What to make of Gary Johnson’s economic policy

In an election year where the Republicans and Democrats have nominated the two most unpopular candidates in history, the Libertarian candidate Gary Johnson will likely play a large role in the presidential campaign.

Let’s take a look at his economic policy to see what kinds of changes he would want to make once in office.

Checks and Balances

Before we review the policies, though, it’s important to ask: Does it matter? Even if a third party candidate shocked the world and won in November, would a Congress controlled by the two main parties work with the new administration to pass its policies?

In this case, I think the answer is mostly yes. Johnson is running on the Libertarian ticket and, generally speaking, wants lower taxes, less spending, and less regulation. So do congressional Republicans, and as long as they maintain both Houses of Congress, they will likely pass legislation in the same direction, if not of the same scale, that Johnson proposes.

Now, on to the issues. All excerpts below are from Johnson’s campaign website.

By the time Barack Obama leaves office, the national debt will be $20 TRILLION. That is not just obscene, it is unsustainable — and arguably the single greatest threat to our national security.

This isn’t as big of a concern as the CAPS LOCK makes is seem. $20 trillion, I mean, $20 TRILLION, is a large number, but our economy is also very large. And interest payments, i.e. what it actually costs to service that debt, are near all time lows as a percent of GDP:

Similarly, annual deficits as a percent of GDP have been getting smaller since the end of the Great Recession:

And, unlike Greece or Spain or Portugal, we control our own currency, so the odds of a sudden spike in interest payments are much lower for us than for countries that don’t print their own money.

Finally, the projections from the Congressional Budget Office show the debt-to-GDP ratio rising gradually over the next ten years, but not outside its historical range. And if the projections turn out to be too optimistic, we can raise taxes or cut spending in the future. If they turn out to too pessimistic, we’ll be glad we didn’t do so unnecessarily now.

So the cost of servicing the debt is near historic lows, the budget deficit is falling as a percent of GDP, and debt-to-GDP is projected to rise gradually in the near future. All things considered, the national debt is just not that important of an issue right now.

Governor Johnson has pledged that his first major act as President will be to submit to Congress a truly balanced budget.

Assuming that Governor Johnson’s tax plan is revenue-neutral, passing a balanced budget next year would imply extreme cuts in government spending and result in a massive shock to the economic system. The budget deficit was about $438B last year. Even if you cut the Medicaid and CHIP budgets entirely, you’d only be about 80% of the way there — and take away health insurance from more than 72 million people in the process.

And regardless of whether the idea is worthwhile on the merits, prudence would suggest phasing in such a drastic change over time and monitoring its effects on the economy. Changing the role of government this much this quickly is exactly the kind of dangerous outcome you get from needlessly wringing your hands over the national debt.

Governor Johnson advocates the elimination of tax subsidies, the double taxation embodied in business income taxes, and ultimately, the replacement of all income and payroll taxes with a single consumption tax that will allow every American and every business to determine their tax burden by making their own spending decisions. Taxes on purchases for basic necessities would be “prebated”, with all other purchases taxed equally regardless of income, status or purpose.

Johnson’s big idea, to tax consumption instead of income, rewards productive behavior and, if structured progressively, could discourage the kind of conspicuous consumption among the 1% that many people find wasteful. But Johnson wants to shift the entire federal tax system to a single consumption tax, not a progressive one, and even with a “prebate,” that would likely result in a massive shift in the tax burden from the rich to the middle class, as those with lower incomes spend almost all of their money each year while those with the highest incomes don’t.

Gary Johnson believes eliminating income taxes on businesses will transform the U.S. into the “job magnet” of the world

As always, the devil is in the details. Eliminating corporate taxes doesn’t necessarily imply that the rich will pay less because corporate income has to pass through to the individual level where it’s taxed as dividends. But the tax rate on capital gains and dividends is currently much lower than the corporate tax rate, so eliminating the latter without raising the former would likely reduce tax revenue in a regressive manner. And under Johnson’s ideal tax system, the capital gains tax rate would be zero.

I think this idea illustrates a broader problem with Johnson’s proposed policies. While it might be appealing conceptually to consider eliminating all business income taxes, I think practical considerations and path dependency make this proposal less attractive in reality. Concentrating all tax revenue in one tax source, for example, might increase the incentive to evade taxes, as opposed to the current system of smaller taxes spread across multiple kinds of economic activity.

To see what’s feasible, it’s worth looking at what other developed countries do to bring in tax revenue. All countries in the OECD have double digit corporate income tax rates, with only the exception of Switzerland at 8.5%. And many of these countries have consumption taxes in addition to rather than instead of income taxes.

Should we really be the first developed country to go all in on using a single consumption tax to finance government spending? Maybe we should wait a bit longer than the first year of a new president’s term to turn on this “job magnet” fully.

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