Even more on Radical Tax Reform

I was asked a question about tax rates on another forum. Here is the question and my answer:

What do you think the tax rate that maximize revenue is?

Great question and it depends on circumstances, including what kind of deductions (loopholes) we have. Today, we have deductions that don't contribute to the overall health of the country.

Federal tax revenues have ranged from a little over 17% of GDP to a little over 19% of GDP for a few decades. This includes when the top rate was 70% and when the top rate was 28%.

Bush lowered tax rates without eliminating tax deductions. Reagan never did that. When Reagan lowered tax rates twice (top rate went from 70% to 50% in 83 and then to 28% in 86) he also eliminated deductions.

After Reagan, tax rates increased and more deductions proliferated. We had a recession. Then Clinton / Gingrich cut the capital gains rate. We had an economic boom as a result.

The problem today is that most politicians are economic illiterates. The left says punish the "rich" with high taxes and the government will have money to spend on "social justice". The right claims that cutting any taxes will stimulate an economic boom. Neither of these positions is correct.

The best approach is to lower tax rates and reduce tax deductions. Reagan believed this. Bill Bradley believed this. Jack Kemp believed this. Jerry Brown believed this. And now Obama's debt commission believes this. It's a bi-partisan belief. Economic illiterates don't understand this. They are in control. That's the problem.

I will trade tax deductions for lower rates any time. I will also trade consumption taxes for taxes on innovation and production anytime. These are the right things to do for the country. Unfortunately, there are politicians who are either too stupid or too power hungry to do this. That's the problem.

What Should Obama Do Now?

After Tuesday's historic election, the pundants and politicians are all speculating on whether or not Obama will "pull a Clinton" by moving to the center and working with the GOP.

There is a lot of speculation on what that might look like.

I have a suggestion. Obama's deficit commission is due to report on Dec 1. He should take their report and dump it in Boehner's lap. Then Obama should do a hard sell, telling the American people that: A.) it is a bi-partisan recommendation, B.) it reduces the deficit, and C.) and we need to pass it now to fix the economy.

That would put the GOP on the spot. They would be forced to come to grips with the bill and either pass it or try to explain why they won't.

Unfortunately, I don't think Obama will do this because there will be spending cuts in the bill that Obama won't like. So, it is very likely that he will muck with recommendations by gutting the spending cuts and adding more taxes. At that point, the GOP will be in the driver's seat until 2012, because they will be able to correctly claim that Obama only cares about growing government, not balancing the budget and fixing the economy.

Why do I believe that Obama won't "pull a Clinton"? Because Obama and Pelosi are already running around claiming that the election was not a referendum on their failed policies. In spite of the fact that Obama has been on television morning, noon and night for the past 18 months selling his stimulus and healthcare bills, the Democrats keep claiming that the American people just don't get it.

It's not the American people who don't get it. It's Obama and Pelosi. Their delusional state doesn't bode well for America over the next two years.