Laying a new foundation for economic growth - Building the American Future - Cover Story

Nation's Business, March, 1992 by Albert G. Holzinger

Under current policies, the U.S. economy will grow more slowly during the 1990s than in any decade since the Great Depression. Growth will not exceed 2.6 percent annually until sometime next century. That's the downbeat consensus of the 52 private economists surveyed by Blue Chip Economic Indicators, a newsletter published in Sedona, Ariz.

By and large, the views of U.S. business people are in line with the projections of those economists. The December "Business Ballot" poll by The U.S. Chamber of Commerce pegged business confidence at an anemic 36.2 percent, down from 61.2 percent in June 1991.

About 83 percent of respondents to the preceding Business Ballot poll indicated they believe congressional policy mistakes are to blame for the 1990-91 recession and the slow-growth forecast for 1992-99 and beyond.

The 1986 Tax Reform Act is a prominent example of lawmakers' good intentions producing bad policy. In this instance, what began as a positive effort to simplify the tax code produced a more muddled code and, worse still, raised the cost of capital and stifled economic growth. It deterred growth by, among other things, raising business taxes $120 billion over five years, placing heavy tax burdens that undercut the real-estate market, eliminating the investment tax credit, tightening the individual and corporate alternative minimum tax, and raising the top capital-gains tax rate to 33 percent for individuals and 34 percent for corporations. (The top capital-gains rate was reduced to 28 percent for long-term gains in the 1990 act, which still left it well above the maximum 20 percent that existed before the 1986 law was enacted.)

The 1992 National Business Agenda calls on Congress to rectify these and other errors by enacting legislation that would increase economic growth by 1.5 percent in each of the next five years by providing tax relief to families, employees, savers, employers, and investors; by placing a moratorium on new government regulations; and by freezing overall federal spending while cutting some wasteful "pork-barrel" program.

Specific agenda items include:

* Reducing by one percentage point the 7.65 percent Social Security payroll tax paid by employees and employers.

* Extending permanently several expiring tax provisions, including the research and experimentation tax credit and allocation rules, the educational-assistance tax exclusion, and the 25 percent deduction for health insurance for the self-employed.

* Reducing the top capital-gains tax rate to 15 percent for individuals and corporations and indexing the new rate to inflation.

* Reforming the capital-cost-recovery system to provide for full recovery of capital-investment expenditures.

* Allowing penalty-free Individual Retirement Account withdrawals for first-time home purchases and educational and catastrophic medical expenses.

* Providing passive-loss relief for active real-estate participants.

* Repealing or reforming the individual and corporate alternative minimum taxes.

* Opposing attempts to increase individual or business tax rates or broaden the tax base.

* Imposing a moratorium on new regulatory activity until the economy has recovered, and creating a new process for evaluating future regulations.

* Further improving the nation's infrastructure.

* Freezing overall discretionary spending.

* Establishing a commission to recommend how best to limit the growth of entitlement laws.

According to U.S. Chamber economic analyses, enactment of these far-reaching fiscal measures would reduce the federal deficit by more than $250 billion over five years, thus commensurately reducing the need for tax increases. Enactment also would create more than 1 million jobs, reduce the costs of capital and labor, and boost the U.S. savings rate. This, in turn, would increase business profitability and enhance America's competitive position in the world economy.

Business's economic-growth agenda also calls on Congress to revise the deposit-insurance system to promote stability, soundness, and efficiency within the banking community, remove taxpayers from future liability for failures of depository institutions, and help alleviate the current credit crunch.