We've talked about incentives before, but now I want to put some of that theory into practical practice. The basics: people are motivated to act by an incentive. You work because you want to get paid or you enjoy your job. You give to charity for the warm glow and the tax write-off. This seems to be most telling in the realm of taxation. A study of economic output over time will show you that productivity grows most after the enactment of a broad based tax cut. That is a tax cut that equally reduces the tax burden on the producing portions of our economy. Targeted credits have not had the same effect because they do not reward production in an economic sense.
A more interesting look at tax policy shows us something else. Regardless of the tax rate, overall taking of revenues as a percent of GDP wavers very slightly. From the close of World War II to present, with top marginal rate ranging from 25 to 70% the government has only captured between 17% and 19% of GDP. What does that mean? Simply that tax policies force a shift in spending and investment. Lowering of tax rates on production encourages us to produce more. Increasing these same rates encourages us to spend more in less taxed areas such as real estate, foreign investments or other (often less productive) capacities.
We should probably discuss at another time why our government insists on spending 20-25% of GDP.
But, how do we incentivize people to spend more, invest more, and produce more? A good start would be lowering taxes across the board to something closer to what people actually pay in taxes. The so called Debt Commission actually endorsed a tax rate of 23% for all earners meanwhile eliminating many popular tax dodges. Further, eliminate or significantly reduce taxes for repatriated income.
Quit subsidizing people for lack of production. From agricultural subsidies that subsidize empty fields and unproductive farmland to long-term unemployment benefits, if you quit paying people and companies not to produce then you will in fact encourage them TO produce. In the area of unemployment a real world experiment took place in Denmark. Denmark paid unemployment benefits for 5 years! Guess what? People stayed out of work for 5 years! When they reduced unemployment benefits to 4 years, people began finding jobs at the 4 year mark!
Finally, reduce federal spending. But! Federal spending enters the economy too, won't that reduce the size of the economy? Absent any other movement in the economy, yes. If I've said it once I've said it a thousand times, government does not spend money well. It is extraordinairily inefficient. Take a look at the recent GAO report that found dozens of duplicative programs costs billions of dollars a year. Do we really need 82 programs to improve teacher quality? Really? 82? The other reason government spending is bad is because our government is OVERSPENDING. This means that at some point in the future, we will have to increase revenues to make up for the costs we are incurring today.
We can always hope, right?