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Don't Stimulate the Economy

President Bush has proposed a $726 billion tax cut spread over ten years. Last Friday, the House of Representatives passed a $550 billion over the same period. This week the United States Senate will debate and presumably vote on a tax cut package that may be no more than $350 billion.

After the Senate votes, then the fireworks should really begin, reconciling the two bills passed by each chamber.

Meanwhile, on the Sunday morning talk shows Treasury Secretary John Snow was pitching the merits of the president's tax cut proposals to create jobs.

The House approved tax cuts include: lower marginal tax rates, a higher threshold for the alternative minimum tax, a higher child tax credit, a higher standard deduction and an expansion of the 10 percent tax bracket to cover more income.

Business tax reductions include a temporary hike in investment expenses that can be written off, allowing business to write off current losses against profits in the 1990s through 2004 and an increase in small business write-offs on plant and equipment.

In addition, the House also approved a major reduction on stock dividend taxation to 15 percent. Capital gains would be taxed at no more than 15% as well. However, taxpayers in the two lowest brackets would pay only 5 percent on dividends and capital gains.

All but four House Democrats and three Republicans voted against the tax cuts. House Democrats were upset because their tax cut bill that included an extension of unemployment benefits, as well other nontax provisions, was not allowed to be brought to the floor. The Democrats were very upset that the House tax cut bill included a substantial reduction in dividend taxation.

The Democrats' mantra has been that we need a tax cut to "stimulate" the economy. In other words, they want to cut taxes primarily for low and middle-income families and individuals who will then spend, spend, spend, our way to prosperity. Democrats do not support any tax cuts that substantially reduce the tax liabilities of upper income families because "they do not need them".

In short, the Democrats view upper income Americans as cows to be milked for the glory of the welfare state.

If President Bush and the GOP controlled Congress want to restore the principles of limited government and create a free economy with low and unobtrusive taxation, the following changes should be implemented immediately.

  • Abolish the Alternative Minimum Tax for both individuals and corporations. There should be one tax code for all Americans and businesses.
  • End the taxation of dividends. All corporations should be taxed as S-corporations, where income is imputed to shareholders not the business entity.
  • End capital gains taxation.
  • Abolish the estate tax.
  • If there is to be a federal income tax, there should be only one rate, like a sales tax, not progressively higher rates.

This would free up hundreds of billions of dollars in compliance costs as well as putting more money back into the pockets of the people who earned the money in the first place. In short a great boon for both freedom and prosperity.

Ideally, there should be no federal income tax. The revenues needed to fund the legitimate activities of the federal government should be obtained with a low indirect tax. That was the vision of the Founding Fathers.

In order to implement the above, the most massive restructuring of the federal government since the New Deal must occur in the next several years. This would result in the abolition in several Cabinet agencies and dozens of major federal government programs like farm subsidies, corporate welfare programs such as the Export-Import Bank and all the institutions and organizations created by the wannabe central planners in DC.

The chance that the above tax plan would be proposed by President Bush is zero. His $726 billion tax proposal marginally benefits the economy. However, the president's budget, $2.2 trillion for fiscal 2004, continues the spending spiral upward. In the final analysis, this is the real burden on the economy: the redistribution of money to fund the welfare-warfare state.

It is time to have a permanent low tax to fund a limited federal government. The federal government should get out of the business of trying to "stimulate" the economy. The economy does not need a fiscal version of Viagra.

A free economy will create jobs, increase the people's incomes, and produce high quality products.

Unfortunately, virtually all members of Congress and in the Bush administration and most economists believe that to "stabilize" the economy the federal government needs to tax, spend, and regulate. They do not believe that the free enterprise system can be left to itself to adjust to ever changing economic conditions. They believe in "enlightened" government action to steer the economy between recession and inflation.

The history of the past hundred years, however, suggests otherwise. Government intervention destroys wealth, jobs, and income.

While the Bush tax cut proposals are a modest beginning to reduce the tax burden on the American people, they are pale in comparison to what is needed to create sustainable prosperity in America.

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