Key to growth: no new taxes - A Business Agenda for the 90's - Cover Story

Nation's Business, Sept, 1990

Key To Growth: No New Taxes

What we do with the federal budget this year will have a fundamental impact on our economy and society in general," says Sen. Phil Gramm, R-Texas, a key figure in the debate over federal fiscal policy. "It will define what post-Cold War America is going to be like."

If the nation is going to invest for the future and increase U.S. competitiveness, says Gramm, a co-author of the Gramm-Rudman-Hollings deficit-reduction law, "we can't keep doing what we've been doing."

What Washington has been doing is spending money much faster than it has been coming in, causing huge annual deficits that have triggered high-level support for tax increases.

As a result of the torrent of red ink over recent years, the federal debt is now more than $3 trillion, three times what it was just 10 years ago.

The continuing annual deficits are in sharp contrast to the goals set when Congress enacted the Gramm-Rudman-Hollings law in 1985 with high expectations. Under its terms, the deficit was to be reduced gradually until it was eliminated in the 1991 fiscal year, which starts this Oct. 1.

Congress was unable to impose the required fiscal discipline on itself, however, and massive deficits have continued; the emphasis in budget negotiations between the White House and congressional leaders has shifted from less spending to more taxes.

President Bush joined those discussions after abandoning his long-standing opposition to tax increases, a position summed up in what had become one of the most famous declarations of recent times: "Read my lips: no new taxes."

The business agenda, however, rejects higher taxes as a solution to fiscal problems. And it has overwhelming support for that position. The U.S. Chamber's "Business Ballot" poll showed that 94 percent of the more than 8,000 respondents opposed tax increases, and only 4 percent favored them, with 2 percent undecided.

Accordingly, the business agenda calls upon Congress and the administration to take concrete steps to restore fiscal order without raising taxes and, in doing so, better position the U.S. for the tough competition ahead.

Among the most immediate actions needed are steps to increase economic growth. A growing economy means more jobs, and more jobs mean more Americans producing and fewer depending on the public treasury. A growing economy is the most effective way of increasing tax revenues - the more money businesses and individuals make, the more income on which they pay taxes.

Even economists typically at opposite extremes are beginning to agree that certain public policies destroy the economy's potential. Those policies include relatively high interest rates, excessive government spending, unnecessary regulation, tight credit, and tax hikes.

Misguided fiscal policies undermine economic health by penalizing work and investment and by failing to provide incentives that will encourage growth.

Ever-higher taxes deprive businesses of the funds they need for the research, development, investment, and expansion that provide salaries and profits. Those taxes further diminish growth by canceling the rewards of harder work.

Thus, it is essential for Congress, with the president's leadership and support, to pass a pro-growth budget package for 1991, says the U.S. Chamber of Commerce in its business agenda.

That agenda lists fiscal-policy reforms in these areas as essential to pro-growth policies:

Overall Spending. Federal spending as a percentage of gross national product must be reduced. (GNP is the value of all goods and services produced in the country in a year.) Federal outlays averaged 18 percent of GNP in the 1950s. While spending as a percent of GNP peaked at 24.3 percent in 1983, it is still above 22 percent. The relationship is important because it shows the share of national resources absorbed by the federal government.

Entitlements. Growth of social programs must be slowed to bring federal spending under control. These programs now account for 43 percent of all federal outlays. The very term "entitlements" indicates the magnitude of the problem - it means that any individual who meets the criteria under a given program is entitled to its benefits. These outlays include Social Security, Medicare, welfare, and government pensions. Entitlements constitute the fastest-growing part of the federal budget.

Budget-Process Reform. This must include line-item veto authority for the president and a balanced-budget/tax-limitation amendment to the Constitution.

The former is necessary because the present system encourages waste and special-interest spending. Under normal procedures, Congress sends to the president 13 complex appropriations bills covering all government departments, agencies, and activities. He must accept or veto each in toto.

Capital-Gains Taxes. These rates should be reduced to ease the excessive cost of capital that U.S. businesses face relative to competitors in other nations. These costs hamper investment at home and put U.S. companies at a disadvantage in world markets. The lower chart at right compares the capital costs that U.S. companies face with costs of businesses in Japan, one of this country's toughest trade competitors.