I was really disappointed to read in the Wall Street Journal last week that some officials inside the Bush administration are attempting to convince the president neither to accelerate the 2001 income-tax rate reductions nor to shorten the period of time that companies must wait to write off investment in new plant and equipment. Both of these changes to the president’s economic growth and jobs package would unduly weaken it.
Since 13 percent of American workers already pay no income tax whatsoever, there is no conceivable income-tax rate reduction that will directly benefit those in the lowest income tier. Hence, the Democratic Party now takes it as an article of faith that any reduction of income-tax rates is “unfair” since no matter which rates are reduced or by how much, those in the lowest income tiers are unaffected.
The administration should recognize, however, that whether it does or does not include an acceleration of the reduction in the top rate in its growth package, it will still find itself portrayed as Simon Legree and criticized for “favoring the wealthy at the expense of the poor.” Therefore, the administration should do what’s right for the economy and accelerate all of the tax-rate reductions. It would also be possible to give a tax cut to labor by reducing the payroll tax and allowing individuals to place their tax savings into personal retirement accounts and to cut the capital gains rate, as well.
The problem with leading with your fallback position is always that the liberal class warriors and devotees of Rubinomics - those who believe the deficit is the root of all economic evil - will make the same tired arguments and the same untrue accusations against whatever the president suggests, bold or timid. So he might as well propose something bold and effective and make suffering the inevitable nasty criticism worth his while.
What the class warriors ignore is that the increased after-tax return to investment and entrepreneurial risk-taking enjoyed by those who receive reductions in their tax rates will certainly generate more jobs that will directly benefit low-income workers. And the administration weakens its own arguments for accelerating the top income-tax-rate reductions by defending them on the grounds that, in the words of the Wall Street Journal, “It would sharpen appetites for spending among a class of consumers who have seen their incomes hammered by the economic slowdown and stock-market reversals.”
This is flawed Keynesian thinking, that “putting money in people’s pockets” will stimulate aggregate demand and spur economic growth. As economic theory and empirical evidence demonstrate, however, that reasoning has it exactly backward. People and businesses must first produce before they can consume.
Moreover, consumption at all income levels remained strong and grew throughout the recession and remains robust in the current lagging economic recovery. Today’s sluggish economy is the direct result of depressed investment spending. That’s why the tax-rate reduction with the biggest bang for the buck when it comes to increasing economic growth and job creation would be to allow companies to write off 100 percent of their investment in plant, equipment, machinery and technology in the first year - even if it’s temporary.
As research done by the economic consulting firm Fiscal Associates has shown, 100-percent first-year write-off of investment (so-called “expensing”) can be expected to produce $9 of additional economic output for every dollar it costs in lost revenue. First-year expensing has the virtue of rewarding only investment in new capital and is, therefore, the best way to increase worker productivity and wages.
Some officials within the administration, I fear, have fallen victim once again to the age-old Republican fallacy of negotiating with themselves before sending legislation to Capitol Hill. Conservatives always seem to feel the urge to pre-negotiate legislation because they long for liberal approval for their proposals. But history demonstrates time and time again that going to extreme lengths to weaken legislative proposals before they are submitted to placate liberals doesn’t produce Democratic approbation; it merely radiates desperation, creates the impression that conservatives don’t have the courage of their convictions and far from placating the liberals, only encourages them on to new heights of rhetorical absurdity.
Those individuals in the administration now beginning to negotiate with themselves appear to have forgotten the fundamental dictum of American politics: “The president proposes; the Congress disposes.” The administration would be much better advised to send its best and strongest economic recovery package to the Congress unadulterated and then work with both sides of the aisle to craft the strongest bill possible to get this economy moving forward.
The president will have to overcome exactly the same fallacious arguments against his proposals whether they are whole and complete or shaved, trimmed and cobbled into a pre-compromised halfhearted effort. My advice: Make economically sound arguments and go for the whole enchilada. That way you’re a lot less likely to end up with only rice and beans.