- The Washington Times - Monday, November 1, 2004

Oil prices have been hovering around $50 a barrel compared to about $30 a year ago. That’s supposed to be bad for economic growth and/or inflation. This makes the government’s initial report on economic growth in third-quarter 2004 even more striking.

The gross domestic product (GDP) numbers for third-quarter 2004 show an economy chugging along quite well. Real GDP grew at a solid 3.7 percent, accelerating from 3.3 percent in the second quarter. A key part of this solid growth picture was business investment. Real private investment in equipment and software, for example, rose 14.9 percent in the third quarter.

At the same time, inflation slowed in the third quarter. The GDP price index increased only 1.3 percent. That’s compared to 3.2 percent in the second quarter.

In fact, the story on the economy has been quite good since last year’s second quarter. Earlier, the economy had been underperforming since mid-2000. Growth slowed considerably in the second half of 2000, recession came in 2001, and the subsequent recovery was sluggish.

But from second-quarter 2003 to third-quarter 2004, real GDP growth has averaged a robust 4.5 percent. Investment in equipment and software has averaged 13.6 percent real growth over the same period.

Make no mistake, the higher oil prices slowed economic growth from where it otherwise would have been. But how is it the economy is still moving along at a good pace? A key positive has been the 2003 tax relief package passed by Congress and signed into law by President Bush.

That measure took the reductions in personal income tax rates passed in 2001 but due to be phased in over multiple years and fully accelerated them into 2003. Capital gains and dividend tax rates were reduced. Small business expensing levels got a major boost. For good measure, under the 2001 law, the death tax is being phased out. What difference does any of this make?

Well, incentives for working, investing and entrepreneurship were enhanced, and these are critical to economic growth. In turn, we have seen stepped-up economic growth over the past six quarters, despite a dramatic run-up in oil prices and continued uncertainty regarding war and terror.

Looking ahead, two paths have been laid out by the presidential candidates.

Democratic presidential nominee John Kerry wants to raise taxes on those earning more than $200,000 a year. The top personal income tax rate would rise from 35 percent to 39.6 percent. The dividends tax rate would leap from 15 to 39.6 percent. The capital-gains tax rate would go from 15 to 20 percent. The death tax would not disappear. All these tax increases would negatively affect the entrepreneurs and small businesses that innovate, generate economic growth and create most new jobs.

Meanwhile, Mr. Bush calls for making the 2001 and 2003 tax cuts permanent. That added certainty would be another plus for economic growth.

The choice is pretty clear. One candidate somehow believes higher taxes would be good for prosperity, while the other recognizes the benefits of tax reduction.

Raymond J. Keating is chief economist for the Small Business and Entrepreneurship Council.

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