The Case Against a 'Quickie' Tax Cut in the US

THE politicians in Washington are about to belt us again. Having made a shambles - a bipartisan one - of economic policy, they are putting together a quick fix for what supposedly ails the economy. But they don't seem to have the foggiest notion of what is wrong in the first place.First of all, it is the steep decline in consumer confidence that has suddenly gotten the attention of leaders in both parties and at both ends of Pennsylvania Avenue. And what is the latest cure that is being proposed? To put a few hundred dollars in the pockets of some "middle-class" taxpayers in the hope that they will be grateful when the polls open that fateful Tuesday in November. It is an unusual taxpayer who would not prefer to keep more money and to see less of it going to the government. But why should we expect a small increase in purchasing power to quickly restore consumer confidence? Responsible policymaking requires ascertaining why public sentiment has been plummeting in the first place. Indeed, consumer income has not been falling, albeit the rate of increase is now microscopic. Many people are worried that the next round of business restructuring, "right-sizing," and other euphemisms for cutbacks, will hit their jobs. It is no wonder that consumers are being chintzy in their spending, mainly looking for bargains. Analysis of economic fundamentals leads to a second point: Those folks in Washington had a lot to do with the predicament that faces the American economy today. We should not let either the Congress or the White House forget that they were warned that the politically popular Tax Act of 1986, which tilted the federal tax burden in favor of individuals at the expense of business, was economically harmful. The new tax law shifted the balance away from saving and investment and toward consumption. More recen tly, late last year, those same folks gave us tax increases - and burdensome regulation of business - just as we were sliding into recession. The results of those misguided policies - exacerbated by virulent foreign competition - have been a steady drumbeat of announced job eliminations. Under these circumstances, the standard economic medicine - such as an across-the-board tax cut - will have little positive impact on the economy. To suggest a reversal of past economic errors is too simple-minded, however. There is no reason to believe that previous policies were ideal. Given the sustained slowdown in the economy, any short-term measures that are taken should advance, not detract from, a positive long-term economic agenda. Public policymakers must remind themselves of something most citizens inherently understand: It is the business system that is the principal job creator in the American economy. Here are the key actions that need to be taken: * Within the confines of tight ceilings on federal expenditures, shift budget priorities away from entitlements, subsidies, and other consumption-oriented outlays. Devote a rising portion of the budget to civilian research and development, education and training, and rebuilding battered bridges, broken highways, and congested airports. * Restore growth incentives, such as the investment tax credit, to the Internal Revenue Code. New credits should focus on productivity-enhancing equipment for manufacturing companies, rather than more office buildings. * Embark on a carefully designed effort to provide economic rationality to the rapidly expanding gamut of government regulation of business. * Face up to the inadequate education of much of the labor force, especially young people who will be at work in the 21st century. It is not a matter of "dumbing down" the content of jobs. Citizens in advanced economies cannot effectively compete for low-paid, low-skill jobs. The developing nations have a "comparative advantage" in that sort of work. On the contrary, Americans do best in the higher-paid jobs - which require increasing education and training. Those who believe that these proposals would be a "give-away" to business forget that the object of public policy is not to punish companies and high income individuals for their economic success. Rather, a new economic agenda should provide the foundation for a rising living standard for productively employed Americans.