However the current debt-limit battle plays out, Washington lawmakers in the next phase of financial policymaking should move beyond simple accounting and focus primarily on economic growth.
Arithmetically, there is no way within reason to handle this nation’s debt and unfunded liabilities without powerful and long-lasting growth, which both boosts revenues and reduces the number of people needing government aid. I well remember Housing and Urban Development Secretary Jack Kemp saying in the early 1990s, when the whole economy was less than $6 trillion, that the budget could be balanced if the economy hit $10 trillion within a decade - even if government weren’t actually cut but merely restrained. People laughed at his notion that the gross domestic product could grow that fast.
Kemp was right: The economy hit his $10 trillion target in just nine years. Even after some temporary budget discipline was again lost beginning in late 1998, the government earned overall surpluses for four straight years. Republican fiscal discipline in 1995 through ‘97 certainly played a large role, but without growth, discipline alone would not have been enough to balance the budget.
Those same lessons are applicable now. Better still, the elements of a growth package already are available in provisions from the “Gang of Six” debt-crisis proposal that have been embraced by liberals such as former President Bill Clinton and President Obama and conservatives such as Sen. Tom Coburn, Oklahoma Republican. These provisions, or close approximations of them, should not be tied to any all-or-nothing deadline and should not be seen as part of a budget plan at all (except incidentally). Instead, they should be considered specifically as a “growth” or “jobs” bill and adjudged on that basis.
Granted, the budgetary effects of the package will need to be officially “scored.” For those purposes, the bill should be designed to be revenue-neutral by Congressional Budget Office “static” analysis - but with a twist. For liberals, who do not believe that tax cuts generate growth that helps recapture lost revenue, the package would have no budgetary downside but would achieve greater efficiency and simplicity along with some movement toward their vaunted goal of “fairness.” For conservatives, who believe in the dynamic growth effects of tax cuts, the officially revenue-neutral package actually could promise higher government revenues in the long term and, thus, lower deficits.
Conservatives understand that despite the Orwellian sound of it, some taxes are more equal than others. Marginal tax rates tend to affect economic incentives and productivity more than some narrowly targeted provisions. Some tax loopholes can be closed without significantly harming economic growth. Some taxes can be collected more efficiently - with less paperwork and less time consumed - than others. Some taxes, such as high corporate income taxes, actually can chase businesses and their jobs away from American shores, where little or none of their profits are recoverable by the U.S. government. And some tax breaks, such as those for ethanol production, result in almost no discernible economic benefit.
House Speaker John A, Boehner said he had an agreement with Mr. Obama to raise as much as $800 billion in revenues over 10 years - without “tax hikes.” While no details were forthcoming, one need only accept half of those revenue enhancements in order to “pay for” a huge chunk of highly growth-inducing, job-producing tax-rate cuts. In fact, with corporate income tax collections at $225 billion annually, the corporate rate could be cut from 35 percent to 30 percent without exceeding half of Mr. Boehner’s revenue enhancements.
Mr. Clinton and Mr. Obama both have advocated a corporate income tax cut even bigger than that, without regard to offsetting revenues (although Mr. Obama has taken no steps to actually to implement it). The Gang of Six suggested a top rate of no higher than 29 percent. If such a cut were combined with a two-year cut in the “repatriation” tax rate of 5 percent for businesses that return to the United States from abroad - 5 percent of something obviously gains more revenue that 35 percent of nothing - it could produce a powerful jobs-creating effect.
Additional revenues could be reaped from royalties and taxes by opening federal lands to energy development. Gary Palmer of the Alabama Policy Institute notes that the federal government owns 80 percent of recoverable oil from shale in the Green River Formation in the American West, which contains more than three times as much oil as the proven reserves in Saudi Arabia. Some of that revenue could provide the necessary cushion to lock in a slightly lower individual income-tax rate for middle-income earners and extend the George W. Bush-era reduction in the capital gains tax.
Throughout government, the same sort of creative thinking could replace inefficient, growth-retarding policies with ones that are fresh and potently pro-growth. The goal would be job, not debt relief. In all likelihood, it would produce both.
Quin Hillyer is a senior fellow for the Center for Individual Freedom, for which he wrote a version of this column, and a senior editor of the American Spectator.