The Afghans call their big governmental get-togethers a Loya Jerga.
Here we just call it a meeting of the Royal Jerkies. Fresh from writing an airline safety bill whose mandates cannot
be implemented in the real world, Congress is now engaged in the interesting exercise of putting together an economic
stimulus bill that, if it got enough votes to pass, wouldn't supply any stimulus. The hope may be that the economy
will recover before they get the bill written.
The Democrats, having had enough of President Bush's positive press, are trotting out their new "split level"
strategy this week. The split level approach is to support Bush on the war and, at the same time, intensively criticize
him on domestic issues. With a 90-percent approval rating, Bush will not be attacked directly but his lieutenants
will come under increasing fire. The latest candidate for demonic vibrations? John Ashcroft.
On the economic front, Minority Leader Gephardt announced that the newly projected budget deficits were caused
by the excessive 10-year $1.35 trillion Bush tax cut. He failed to explain how a back-loaded tax cut with just
$38 billion spent reduced the surplus by, oh, some $175 billion. None the less, a speech by the administration's
budget director Mitch Daniels, predicted short fall for at least three years. That means all four Bush budgets
could wind up in deficit
The prospect for multiple deficits after four year's of Clinton surplus had Democrats dreaming big - Congress in
'02 and the Presidency in '04. Political ambitions colored the question of how to return to surpluses as quickly
and efficiently as possible. As the debate rails on, Scott Hodge and John Barry, of the Tax Foundation, have put
together some guidelines for spectators of the policymaking debate,
Avoid temporary tax relief. Rebates, tax holidays, one-time or short-term tax relief schemes do reduce the
tax burden in the short run, they say. However, such schemes do not change economic behavior. (Witness this past
summer's tax rebate. Only 15-18 percent was spent.) Such political gimmicks are viewed as being haphazard and very
unpredictable. The small amounts, a few hundred dollars at most, are considered to be a windfall that won't be
repeated. Consequently, the rebates cost significant money in the aggregate but do not promote sustainable economic
growth.
Do not let current politics overwhelm sound tax policy. Sound tax policy, the authors declare, requires
simplicity, stability, neutrality and transparency. Adhering to consistent principals is even more important in
times of turmoil. Proposals that complicate the tax code and increase compliance costs have little lasting impact.
Individuals make more effective spending decisions than government. In order to spend, the government must
first tax, borrow or print. Taxing and borrowing are the same economically in that either takes money from private
individuals who would have otherwise made spending decisions themselves. The authors point out that the replacement
of private economic decisions with government decisions is not an additional economic activity. It is a substitute
of a distant decision-maker for individuals who know what is closer at hand and can more ably distinguish what
leads to growth for them.
Applying these three principals to current proposals, Hodge and Barry suggest four significant tax policies to
look for in the debate
- Accelerate Depreciation Schedules. An across-the-board acceleration of depreciation delivers immediate pro-growth
tax relief without creating the situation where government picks winners and losers.
- Eliminate the Corporate AMT. The corporate Alternative Minimum Tax hits employers during an economic downturn
when they can least afford it. It should look forward only. Retroactive relief is a terrible political idea.
- Reduce marginal rates. The marginal rate cuts scheduled for 2004 and 2006 should be put into place immediately.
Economic decisions are made at the margin and on predictable data. Permanent marginal rate reductions provide immediate
pro-growth relief.
- Reduce payroll taxes. The social security "surplus" is simply an overcharge which, instead of being
refunded, is used for general government purposes each and every day. An adjustment to accurate collection here
benefits all workers, even those without income tax liability.
What is the one thing that won't work? In the 1960's and 70's, many Western European nations
adopted a philosophy of increasing aggregate demand through targeted tax breaks and increased government spending.
The result was a decade-long trip through the swamp of stagnation.
Economic growth occurs when there is an increase in national income. The only way to increase national income is
to encourage more work, more savings and more investment. It's risk-taking entrepreneurs responding to incentives
that create wealth. Or so says Dr. Daniel Mitchell of The Heritage Foundation.
The Organization for Economic Cooperation and Development forecast this month that the world's 25 richest economies
would shrink 0.3 percent in the second half of this year. That's the first drop in over two decades. The Conference
Board published the new Consumer Confidence Index which has fallen for the fifth consecutive month and set a new
seven ½ year low. The National Bureau of Economic Research (NBER) confirmed that a recession began in March
of 2001, the first since 1990. The key factor was a decline in job creation. Aggregate employment has been slipping
since last March. The recession is the tenth since World War Two. It appears to be of global dimension.
It is simply not too much to ask that our elected representatives get serious.
