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Richmans' Trade and Taxes Blog
Household Consumption Falls and the Market Plunges
On Friday morning, the Bureau of Economic Analysis reported that household disposable income (personal income after taxes) fell 0.1% in April after rising in March. The fall in household consumption was even larger (0.2%), again after rising in March. The response of the U.S. stock market was immediate. Both the Dow Jones Industrial Average and the S&P 500 closed down 1.4% with the Dow falling 209 points.
Some economists have been hoping that consumer spending will drive an economic recovery, perhaps due to rising stock prices and rising home values. They were brought back to reality by these statistics. Households can only increase consumer spending over the long-term if their incomes are rising, and those incomes are not rising. It is becoming evident that economic stagnation will continue with real GDP growth staying at about the 1.8% rate that the U.S. economy experienced from the first quarter of 2012 to the first quarter of 2013.
A real recovery is going to require an increase in the rate of business investment spending and/or a reduction in the trade deficit. And neither of them are likely to improve much so long as the United States retains the highest corporate income tax rate in the world and continues to let trade cheaters keep our trade out of balance.
Former Reagan speechwriter Pat Buchanan has a solution: abolish the U.S. corporate income tax and replace it with a 10% tariff. In his May 31 column (Abolish the Corporate Income Tax!), he points out that corporate income tax revenue has declined to 10% of tax revenues, despite the U.S. having, by far, the highest corporate income tax rate in the world. He points to all of the following benefits of eliminating that tax altogether:
While Buchanan’s solution would work, it is not optimum. There are two alternatives for replacing the corporate income tax that would be better.
Three changes should be made to the personal income tax if the corporate income tax is eliminated: (1) the tax rate on dividends must be raised to the same level at which normal income is taxed; (2) capital gains must be taxed at the normal rate, with taxation deferred whenever the proceeds of one sale are rolled-over into a new investment; and (3) the foreign government exemption from paying tax on dividends must be eliminated.
Buchanan is on the right track, but there are better ways than an across-the-board tariff to replace the revenue lost by eliminating the corporate income tax. Both the value-added tax and the scaled tariff would increase American exports at the same time that they reduced American imports. Also, they would both be WTO-legal.
The scaled tariff would be the ideal way to replace the revenue that would be lost from eliminating the corporate income tax. It would force the trade cheaters to choose between buying more of our products or losing market share in our markets. As a result, it would produce a huge increase in business investment. The new U.S. factories, built by both U.S. and foreign companies, would cause a real economic recovery; increased personal income tax revenue would replace lost corporate income tax revenue.
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