James Glassman touts taxing consumption instead of earnings

Live from the IMCA conference: 'Policy change is really key to growth,' he says

Oct 7, 2013 @ 1:18 pm

By Jeff Benjamin

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One theory of why the “new normal” slower-growth economy is here to stay is that the United States has become more like Europe and Japan, which is attracting mixed reviews, according to James Glassman, visiting fellow at the American Enterprise Institute for Public Policy Research.

“This is one of my own pet theories, but the debate is about whether the government should play a larger role in making life easier for people by providing more safety and comfort,” he said as part of a keynote presentation Monday morning in Chicago at the Investment Management Consultants Association's Advanced Wealth Management Conference.

“It is possible to still get America to grow faster in this environment of chasing desires by doing some things like taxing consumption instead of earnings,” Mr. Glassman said. “Policy change is really key to growth.”

As one example of the kind of government gridlock impeding economic growth, Mr. Glassman cited the fact that it takes 433 days to start a business in this country, up from 368 days in 2006.

Mr. Glassman, who is also chairman and chief executive of Public Affairs Engagement, laid the foundation for his presentation by pointing out: “The world is getting riskier in a special kind of way.”

Beyond what he described as the familiar notion of risk comparable to flipping a coin and having it come up heads about half the time, he said we are in a period of “discontinuous risk,” which he compared to a “bolt from the sky, a flash crash or the toppling of the World Trade Center towers.”

“That kind of risk is always hanging out there, and I think it's increasing,” Mr. Glassman said.

On the subject of the government shutdown, he tried to spread the blame evenly between Democrats and Republicans, but he also downplayed its significance.

“The previous 17 government shutdowns going back to when Gerald Ford was president totaled more than 100 days, including the longest during the Clinton era which lasted 21 days,” Mr. Glassman said. “During that shutdown, the stock market gained 3 percentage points, so the likelihood this time is that it will not have much of an effect on the economy.”

Mr. Glassman chided the Republican Party for its focus on defunding Obamacare, saying that those efforts “don't make sense, for all kinds of reasons.”

“If the Republicans had simply sat back and let the problems with Obamacare happen, people would have recognized that this government can't even run a website,” he said.

On the economy and the stubborn persistence of the new normal, Mr. Glassman pointed out that it might be easy for some to ignore the sluggish pace of economic growth against the backdrop of a stock market that has gained more than 150% since the March 2009 bottom.

“Investors are naturally reacting to low interest rates, so stocks don't really indicate a strong economy,” he said.

“This is the worst recovery from a recession in modern history. It's not a recession right now and it's not a depression, but it feels pretty depressing,” Mr. Glassman said.

The good news is that you can “never, never, never underestimate the ability of Americans to overcome obstacles that are often created by our own government,” he said.

“I think one of the things people in this room can do is demand better leaders,” Mr. Glassman said.

On that note, he suggested an emphasis on reforming the U.S. tax code, something that he said could get bipartisan support.

“There are two points where tax revenue to the government will be zero. The first is if tax rates are at zero, and the second is if tax rates are at 100% and nobody will have a reason to work,” Mr. Glassman said.

“There is no doubt that at certain marginal tax rates, you are discouraged from earning or investing, and instead are apt to consume or choose leisure,” he said.

For example, Mr. Glassman said, if he were offered the opportunity to work an extra 10 hours for income that would be taxed at 80%, he would choose leisure.

“In some parts of the country, some people believe we have already gotten to the point where tax rates are too high and are discouraging work,” he said. “I think raising taxes is about the single worst thing you could do in this economy.”

Where would Mr. Glassman start with reforming the tax code?

“I would tax consumption instead of income, and I'd give people a deduction with no limit on investments they make, and I'd keep marginal rates as low as possible to not discourage work,” Mr. Glassman said.

“I'd introduce a simplified tax code so there aren't any special deals. If the government wants to give special deals for having more kids or buying an electric car or taking out a mortgage, just send them a check.”

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