Low Taxes, Less Spending and Regulation is Essential to Restoring Business Confidence
By John Hendrickson

 

In a recent letter to President Barack Obama’s former Budget Director Peter Orszag, the Business Roundtable and The Business Council stated that “many regulations and legislation — both existing and proposed — exacerbate the uncertainty created by today’s volatile economic environment.”[1] The policy agenda of President Obama and the Democrat-controlled Congress is causing much uncertainty in the market, which has a negative impact on the economy. In order to bring stability to the economy and find solutions to the financial crisis in government spending, policymakers need to establish an agenda that includes both tax and spending reform.

 

The report issued by the Business Roundtable and The Business Council is alarming because it demonstrates a clear signal from the private sector that many business leaders are faced with anxiety over the Administration’s policy agenda:

 

With a massive new health care law and financial reform legislation looming, companies are more worried than ever about the impact new regulations and legislation will have on their operations and their bottom line. Not knowing what to expect from these pending regulations, businesses are acting cautiously to forestall any negative impact. These actions are squelching economic growth and job creation, as companies are forced to freeze investments and hiring until they understand how they will be affected by these new mandates.[2]

 

The Chamber of Commerce of the United States also echoed the concerns of the Business Roundtable and The Business Council. In a recent open letter to President Obama, the Congress, and the American people, the Chamber addressed the need for sound economic policies and how anxiety over current policies is causing uncertainty. In regard to the policies of the Administration and Congress the Chamber states:

 

Instead of continuing their partnership with the business community and embracing proven ideas for job creation, they vilified industries while embarking on an ill-advised course of government expansion, major tax increases, massive deficits, and job-destroying regulations. This approach has failed to turn our economy to a path of robust growth, which is a critical prerequisite to significant private-sector job growth. In some cases, wrong policy choices are actually eliminating good job opportunities for American workers. By straying from the proven principles of American free enterprise, policymakers are needlessly prolonging the economic agony of the recession for millions of Americans and their families.[3]

 

At the heart of the uncertainty is what will happen with tax rates. In January 2011 the tax cuts initiated by Congress during the administration of President George W. Bush (Bush Tax Cuts) are set to expire, which will cause tax rates to rise. Larry Kudlow, an economist and former economic adviser to President Ronald Reagan, noted that “we are facing one of the largest tax hikes in U.S. history.”[4]

 

“Taxes on investor capital and business will go up significantly. So will individual-income tax rates,” noted Kudlow.[5] Writing in The Wall Street Journal economist Arthur Laffer stated that when the Bush tax cuts expire “the highest federal personal income tax rate will go to 39.6 percent from 35 percent, the highest federal dividend tax rate pops up to 39.6 percent from 15 percent, the capital gains tax rate to 20 percent from 15 percent, and the estate tax rate to 55 percent from zero.”[6] In an increasingly globalized economy the national corporate tax must also be reduced. “Most economists understand that the corporate tax is one of the most destructive forms of taxation because it is an additional tax on the factors of production, capital and labor,” noted Richard Rahn, who is a Senior Fellow at the CATO Institute.[7]

 

The rhetoric from President Obama and his advisers such as Secretary of the Treasury Tim Geithner that the capital gains rate will only increase back to 20 percent, along with promising to further free-trade agreements, still leaves uncertainty whether or not the policies will return to a more pro-business approach.[8]  The fact remains that the Administration and the Democrat Congress has not addressed the need for a reduction in government spending and reform of entitlement programs. The Keynesian approach — illustrated by the $862 billion stimulus — has failed to solve unemployment. Both the national debt ($13 trillion) and deficit ($1.5 trillion) are expected to increase and entitlement programs, unless reformed, threatened to consume the federal budget, which would result in major tax increases that would cripple the economy.

 

Amity Shlaes, a Senior Fellow in economic history at the Council on Foreign Relations and author of The Forgotten Man: A New History of the Great Depression, writing in Bloomberg called for a more humble economic policy to encourage the private sector.[9] The first policy recommendation that Shlaes offers is “permanently set tax rates lower for all,” which includes dividend, income, capital gains, and corporate taxes.[10] Shlaes also recommends passing the American Roadmap plan of Representative Paul Ryan (R-WI), which “advocates abolishing taxes on capital gains and dividends, and reduces the top marginal rate on income taxes to 25 percent.”[11] Among the other “humble” policy recommendations that Shlaes recommends include reducing regulation, jettisoning stimulus spending, and reforming entitlement programs.[12]

 

The Chamber recommends renewing the Bush tax cuts, which would “substantially boost investor, business, and consumer confidence and would infuse our economy with fresh momentum.”[13] In addition the Chamber argues that “Congress should also reduce the U.S. corporate tax rate, which is among the highest in the world, and address the fact that the United States is the only major economy that double taxes overseas earnings.”[14]

 

These policy ideas would encourage business confidence and address the need to reform entitlements and cut government spending. “Economic recovery must be lead by the private sector, both large and small, if we are going to create jobs and reduce the unemployment rate.”[15] The uncertainty of tax and regulatory policy, followed by excessive government spending and new entitlements will not produce economic recovery nor will it solve the national fiscal crisis. “In assessing all regulations, the goal should be to reduce uncertainty, fear, and overall cost impact while creating a regulatory system that is business-friendly, cost-effective, and encourages efficiency.”[16]  As the Chamber argues:

 

Uncertainty is the enemy of growth, investment, and job creation. Through their legislative and regulatory proposals — some passed, some pending, and others simply talked about — the Congressional majority and the Administration have injected tremendous uncertainty into economic decision making and business planning. This is why banks are reluctant to lend and why American corporations are sitting on well over a trillion dollars. It is why America’s small businesses and entrepreneurs, the engines of innovation and job creation, are starving for capital and are either struggling to survive or unable to expand.[17]

 

Excessive regulation and taxes have hurt the American economy. Columnist Patrick J. Buchanan recently noted that the Financial Times reported that in 2011, “China will surpass the United States as the first manufacturing power, a title America has had since surpassing Great Britain around 1890.”[18]  In order to reverse the economic decline and address the fiscal crisis policymakers must focus on a pro-business agenda that includes across-the-board tax cuts, reduction in government spending, paying off debt, and encouraging entrepreneurship. These policies would result in a moving toward a more constitutional limited government, creating economic prosperity, encouraging business and market confidence, and restoring the “Arsenal of Democracy.” 

 

John Hendrickson is a Research Analyst at Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.