it raises the cost of health care and it is paid for inequitably; it subsidizes health care to families with income less than $100,000 by a regressive tax on those with incomes over $100,000. It is hard to believe that any  qualified economists were consulted in writing this law. And the economics effects are terrible. Employers have an incentive to hire part-time rather than full-time workers. One after another of its provisions has been nullified by presidential decree, a probably unconstitutional practice.  

Fourth, balance trade. Too often our chronic trade deficits with a particular country are caused by its mercantilist practices, defined as those which restrict imports from the U.S. and encourage exports to the U.S. These trade deficits promote economic growth and increased jobs in the offending country at the expense diminished growth and fewer jobs in the U.S. There are many reasons for outsourcing the manufacture of finished and intermediate products. But the government has done little to prevent such practices. The government even prohibits some exports, as is the case of petroleum. And our prohibition of narcotic drugs, besides causing the imprisonment of thousands of persons, has required the expenditure of huge sums abroad in a futile attempt to prevent their importation. Regardless of whether our chronic trade deficits are caused by our trading partners’ mercantilist practices or by our economic policies, they can be brought under control and the budget balanced by a simple device invented by myself and colleagues called the “scaled tariff”, a tariff imposed on all the imports from a country with which we have been experiencing large and chronic deficits, such as China. The scaled tariffs varies and automatically diminishes as trade becomes more balanced and increases as the trade deficit with a particular country increases.

Fifth, abolish the federal and state minimum wage laws. The minimum wage was promoted by lily–white trade unions under FDR in the 1930s to prevent competition from employees of non-union workers, including many blacks who were willing to work for less than union wage. While the minimum wage had little effect on blacks and unskilled workers during WWII, it began to affect them beginning about 1950. Before 1950, the rate of unemployment among blacks was lower than that of white workers. Today it is more than double the rate of white workers. Government has no role in fixing the prices of anything except products whose usage it wants to restrict. The minimum wage has doomed millions to poverty and unemployment. It has created a permanent army of unemployed.

The minimum wage has eliminated whole industries and encouraged considerable out-sourcing of the manufacture of intermediate products. Once great producers of shoes, clothing, and other labor intensive industries, employing millions of workers have been forced overseas. A minimum wage of $7.50 per hour, and some want to increase it to $10 and even $15 per hour, mandate annual wages, excluding fringe benefits, of  $15,000 per year and $20,000 a year for an unskilled worker capable of producing a value-added of $10,000 or less. For a teen-ager, $10,000 a year is a considerable sum. The minimum wage law ensures he will seldom find employment. It is a disgrace that 42 percent of black teen-agers are in that category.

Sixth, end uneconomic regulation of business which has been estimated to cost the U.S. economy $2 trillion per year. Regulation of the financial sector is alleged to be necessary because some financial institutions are too big to be allowed to fail. Bankruptcies seldom end the business, it usually merely transfers the ownership from those policies led to bankruptcy to the creditors of the business. Most regulation is designed mostly to prevent businesses from more efficient competitors. The anti-trust division of the US Department of Justice has never proved a case of monopoly. It has won and settled cases involving “unfair” competition. The law enables competitors to sue when they are injured by unfair competition. We should leave it to the courts to enforce the so-called antitrust laws. Other regulatory agencies are enforcing laws designed to implement public policies that affect the public’s health. An example is the Affordable Care Act which has inflicted immeasurable harm on the economy. Another is the Environmental Protection Act which has inflicted huge costs on industry to achieve very little benefit.

There are other desirable actions which can be taken to reduce the negative effects of big government but none seem as important as these in setting the U.S. on a renewed growth path.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]