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Wednesday, February 26, 2020

ANALYSIS/OPINION:

Federal spending and debt are unsustainable, as Federal Reserve Chairman Jerome Powell said last November. Days ago, the newly appointed Congressional Budget Office Director Phillip Swagel warned federal debt held by the public is projected to rise to over $30 trillion by 2030, equal to nearly 100 percent of that year’s total U.S. economy (GDP). It will get worse from there if we don’t do something about reducing spending and increasing the growth of the private sector and the national economy.

We know how to do it. We just need the will and right leaders at all levels of government with the courage to continue the right tax policies and implement spending controls to achieve maximum national growth as we “right-size” America’s governments. 


Ronald Reagan, as both governor of California and as president, understood that “limited” government was best for our nation. But even he had only an intuitive sense of the right size of government.

Since Reagan’s days, a substantial body of economic studies and literature has developed worldwide, led by the late Texas economist Jerry Scully, named the “optimal” or “right size” of government. According to these experts, economic growth in a nation is maximized when government taxes, spending, and regulatory burdens represent a total of about 20 percent of GDP. 

Currently, that burden of government in the United States is trending at about twice that, at roughly 40 percent — 21 percent federal, 14 percent state/local and 5 percent for the cost of complying with regulations. Policymakers who shape tax, spending and regulatory policy need to work together at all levels of government to achieve the “right size” of cumulative government.

We have learned from the combined experiences of several nations that have intentionally reduced the size of their government and exploded their economic growth rates: The U.K. under Margaret Thatcher; New Zealand; Sweden; Canada; Ireland. Even Greece, recently an economic basket case, has embarked on a “right size” of government policy.

Why is economic growth so important? Because it determines the wealth of a nation and its people. Chicago economist Paul Romer won the Nobel Prize in economics in 2018 for his “Rule of 72,” which shows how long the rate of growth will take to double the size of an economy. At 4 percent growth per year, the economy will double every 18 years. By contrast, President Obama’s 1.2 percent annual growth would take a crushing 60 years to double America’s economy.

Tax reform done well, as in the United States in 2017, accelerates growth. That follows the historical model of JFK’s tax cuts of the 1960s, which produced 4 percent+ annual growth, as did Reagan’s in the 1980s.

The key elements of the 2017 tax reform that produced President Trump’s blue-collar boom today include:

• Tax Rate Reduction for Corporations and Individuals. At 45 percent, the United States had the highest corporate tax rate among Western nations. Reducing that rate to 21 percent has made the United States healthy and competitive again. The mantra of The New York Times and Washington Post that corporate tax cuts only benefit wealthy corporations ignores the reality that only people pay taxes. Corporations only pass them along in higher prices, lower wages, fewer jobs and reduced returns to owners.

• Slashing individual rates, doubling the personal exemption and increasing child tax credits. The social revolution of these components brought economic growth to the middle class, with historic job growth, and record low unemployment rates for all demographic groups.

• Elimination of double taxation. This one change encouraged trillions in off-shore earnings of U.S. corporations to return home to finance even greater growth.

• Current Year Expensing of Capital Investment. Possibly the most important change promoting booming growth.

We must stop tax reform opponents from repealing it, as they have threatened if returned to power. And enact Tax Reform 2.0, making the middle-class tax cuts permanent and killing the evil death tax, as National Economic Council Director Larry Kudlow has recently pledged.

All levels of government — Congress, state legislatures and local governments — must work to restore fiscal order, balance budgets, right-size government and maintain good tax policy, maximizing economic growth for the benefit of America and its citizens.

• Lewis K. Uhler is founder and chairman of the National Tax Limitation Committee and Foundation. Peter J. Ferrara is a senior policy adviser for the foundation and teaches economics at Kings College in New York.


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