Whatever the outcome in November, our new president will be saddled with a tremendous economic mess.
The United States is drowning in debt, some $19.3 trillion right now. Entitlement spending is about to explode, including the costs of Obamacare that were conveniently delayed until its chief author left office. The cost of servicing what will soon be a $20 trillion federal deficit is heading higher and consuming a larger percentage of government spending. The United States' fiscal situation is on an unsustainable trajectory.
The situation, however, is not hopeless. There are steps a new president can take to improve the situation.
But there's one thing he - or she - absolutely must deal with right away.
Right now, only a massive reprogramming will place the U.S. economy on a sufficiently productive path to pay its current and future obligations. Some may view the following proposals as extreme, but they are absolutely necessary. Whether they are feasible depends on whether we can summon the political and moral courage to enact them.
The tax code is the DNA of the economy. It establishes incentives for different types of economic behavior. Unfortunately, the U.S. tax code has been hijacked by Wall Street, Big Business, Big Oil, and other "Big" special interests.
The result is a system that favors debt over equity and speculative over productive investment.
In some cases, such as the totally unjustified tax breaks given to hedge fund and private-equity managers, the wealthiest Americans are allowed to pay significantly lower tax rates on their income than lower-earning Americans.
Until these flaws in the economy's DNA are fixed, the United States will keep growing more indebted, less productive, and less competitive.
The first step is to broaden the tax base and promote tax fairness. A common misconception is that the way to promote "fairness" is to raise taxes: That type of thinking is the product of minds that understand little of economics and less about human nature.
Lower tax rates benefit everyone but particularly those who aspire to the top of the economic pyramid. Higher tax rates discourage economic activity and encourage people to avoid taxes.
The government is an inefficient allocator of capital. Higher tax rates reduce the return on capital, create disincentives for investment, and reduce the amount of capital available for investment in productive activities such as technology, education, building new factories and capital goods, and research and development.
They also reduce the capital available to invest in raising labor productivity to enhance economic growth and income gains. In short, they trap the nation in an economic death spiral.
Leaving more income in the hands of the private sector, on the other hand, is the surest pathway toward economic revival (which we certainly need right now).
My solution is simple:
Like monetary policy, tax policy suffers from the flawed belief that economic actors do not respond to incentives. Tax policy loses the forest for the trees; it focuses on tax rates rather than overall tax revenue. Each time tax rates were lowered, tax revenue increased because economic growth increased.
It is common sense that taxpayers will spend less time avoiding taxes if they are required to pay lower rates and if they believe the system is taxing them fairly. If overall corporate tax rates were lower, more revenue would remain in the United States, and more taxes would be paid here which, after all, is the point of the tax code in the first place.
Until we fix a system that encourages and rewards debt, gullible investors will continue to rush into extremely risky debt investments, like high-yield. The worst is not over for leveraged corporate borrowers, so I've prepared a simple way to profit from Wall Street's debt addiction. Click here to download "How to Play the Debt Game... And Win" and you'll get my Sure Money investor service, too. There's never a charge.
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About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.