- The Washington Times - Wednesday, February 25, 2009


The federal government should take a lesson from one of the 50 states as it struggles to develop a “stimulus” program that will lift the sagging U.S. economy. The Texas model of economic development produces positive results with low taxes, fiscal restraint and regulatory reform.

But the Democratic administration and Congress instead seem determined to follow the California model - high taxes, fiscal mismanagement and regulatory overkill. To see the likely results of applying such a model nationally, all we have to do is look at what is happening in California. To see what could happen if Washington adopted sane policies, look at Texas.

California is struggling to overcome a budget deficit of more than $40 billion. Texas’ main budgetary challenge is to avoid being tempted into overspending its substantial budget surplus.

In his State of the State address on Jan. 15, California Gov. Arnold Schwarzenegger said dramatically, “The truth is that California is in a state of emergency.” The deficit “is a rock upon our chest and we cannot breathe until we get it off.” The state reportedly is perilously close - a matter of days or weeks perhaps - to not having enough money to cover all its bills.

California cannot blame national and international problems for its financial woes. Jean Ross, executive director of the California Budget Project, admits that “California went into this downturn in a very weak position.”

Texas, on the other hand, can boast that its policies cushioned the blows its economy received from the outside. Texas’ unemployment rate is more than a point below the national average and more than 3 points below California’s rate.

As Andres Alcantar, my fellow commissioner at the Texas Workforce Commission has noted, “Texas employers have added a significant number of jobs in the past 12 months while the United States has lost millions of jobs.” That’s because “state leaders have laid a strong foundation for Texas as a business-friendly state with low taxes and less regulation.”

Texas has learned the most important lesson of job creation: Government cannot create jobs - only the private sector can.

While the government may seem to create jobs when it hires people or buys things, it destroys at least as many jobs as it creates when it does so. It has to get the money to pay the people it hires from somewhere, and that somewhere will have that much less money to hire people and buy things. Of course, John Maynard Keynes, the intellectual founding father of deficit spending, said he didn’t care whether the government paid some people to dig holes and other people to fill them in. But that means money is unavailable for other, more productive projects.

The federal government does not need to spend trillions of dollars in a vain attempt to “stimulate” the economy. Indeed, one of the most important things the government could do to encourage economic development and job creation would be revenue neutral. Over time, this change in economic policy would bring in extra money to the Treasury: The time has come to reform our economy-killing business tax system.

At the national level, we have to scrap a business tax policy that rewards businesses for borrowing money and shipping jobs overseas and penalizes them for saving money and investing in the United States. This must change if we are to reduce our dependence on foreign energy and rebuild our manufacturing base.

Our tax structure provides incentives for companies to incur debt in order to avoid taxation. Companies can write off debt, but savings and investment incur heavy taxes. The tax structure also makes it difficult for American businesses to compete with their foreign rivals. The United States is the only member of the Organization for Economic Co-operation and Development (OECD) that does not have a border-adjusted value-added tax, or VAT. As a result, our goods carry the full burden of federal, state and local taxes, plus an added tax averaging 18 percent when they are shipped to foreign markets.

What’s worse, foreign goods shipped into the United States enjoy an 18 percent VAT abatement. Economist Doug Ingram says we are “exporting prosperity,” I believe because of our fatally flawed business tax system.

Austin businessman David Hartman has an idea on how to level the playing field for U.S. businesses so we can rebuild our manufacturing base. For example, we could replace the corporate income tax, reduce the estate tax (the infamous “death tax”), and cut payroll taxes substantially with an 8 percent border-adjusted, value-added tax (VAT). The VAT would raise as much money as these other taxes but would be much less of a burden on the economy. In the long run, it would bring in a lot more money than the taxes it would replace because the economy would grow much faster. We would have a tax system that would encourage companies to create jobs in the United States and keep them here.

There are other ways to provide an economic “stimulus” without deficit spending. We need to rekindle that strong work ethic whereby individuals take pride in their work and in using the talents God gave them. We should rescue those young Americans trapped in the destructive drug culture. And, our educational system must prepare students for real jobs in the real world with a greater emphasis on the kinds of skills training that can encourage our young people to become more self-sufficient.

Private-sector job creation, along with a renewed emphasis on skills development and a good work ethic, would provide the kind of economic stimulus plan we need to put Americans back to work.

Tom Pauken is chairman of the Texas Workforce Commission in Austin.

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