OCTOBER 13, 2010.
A Growth Agenda for America
An economy grows through increased production, which is financed by capital or savings. Congress can encourage this process with the right tax reform.
By JON KYL
The president, members of Congress of both parties, and some popular economists have lost the sense of what it means to have a "growth agenda." They believe that since consumer spending makes up a large part of our economy, the only way to reignite economic growth is to encourage Americans to spend even more. Lawmakers, frantic to do something about our sluggish economy and stubbornly high jobless rate, have focused myopically on stimulating consumer and government spending, with dismal results. The classic Keynesian approach has failed.
What, then, encourages growth? For one, it turns out that savings, much-maligned by the president and the press, actually help our economy grow. Money saved is invested. Adam Smith, in his famed "Inquiry into the Nature and Causes of The Wealth of Nations," and later economists, including Jean-Baptiste Say and Friedrich Hayek, all noted that an economy grows through increased production, which is financed by capital (savings); increased consumption follows—it does not lead—economic growth.
The best way for us to encourage production is through pro-growth tax reform. And it just so happens that events are shaping up to achieve the kind of tax reform that could put our economy on a path of long-term growth.
Americans know they are facing a large tax increase on Jan. 1 unless Congress prevents it. President Obama wants Congress to raise taxes on wealthier Americans (including many small businesses). Republicans oppose raising taxes on anyone, especially in this weak economy. Democrats ducked the issue until after the election. The result is that Congress must act in a post-election session; and while economists tell us that permanent tax policies are best, the most likely scenario in this divided Congress is a temporary extension of current rates for all Americans, probably for two years.
Congress must seize this opportunity. We should get to work on a bipartisan, comprehensive pro-growth tax reform that would be implemented at the end of the two-year period. The resulting system should collect no more than 18% to 19% of the economy in revenue for federal government operations (roughly the average level for the past 50 years), and it should free up Americans to work, save, invest and even spend as they choose.
Our current tax system is a drag on business productivity. It is too complex and includes too many special inducements to encourage preferred behaviors or help favored constituencies. It doesn't allow our dynamic economy to grow and flourish as it should.
Economists agree that even well-intentioned subsidies can cause businesses to misallocate resources into less productive activities. The current fascination with "green jobs" is but one example. Congress isn't very good at picking the next big technology, green or otherwise, and we should stop trying.
Businesses must be willing to give up their special preferences in exchange for a corporate tax rate that is competitive with our major trading partners. Small businesses need tax rates that are low and permanent. Beyond that, we should consider a uniform and generous treatment of research and development expenses that does not favor any particular innovation but will encourage businesses of all kinds to create and grow in ways that could never be achieved if government officials try to pick winners and losers.
Similarly, the individual side of our tax system is far too complicated. Americans of all income levels and family situations would benefit from a flatter (but still progressive) rate structure that includes few preferences.
Our tax system should not be a tool for social engineering; rather it should collect the revenues needed to operate our federal government. To avoid impeding economic growth, it should encourage work through low income-tax rates, and savings and investment through low capital-gains and dividends tax rates.
The estate tax must also be reformed. All rates must be permanent to provide certainty and eliminate the distortions that occur when taxpayers modify their behavior as tax levels change.
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And here's something else: Every American with an income should pay some level of taxes. Why? Not to raise additional revenue (the rate should be very low and payment simple), but because every American should have a stake in the cost and size of our government.
What else should be done? First, our country must stop spending beyond our means. We can hardly keep taxes at 18% or 19% of the economy if the government spends upwards of 25% of the economy. Americans know there is no free lunch. Therefore, the "free lunch" politicians who argue for more Washington stimulus spending or who demagogue Social Security and Medicare reforms must be held accountable for recklessly mortgaging our nation's future.
Second, regulatory overreach is strangling our businesses. The president controls agency regulations, but Congress has oversight power, can insist that agencies play by the rules, and can vote to overturn regulations that go too far.
America is in a period of great economic uncertainty, but there are concrete steps we can take to put our country back on a growth path. Comprehensive tax reform, if done properly, would shift much of the economic decision-making back to the private, free market and away from government control.
President Obama said recently that he wants to raise taxes on upper-income Americans because there are "better ways to spend the money." Wrong. The last two years have proven that Washington cannot successfully direct the American economy.
We need to trust that Americans will make the right economic decisions for themselves and for their businesses. That is the growth agenda America needs.
Mr. Kyl, a U.S. Senator from Arizona, is the Republican Whip.
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