Representative Paul Ryan, Republican of Wisconsin, shows the heart of a centrist in this piece that he wrote. I sometimes get the impression he feels equally trapped by the GOP’s lack of focus and cowardice when it comes to legislating reform.
Getting the Fundamentals Right
Rep. Paul Ryan
Ranking Member; House Budget Committee
What sweeping new initiative can the Federal government enact to create X number of jobs? This question – frequently asked by policymakers in Washington – helps illustrate why the quest for jobs remains painfully elusive.
The Federal government must get the macroeconomic fundamentals right, fostering a more conducive climate for the private sector to grow and create jobs. The Federal government can – but should not – try to endlessly micromanage the economy under the misguided belief that we ought to take money from the private sector (with higher taxes or more borrowing), strain it through Congress and the bureaucracy, and deploy it among government programs and government jobs. Centralizing power in Washington, expanding government’s reach into all sectors of our economy and more and more aspects of our lives, creates a more hostile environment for private sector job creation.
Deep skepticism should accompany government initiatives that come with a promised number of jobs. As part of the sales pitch, Speaker Nancy Pelosi argued that the health care overhaul was “about jobs”, and promised the law would create “4 million jobs – 400,000 jobs almost immediately.” In celebrating the passage of cap-and-trade in the House, the legislation’s author, Rep. Edward Markey noted, “This legislation will create jobs by the millions.” More famously, the stimulus legislation promised, according the White House, to save or create 3.5 million jobs by the end of this year and keep unemployment below 8%. Counterfactual arguments aside (i.e., ultimately, it’s hard to know exactly how the economy would have performed without fiscal stimulus), it is disappointingly clear that the stimulus failed to deliver on its promised results.
As I argued this past week, Americans rightfully demand “for government to play some positive role in their lives.” The question is not whether Congress should take action to address the economy, but what form such action should take. We remain in need of true patient-centered health-care reform, all-of-the-above energy solutions, transparent and effective financial regulations, and serious entitlement reform to strengthen our safety net. Legislative action is needed to restrain the explosive growth of government spending. Legislative action is needed to prevent massive tax hikes from hitting job creators at the end of the year. Last week, House Minority Leader John Boehner put forward a common-sense plan that does both: cuts spending and stops tax hikes. My hope and belief are that Leader Boehner’s proposal, which I strongly support, would pass Congress with bipartisan support if put to a vote.
The tax code should not be a tool for income redistribution or social engineering; taxes should aim to raise needed revenue efficiently to fund our national priorities while maximizing economic growth. To that end, I’ve proposed several specific tax reforms to realign incentives for growth and foster the right conditions for job creation:
Simplify the tax code. Individual income tax payers can choose to pay their taxes through existing law, or through a highly simplified return that fits on a postcard with just two rates and virtually no special tax deductions, credits, or exclusions. Joint filers would pay a 10% tax on the first $100,000 of income ($50,000 for single filers), and 25% above that. With a generous standard deduction and personal exemption, a family of four would have zero tax liability on their first $39,000. By clearing out the array of loopholes and credits (disproportionately enjoyed by high-income earners), we can broaden the base and lower tax rates. Additionally, capital would no longer be buried in the complexities of the tax code to hide from tax collectors. Simplification would reverse this misallocation of resources, as economic decisions would be exclusively geared to grow, expand, hire and prosper.
Promote growth. The tax code punishes the very things we ought to promote. Individuals pay taxes on their earnings, and then pay another tax on the return from investing those earnings. We should eliminate the double-taxation on savings and investment. The economy desperately needs more investment to create jobs, but the Democratic Congressional Majority remains intent on increasing rates on interest, capital gains, and dividends. By taxing income once at its source and never again, we better align incentives to promote growth.
Boost exports. The corporate income tax puts American manufacturers and job creators at a competitive disadvantage relative to our foreign competitors. We have the second-highest corporate tax rate in the industrialized world, coupled with a backwards double-taxation on our exports relative to imports. Our own tax code is driving businesses and jobs overseas, so I propose to replace the entire corporate income tax with an 8.5% business consumption tax, a rate half the average of the industrialized world. To level the playing field for American-made products, the tax would be lifted on exports and imposed on imports, which is how the rest of world taxes their imports and exports. With 97% of the world’s consumers living outside the United States, and fierce global competition, we must do everything we can to keep America’s edge in the 21st century.
Trillion-dollar deficits and the ominous debt cloud hanging over the economy allow some to argue for higher tax rates and even new revenue machines, such as the value-added tax. We simply cannot chase ever-higher spending with ever-higher revenue; the taxes cannot keep pace, and if we try, we’d kill the economy. Spending is driving our long-term budget crisis, and a move toward more efficient consumption-based tax reform must be predicated on both the full replacement of the anti-competitive components of the tax code and a plan to address uncontrolled spending.
Sound money. In addition, the certainty needed to restore job and capital expansion requires that entrepreneurs and workers trust that the value of the dollars they earn and invest will not be eroded by inflation. So the Federal Reserve’s commitment to keeping the value of our money stable is a crucial condition for restoring job growth.
A plan for prosperity is urgently needed, but many of the reforms outlined above would no doubt require time and effort, as economic hardships continue to mount. What Congress can do today is take action on Leader Boehner’s proposal to 1) pass a continuing resolution at FY2008 spending levels to take the needed first steps to get a grip on spending; 2) pass a freeze of all tax rates to avert a painful across-the-board tax increase at year’s end.
Going forward, policymakers need to think critically about government’s proper role in the job creation process. Above all else, we must get the fundamentals right.