American Embassy/Beijing
FPO San Francisco, CA 96655
November 25, 1991
The Honorable Orrin Hatch
United States Senator
Senate Office Building
Washington, D.C. 20515
Dear Senator Hatch:
I've written you from time to time putting forward various ideas and you've been good enough to encourage my sallies. Point of this letter: I was disappointed in watching the Chairman of the RTC, when asked by a Congressional Committee for his 1, 2, 3, ideas on how to get the economy moving, reply that he'd not given it much thought. I think it is time for someone to get cracking about stimulating economic recovery before the next Presidential election -- virtually taken for granted until recent weeks -- crashes in the flames of growing unemployment, falling property values, and acrimony over extended family and health benefits.
As an economist who's given some thought to the matter, and Chairman of Republicans Abroad in China, the most populous nation on earth, let me say that I think the Party's pretty well on the right track; but someone ought to start articulating our thinking more effectively or we'll have both a Demo President and a Demo Congress at the end of next year -- and then think of the tragedy the country will face in terms of more budget-breaking expenditure programs, including a national health program. My grandkids will want to emigrate back to Scotland where their great-great-great grandparents came from.
Here are some 1, 2, 3, 4s to think about:
1. We need Congress and the White House to really get moving on the Capital Gains Tax cut the President has been pushing for ever since he was first elected. President Bush needs to take some time off from fishing and golfing and visiting Heads of State abroad to start stumping in Detroit and Chicago and Atlanta and Denver to explain the benefits of his Captial Gains Tax Cut program with the public. Every home owner or stockmarket investor, or small businessman who's ever made a little money from prudent management of his hard-won savings should be brought to realize that cutting capital gains taxes benefits not only the rich, but middle class people on their way to prosperity. My wife's own family has been dawdling for three years over the decision whether to sell the company business (which is experiencing hard times since its founders death), because of the enormous tax bite their CPA tells 'em would be due.
Hundreds of thousands of investors are locked into businesses because of the cost of getting out. This means hundreds of thousands of businesses are being managed less efficiently than they might otherwise be at a time when we need to become more competetive; billions of dollars in unrealized American profits are not being invested in new businesses while the Japanese buy up recession depressed businesses by the score; and thousands of new jobs are not being created at a time of rising unemployment. Ditto with regard to the housing market. Someone should be telling people these things instead of letting the Dems get away with their false charges that this is just another Republican "reward the rich" scheme.
2. We ought to be using this moment of national crisis to push -- and push hard -- for a move away from Personal and Corporate Income Taxes, which everyone acknowledges incentivize spending and discourage savings (and exports), in favor of the more modern Value Added Tax system that most of the rest of the industrialized world has adopted. Money not spent, is not taxed under a VAT -- the best incentive for savings ever known. And VAT taxes can be rebated, effectively serving as a subsidy for exports -- something the GATT prevents us from doing with income taxes. At a time when everyone recognizes we need new incentives to save and to export, here is the most powerful tax machine ever invented by the mind of man ready to go to work, while Congress and the White House sit diddling when the need is greatest and the climate right for launching a tax reform movement far more powerful than cutting existing rates a couple of points on the margin or tinkering with a couple of loopholes.
I realize compromise will be necessary and we needn't do it all at once. We could adopt a VAT for only a portion of the Corporate and Personal Income Tax system -- maybe start out with an eight per cent VAT (compared with a European average of 16%), which, by shirtcuff calculation, would enable us to cut personal taxes from the present maximum of twenty-eight per cent to maybe twenty per cent.
I recognize some states are opposed because sales taxes are their main revenue source. The Canadians have a possible solution: the Dominion government collects all taxes, then rebates a stipulated share to the Provinces. Most state sales taxes are of the order of 4 to 6 percent. If the IRS, with its reputation for being a hard-nosed collector, took over a) the states could fold their fifty tax commissions of varying efficiency, saving money which could then be devoted to much needed schools, bridges, and highways; whereupon b), the Federal government would split the VAT with the states, preserving their more efficiently garnered revenue source while easing heartburn over this invasion of their turf. They'd still have state income taxes (if they wanted to yield this competetive edge to sister states), and they'd still have a monopoly over property, many types of excise, and professional and business licensing taxes.
3. We should, at this moment when the psychology of looking for new remedies is hot, consider adopting a British-style "Regulator" -- a pre-approved list of Federal taxes which Congress would authorize the President (unilaterlly? with Cabinet approval? with the concurrence of the Fed? the Treasury?) to cut temporarily by a stipulated amount (maximum 20%? 40%?) by Executive Order at the first signs of recession to give the economy a kick in the pants.
4. We should look closely at a Swedish-style Investment Reserve Fund surtax which would be levied during periods of prosperity at, say, 3 per cent of gross profits, payable into a blocked account held by the Treasury (FRB?). As signs of recession and rising unemployment occur, the Treasury (Fed) would announce open season on business investment from this special fund.
These funds (which belong in title to the paying corporation) would be unblocked for immediate investment, giving the economy an even more telling kick in the britches. It's worked marvelously well in Sweden, keeping their economy on a much evener keel than ours during most of the post-war period. Businesses would have to act and act quickly if they wished to obtain use of this portion of their profits, because once the economy gets underway, the investment window is closed and the money is locked up until the next recession.
5. Perhaps its only peanuts in the big scheme, but we should do what every European country does, charge foreign tourists $5 or $6 for admission to national museums. Locals get in free upon presentation of a school ID (or Social Security card?). But when foreigners are willing to spend thousands to come to the US, why shouldn't they pay a tariff for viewing our national art treasures. A few hundred millions her and a few hundred millions there begin to add up.
6. A related idea from Switzerland: every foreign tourist who arrives at the Swiss border by car is advised he must buy a $20 highway use sticker for his front window. Without it one can drive on the regular Swiss highways. But if you try to use the Autoroute (equivalent of our Interstate System) and a passing highway patrol car doesn't see the sticker in your window, the fine is very high indeed. We have hundreds of thousands of Canadians and Mexicans who drive across the border to use the US Interstate to get from one end of their country to the other, paying nothing for the highway system we've built. Why not establish a Swiss-type system so they at least pay a use tax? Same idea could be extended to Europeans who rent cars to drive during their vacations. Auto rental agencies renting to anyone without an American driver's license, would have to offer for sale an Interstate use tax certificate. As in Switzerland, most enforcement is by the honor system. But it'd raise fairly big bucks.
As you can see, both the Regulator and the Investment Tax Surcharge avoid the long legislative delay on top of the always significant recognition delays which have made so many American efforts to spend our way out of recessions counter-productive. Experience has often been that the new spending programs enter into force after the recession has already ended, contributing to overheating and additional inflationary pressure during the rapid recovery upswing.
We've achieved only one budget surplus in the past forty because the President has never had a mechanism independent of the Fed's monetary controls which he can manipulate independently to contain an exhuberant expansion, keeping it running a bit longer. The ability to manipulate a Regulator and shut the Investment Surtax Window would enable Presidents to do a much more effective job at equilibrating the economy.
In conclusion, this is not the moment to fritter away Republican political advantage by standing pat or counting on good luck to restore the economy before the election. Nor is this the moment to settle for gimmicks or half measures. Let's use the momentum of events to push all out for solid reforms. If the Dems won't go along, we can at least hit them with some solid "do nothing Congress" charges in November.
Sincerely,
D. B. Timmins, PhD (Harvard)
Professor of Finance & Economics
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