Morici: To Boost Growth, Everyone Should Pay Income Tax

NEW YORK ( TheStreet) -- The economy is not doing well. Unemployment is too high and big deficits threaten the credit worthiness of the federal government. Only genuine tax reform will make things right.

With 46% of Americans paying no income taxes and many more who pay very little, it is no wonder federal spending is at record levels. It's simply too easy to vote for politicians who promise free health-care services and other worthy benefits by raising taxes on someone else -- the wealthy.

Taxing the well off is not free. It slows growth, smothers jobs creation and pushes down wages for the middle class and working poor.

Much of the U.S. economy is not large multinationals but are innovative startups, the local restaurant and other small business services that are mostly organized as limited liability corporations and pay the highest personal tax rates. For those jobs creators the combination of federal, state and local taxes often increases the bite on income to well above 50%.

The impact is large and negative. During the Obama years, unemployment peaked at 10% and the economy has since grown at a 2.1% pace.

Over the comparable Reagan years, when taxes, especially on the well-off were lower but more voters paid at least some income taxes, unemployment peaked at 10.8% -- but the economy grew at 5.3%.

Simply, with lower taxes on the wealthy and more voters with skin in the game, the federal government did less and the economy did better -- many more jobs were created and workers had more power to bargain for decent wages than they do now.

The highest marginal federal tax bracket is about 40%, but with so few Americans paying significant taxes the average income tax rate is about 12%.

To exercise some restraint on federal spending, why not require everyone to pay at least 6% of their income in taxes and set the maximum rate of 18%? That's about what Barack and Michelle Obama paid on their 2012 income. Folks in the middle would pay something in between so that the average take is still 12% of income.

Each year, automatically adjust those levels up or down so that the share of federal spending financed by the income taxes remains constant. If folks want more or less federal spending, everyone pays more or less federal taxes.

Also, get rid of all the deductions and exemptions -- everyone pays on everything they earn. No special preferences for capital gains or the carried interest of Wall Street financiers. Then the minimum and maximum rates could be set even lower.

These reforms would eliminate the terrible disincentive high taxes impose on small businesses to invest, grow and create jobs. Corporate tax rates could be similarly reformed so that investment decisions are not made on the basis of getting a tax credit but on the likelihood of boosting profits and employment.

For the working poor, having to pay some taxes would be a jolt, as it would be for the elderly depending on Social Security. For the former, the minimum wage could be boosted an appropriate amount -- perhaps 50 cents an hour -- beyond what President Obama and Congress agree. Social Security payments could be similarly hiked, on a one-time basis, by adjusting the payroll tax a few tenths of a percentage point.

A one-time jolt to inflation would follow as wages above the minimum adjusted through the forces of supply and demand. But it would be worth it to have long-term tax sanity.

Politicians running for the Senate, House and Presidenct could no longer promise the moon by getting someone else to pay for it, The economy would grow robustly and more Americans would benefit from the best social program of all -- a well-paying job and a promising future.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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