Assuring Economic Liberty and Strong Economic Growth: Moving the Government Barriers to Economic Expansion

AMERICA’S ECONOMIC SUCCESS has been due to lower taxes and fewer government-inspired obstacles to enterprise than is true in most other countries. But that favorable climate for economic growth has been maintained only by vigilance in resisting politicians’ temptation to micromanage the economy. Regrettably, many lawmakers are once again focused on moving money from one pocket to another and favoring one industry over another rather than on fostering growth. This must be resisted, and Washington must instead be urged to concentrate on creating the most favorable climate for enterprise by reducing and simplifying taxes, reducing red tape, and avoiding economic class warfare.

Principles

Since economies grow fastest when government interferes least, public policy should allow the private sector the greatest leeway for improving efficiency and spurring innovation. The freedom to use one’s labor and capital as one pleases while respecting the equal freedom of others to do the same produces the greatest economic good for everyone at the least cost to society. Government plays a facilitating role in the growth of an economy. However, beyond these core functions, federal fiscal and monetary policies should be as economically neutral as possible. In addition, all levels of government should focus on only those programs that are constitutionally within their purview and provide goods and services that cannot or should not be produced by the private sector, such as a justice system and national defense.

Government should not try to pick economic “winners and losers,” nor should it pursue policies to reallocate income and wealth. The private, competitive marketplace does a much better job of allocating resources than government does. If a company fails to use its capital in a way that creates value for its customers and investors, customers go elsewhere and investment follows sales. The same is true for wealthy families. This is why the Forbes list of the top 400 wealthiest individuals bears little resemblance to the same list 20 years ago. Free and open markets reward those who enhance economic well-being and strip resources from those who do not.

The tax system should be simple—with tax rates as low and flat as possible and with no income taxed more than one time—and taxes should be collected to finance needed government programs, not for social engineering. One important way that government can encourage stronger economic growth is to make sure the federal tax code is simple and encourages savings, investment, and work. Nobody should need to hire high-priced accountants and spend hundreds of hours each year just to pay federal income taxes. Moreover, millions of people making decisions about their own lives yields better social and economic outcomes for everyone than a few politicians trying to engineer everyone else’s lives.

Tax competition among nations is a powerful liberalizing force in the world economy. Governments are much more likely to adopt good tax policy—and much less likely to increase tax burdens—when politicians understand that labor and capital can escape to jurisdictions with pro-growth fiscal policy. Tax competition is also a vital component in the battle for fundamental reform since it pressures policymakers to lower tax rates and reduce double-taxation of saving and investment. Regrettably, uncompetitive high-tax nations do not like tax competition and are working through international bureaucracies such as the Organisation for Economic Co-operation and Development (OECD) and European Union (EU) to pursue tax harmonization policies that would hinder the flow of jobs and capital to low-tax jurisdictions.

Vigorous international trade enhances domestic economic growth, especially when that trade is free of tariffs and regulations that reduce the variety and volume of foreign goods and services. Free trade helps economic growth by pressing domestic producers to improve their products and reducing their operating costs. It provides consumers with a wider array of products and services at lower prices than would otherwise prevail in the absence of free trade. Thus, it is emblematic of the benefits that everyone receives from open and competitive markets: more choices and enhanced economic well-being.

A dynamic economy is fueled by a vibrant and innovative workforce. Labor laws should not constrain workers or employers in a growing and changing work environment, but should advance freedom and accountability to provide the greatest opportunities for increasing productivity. Employers and workers should have as much flexibility as possible to create a workplace that is productive and rewarding. U.S. labor laws, written in the 1930s, should reflect the dramatic changes in the economy and the workforce that have occurred since then, and give workers and employers the ability to respond to these and future changes. At the same time, labor law should ensure that unions serve the interests of workers. Workers benefit when unions are strictly accountable to the men and women whom they seek to represent.

Objectives

Enact legislation to make the tax cuts of 2001 and 2003 permanent. The tax cuts of 2001 and 2003 shortened and softened the recession and the economic blow of the terrorist attacks. The 2003 tax bill was especially effective since it not only reduced the double-taxation of dividends and capital gains, but also accelerated the income tax rate reductions from the 2001 tax bill. As a result, America is now enjoying a strong economic expansion. However, these tax policy changes are scheduled to expire by 2011. If Congress lets the tax cuts expire, taxes will rise and the economy will slow down. Making the tax cuts permanent will send a signal that Congress values continued economic growth.

Enact legislation to reform or repeal the alternative minimum tax and the corporate profits tax. Congress introduced the alternative minimum tax (AMT) for individuals more than 30 years ago as a means of ensuring that a small number of very wealthy taxpayers could not use tax preferences to avoid any tax liability. This provision has grown into an alternative tax universe that is now affecting millions of Americans. The AMT does not allow taxpayers to take credits or deductions, taxes their income at the relatively high rates of 26 percent and 28 percent, and does not adjust their tax brackets for inflation. Today, thanks to years of providing middle-class taxpayers with special credits and deductions, over 1 million taxpayers are paying the AMT. The U.S. Treasury forecasts that over 40 million taxpayers will be paying AMT taxes within 10 years. Congress should repeal the AMT as part of a major program of tax reform.

Reform the tax code by adopting a single rate, flat income tax that taxes all income once and at its source. Unleashing the productive potential of the U.S. economy requires that Congress reform today’s enormously complex, increasingly burdensome tax system. Congress should adopt a tax system that eliminates all multiple layers of taxation by taxing all income once, at its source, and at one low rate. Such a “flat tax” system would increase the incentives to work, save, and invest and vastly reduce the current barriers to economic growth raised by today’s tax system.

Lawmakers should vigorously defend the principle of fiscal sovereignty by rejecting tax harmonization schemes being advocated by the EU and the OECD. The need to compete in the global economy is a powerful reason why the United States should lower tax rates and shift to a territorial tax system—the common-sense notion of not double-taxing income earned outside U.S. borders. Congress and the President should not accept any agreements or enact any legislation that would harmonize the U.S. tax system with that of any other country or group of countries.

Congress and the President should adopt energy and environmental policies that enhance the quality of life while facilitating the growth of national income. An environmentally sound national energy policy would also encourage the growth of new energy supplies and smarter energy use, both of which contribute to increased economic activity and greater national income. Congress should adopt a comprehensive energy policy that enhances domestic energy supplies by opening access to oil and gas reserves that are currently off-limits or restricted. Further, Congress should promote diverse energy supplies including coal, nuclear, and hydropower, employing new, safer, and cleaner technologies to reduce dependence on foreign imports of oil and gas to meet increasing demand for energy. Likewise, Congress should reform restrictive regulatory regimes contained in the Clean Air Act and Clean Water Act, which increase costs and restrict energy access and supplies but in fact do little to improve the environment.

Amend the Fair Labor Standards Act (FLSA) to allow workers to take compensatory time off in place of overtime pay. In this era of two-income families, many workers, especially those with children, would prefer to take additional time off in exchange for working overtime. A compensatory-time amendment to the FLSA would allow employers and workers to agree to just that. Comp time is a pro-worker, pro-family law that allows greater cooperation between employers and employees and reflects the reality of the modern workplace. This would reduce employer overtime costs and increase productivity.

Make unions more accountable to the rank and file. Unions will always play a vital role in the American workplace, but they should always be strictly accountable to the workers they represent. To strengthen union accountability, two changes should be made to U.S. labor law. First, an external audit should be a required part of the financial reports that unions file under the Labor- Management Reporting and Disclosure Act. Workers are entitled to know that their union is using its resources wisely, and auditing will reduce the risks of fraud and abuse. Second, no employer should be allowed to recognize a union without a secret-ballot election. Workers should always have the final say on union recognition, and a secret-ballot vote is the best way to ensure that workers’ desires are accurately represented in this critical workplace decision.


William W. Beach is John M. Olin Fellow in Economics and Director of the Center for Data Analysis, Alison Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies, Tim Kane, Ph.D., is Bradley Fellow in Labor Policy, and Daniel J. Mitchell, Ph.D., is McKenna Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. This article is reprinted from The Heritage Foundation’s Mandate for Leadership.