The look from Washington is gloomy
President Bush recently proclaimed at the end of the recent economic talkathon in Waco, Texas, that "A limited and focused government is essential to a growing economy. And if Congress won’t show spending restraint, I intend to enforce spending restraint." Tough talk. Maybe 43 has returned from his invertebrate position on spending restraint. Doubtful. His record thus far on spending restraint is pitiful.
In the name of "a new tone in Washington," Congress passed, and the President signed, an education bill ($53.8 billion), a farm subsidy bill ($74 billion over 10 years), and a $459 billion budget for Health and Human Services which increases discretional spending by over 3-times the rate of inflation. That’s a lot of money for Tommy Thompson to distribute in one year but he can do it–just look at his track record in Wisconsin.
Spending is only one side of the stimulus debate-tax rates are also a key element. There were several good stimulus proposals proposed at Waco, to wit, an elimination of taxes on dividends and a cut in the capital-gains tax rate.
Two other proposals that surfaced were an increase in the amount of losses investors can deduct in a given year for losses on security sales. At present, the IRS takes a percentage of all gains (what a surprise) but caps losses at $3,000 per year. The other suggestion was the liberalization of the 401(k) contribution limits in order to allow people to make up for losses in their retirement accounts.
If the President and Congress are serious about stimulating the economy they can follow the lead of presidents Kennedy and Reagan. President Kennedy lowered the top marginal tax rate from 91% to 70% and inflation adjusted GDP grew by 50%. It worked again in the 1980s when President Reagan lowered the top marginal rate from 70% to 28% which lead to the longest peacetime economic expansion in US history.
Don’t bet on anything happening to stimulate the economy. The Democrats in Congress will demagogue any tax relief as a sop to the "rich" and would prefer a stagnant economy as a campaign issue in November. The Republicans, if they had the conviction and courage, do not have the votes. Anyway, Bush thinks a 35% marginal tax is just fine. He forgets that in Medieval Europe, people who were forced to give 35% of their income to the state were called serfs. The outlook is gloomy.
Michael Fredrich is a board member of the Independent Business Association of Wisconsin.
Sept. 13, 2002 Small Business Times, Milwaukee
