The Economic Fixes We Need

A flat income tax and a national sales tax are two ideas.
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Desperate times call for desperate measures.
English translation of an old Latin saying literally meaning, "Desperate diseases must have desperate remedies."

Can anybody under the age of 90 remember a more desperate economic situation than we face today? I doubt it. Maybe things are just desperate enough for our fearless political leaders to embrace some real change that we need and consider the following radical actions to promote economic growth.


End corporate welfare as we know it. If single moms with kids can get off the dole, so can big corporations and their lobbyists. Estimates vary, but this would save at least tens of billions of dollars per year that could be used for pro-growth initiatives, such as infrastructure, job training, tax cuts and energy independence incentives.


Eliminate the 1031 exchange tax deferral system for commercial real estate. This is basically a way that commercial property owners can avoid paying taxes on their gains forever. When you sell any other asset such as stocks or bonds at a gain, you pay taxes regardless of whether or not you buy another stock or bond with that money. There is no reason for commercial real estate owners to get special tax treatment. This change would generate tens of billions of dollars in tax revenue that could be specially allocated to help families whose homes are in foreclosure. Nothing is more fair, or pro-growth, than scaling back a tax giveaway for the rich to help middle class families in distress.


Stop spending taxpayer money to bail out poorly run financial institutions. This does not help the economy or the markets because these companies are too weak to make new loans and have proven that they are incompetent to make good loans anyway. Instead, guarantee the obligations of the best run financial institutions, which will allow them to raise enormous sums of new capital in the private markets.

If necessary, the Fed can agree to match private capital raised to further enhance the capital raising effort. Institutions benefiting from this program would have to agree that at least a certain minimum percentage of the capital raised would actually be used to make new loans. This would kick start lending and increase economic activity.


The federal government should guarantee the debt of municipalities and states rated at least AA for the next five years. This would lead to an enormous wave of new issues and investor demand in the municipal bond market. States and cities could use those proceeds to fund infrastructure, public services, tax cuts and other pro-growth initiatives.


Eliminate the tax on corporations. Corporate taxes destroy jobs, restrict capital investments and provide a huge financial incentive for companies to hire lobbyists with the objective of evading taxes. Eliminating corporate taxes would lead to increased investments, job creation and less lobbying for tax breaks. How would the government fill that shortfall in revenue? Ending corporate welfare and the 1031 exchange are two ways.


Throw out the personal income tax code, with all of its loopholes and credits, and replace it with a flat tax of 19% on income above $50,000 for each married household. For single people, the threshold would be $30,000. It has been shown in many studies that this system would actually generate at least as much revenue as our current income tax system; it is fair; it is pro-growth, and it discourages inefficient lobbying efforts for tax breaks.


Create a national sales tax of 5% that would raise hundreds of billions of dollars and could be used entirely for pro-growth spending initiatives such as job training, infrastructure, energy independence, and public services. This would also encourage savings, which is something we must do as a society if we are going to survive economically. Foreigners are not going to keep us on the dole forever. At some point, we will need to regain the ability to fund our national expenditures through internal savings and investments as opposed to our current enormous balance of payments imbalances.


Normalize interest rates. This one is controversial, but here's how it works. The idea that extremely low or negative real interest rates (i.e. below the rate of inflation) create sustainable economic growth is simply wrong. All it really does is create an enormous incentive to borrow and spend and speculate. Further, with our aging population and so many retirees living on fixed incomes, extremely low-interest rates actually has a dampening effect on the ability to spend of a large and growing segment of our population.

The primary beneficiaries of negative real interest rates are speculators, irresponsible consumers who spend more than they earn, and poorly run financial institutions that need extremely cheap capital to survive. Interest rates should be normalized to at least the level of current inflation.


The federal government should guarantee all prime-rated home mortgages on primary residences that are written by regulated financial institutions and have a current loan to value per a third party appraisal of 75% or lower for five years. This would calm the mortgage market and provide a strong incentive for lenders to make new loans on terms that are properly underwritten to and reasonable for the borrower. It would also give investors in lending institutions more confidence to hold those investments or invest more capital into those institutions.


Get rid of Medicare. Yes. You read that correctly. Medicare should be eliminated. It is a ridiculous boondoggle that subsidizes wealthy retirees, drug companies, and other inefficient and often corrupt health care providers at the expense of poor working people who are most burdened by the Medicare payroll tax.

It costs hundreds of billions of dollars each year. Instead, we should take the money being spent on Medicare and use it to fund a much more modest safety net health care system for all Americans who are not covered by their employer and cannot afford to buy private health coverage. It would administered by the same bureaucracy as Medicare, but they would be running a program that is fair, more efficient, and targeted at the people who need it most rather than the people who have the best lobbyists.


Get out of Iraq now. Worried about a civil war? The countries in that region have been in a state of civil war, revolutions and dictatorships for hundreds of years. We cannot save people from themselves. We need the hundreds of billions of dollars that we're wasting in Iraq for pro-growth and energy independence initiatives at home. Our government's primary responsibility is to Americans, not Iraqis or their neighbors.


Initiate a $1 trillion stimulus package focusing on tax rebates, tax credits for job creation and small businesses and energy independence. We need to stop these incremental actions and do something bold that will inspire confidence in the markets. What about the government debt? The only way we're ever going to be able to service this debt is by growing the economy, so we need to encourage private demand and risk taking as well as penalize those investors hiding in short term Treasuries out of fear.

The $1 trillion in new bonds should be issued in shorter maturities for just that reason. To avoid "pork barrel" spending and other wasteful expenditures, there should be total transparency in how the money is spent. I mean that every line item of the stimulus should be available online for everyone to view in plain sight.

These are some radical ideas that confront some of the most powerful interest groups in Washington. However, if we're going to fix this horrible economic mess, we need some real changes and not just nice speeches about change. We don't have the luxury of feeling good about ourselves. That luxury disappeared along with the trillions of dollars of our wealth that has evaporated during the past year.

Christopher Grey is a managing partner of Third Wave Partners. He currently has no positions in the stocks mentioned in this article. This article should not be interpreted as personal investment advice or a recommendation to buy or sell any security. Interested readers may contact the writer by e-mailing or visiting the company's Web site,