GRASS IN REVIEW

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 WEEKLY GRASS IN REVIEW   -    May 14, 2008

Hungry for Incentives: Real Economic Stimulus
By Deroy Murdock

"Incentives matter.”

That sentence encapsulates the free-market approach to economic growth. Unfortunately, these two words exceed the attention spans of easily distracted Washington politicians. Rather than encourage work, savings, investment, and production, federal authorities treat America’s current economic woes with a hyperactive parade of universal welfare checks (approved in February, yet still undelivered), corporate bailouts, currency debauchery, tax-hike threats, Congressional witch-hunts against oil executives, innumerable earmarks, and a spending-growth curve as strong as an Olympic wrestler’s back.

What this wheezing economy desperately needs is revitalized productive potential. Congress and the Bush administration should implement these simple steps to return America to the road to prosperity:

• Cut corporate tax rates from 35 to 25 percent, maximum. Among developed countries, only Japan has higher corporate rates. Lower business taxes will boost American competitiveness, turn pink slips into promotions, and make red ink black.
  
  
• According to National Taxpayers Union attorneys, President Bush can order the Treasury Department to index capital gains taxes against inflation. The Treasury could interpret “gains” as inflation-adjusted asset appreciation. NTU estimates that this could reduce the tax on a $6,000 asset sold after ten years for $10,000. Assuming 50 percent cumulative inflation, that tax should plunge from $600 to $300. This, too, will accelerate growth.
  
  
• The stultifying depreciation tables for capital expenditures should be made voluntary. Businesses should be free to write off major purchases immediately or over as many years as satisfy their needs. A company aching to modernize its machinery today might wait one or more years until it exhausts its amortization schedule. Who does this help? If it could expense that gear now, it could replace it today and thus increase durable-goods orders. This is healthy.
  
  
• America is being bludgeoned by soaring energy prices, and yet we stymie domestic oil, gas, hydroelectric, atomic, and even wind power. Our corn/ethanol program hikes food prices everywhere, triggering widespread panic. Why not do something constructive? Anyone who, between now and 2012, can patent a fuel or engine that gets, say, 75 miles per gallon, can enjoy 100 percent of that patent’s revenues tax-free for 10 years. Uncle Sam gets zilch until year 11. Rather than pick winners — as Washington did cataclysmically with ethanol — let inventors and investors try to drive us off this picture.

How do we finance all this?

Tax cuts tend to fund themselves, at least partially, by generating greater revenues. Smaller slices of larger pies often are worth more than bigger slices of tinier ones. After the top capital-gains rate fell from 20 to 15 percent in 2003, revenues swelled from $53 billion to $106 billion in 2006, far ahead of the Congressional Budget Office’s $68-billion forecast. Beyond these supply-side effects, however, Washington could help finance these incentives simply by halting spending growth for at least one year.

Between 2008 and 2009, spending will increase 6 percent, Heritage Foundation analyst Brian Riedl calculates. This is one and a half times the inflation rate. Madness! A one-year spending freeze would save taxpayers at least $176 billion while funding all the government we endured last year, which was plenty. This baby step toward fiscal responsibility finally might signal global investors that America again can handle our public finances like adults, not screaming infants.

John McCain gets it. The presumptive GOP presidential nominee recently unveiled a voluntary flat tax that makes the glorious 67,200-page Tax Code optional. Americans could choose to file a far-simplified, two-rate form. The Tax Foundation reckons that Americans spend $265 billion and 6 billion hours annually completing tax paperwork. Compliance costs 22 cents for every income-tax dollar collected. Imagine instead, investing this deadweight loss in stocks, bonds, and start-ups.

McCain also pledges to veto any bill containing even one pork-barrel project. President Bush has approved enough pork to feed a prison. He threatens to veto appropriations that don’t at least halve earmarks. But why support any pork?

McCain’s latter-day tax cutting and his long-standing thrift are exactly what America needs. The latter would be a welcome contrast to the financially diuretic Bush administration.

Assuming McCain wins, he would not be inaugurated until January 20. That is ages away, which is why Washington should begin providing incentives to this flailing economy today.

Deroy Murdock is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution. He is a member of GRIH’s Board of Advisors.

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LIBERTY NETWORK

1. GRIH welcomes Communications Director Tom McAuliffe, who started this week. Tom will be working on the Transparency Project, as well as on other GRIH programs. Tom joins us from the Legislature, where he worked for Representative Cindy Evans. Tom is also a musician, film editor and writer.

2. GRIH is looking for student interns for the summer. Interns will focus on one of three areas - policy, media, or development - and will receive a stipend. Click here for more information.