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A Budget Plan We Can’t Live Without

We’re only a couple of weeks away from choosing our nation’s next chief executive. That means we’re also within weeks …

We’re only a couple of weeks away from choosing our nation’s next chief executive. That means we’re also within weeks of charting an economic course through the end of the decade-a course that will be determined either by goofy, big government zodiac-gazing or by the compass of conservative, free-market economics.

There’s no mistaking the political mood in the country. As I mentioned recently in this column, the voters are weary of Washington‘s arrogance. Indeed, the presidential campaigns of Patrick Buchanan, Jerry Brown, and Ross Perot can hardly be explained without reference to the growing protest movement among Americans from all walks of life-from California to Maine.

Yes, everyone knows who caused the recession, who created the $399 billion deficit, who hamstrung business start-ups and investment, who helped send 2 million people to the unemployment line in the last two years. Everyone knows. Everyone except those most responsible: members of the Washington establishment.

Unfortunately, public disgust won’t be enough to reform the system. America needs a plan that strengthens both the American family and the economy, and the political will to implement it.

An impossible task? Not really. My colleagues at The Heritage Foundation have developed such a plan. Variations on this theme are possible. What is vital is to stop talking about the problems and start tackling them. Some suggestions:

Offer real tax relief to families. Washington‘s unrelenting reliance on tax increases and higher levels of spending-grotesquely played out during the 1990 budget agreement-turns a cold shoulder to the economic crunch on the American family. One of the greatest burdens is taxes. In 1948, the average family of four paid just 2 percent of its income in federal taxes. Today, a similar family surrenders an average of 24 percent of its income.

The surest way to provide tax relief for families is through a tax credit-a dollar-for-dollar reduction in taxes. The Bush administration, finally responding to a flurry of tax-relief proposals from Congress, offered a meager tax credit for pre-school children earlier this year. Arkansas Gov. William Clinton, the Democratic nominee for president, is proposing a $500 tax credit per child, financed by higher taxes on the wealthy.

But after three years of higher taxes and declining income, Washington has to do better than either of these proposals for the family, society’s bedrock institution. How about this: a $1,000 credit for each child between 6 and 18, and $1,500 for children under 6. Phased in over five years, this credit would reduce the typical family’s tax burden to what it was a generation ago.

Washington would also be wise to enact significant tax reform to stimulate economic growth.

Reduce the tax on investment gains. As most business executives realize, compared with other advanced industrialized nations, the current top capital gains tax rate of 28 percent puts America at a disadvantage in its efforts to create investment capital. Though you’ve probably heard the numbers before, they’re worth repeating: Germany, Belgium, the Netherlands, Hong Kong, Singapore, South Korea and Taiwan exclude capital gains from all taxation. Japan taxes such income at a 5 percent rate. French investors pay 16 percent; Canadians pay 17.5 percent; and Swedes pay 18 percent. Until we reduce the capital gains tax significantly, perhaps to 15 percent, investment and job creation rates will lag far behind what our economy can produce.

Expand Individual Retirement Accounts. As with the capital gains tax, earnings on savings are taxed more heavily in America than in almost every other industrialized nation. This boosts consumption, but causes savings and investment in the economy to decline. Our plan would make all taxpayers eligible for tax-preferred IRAs. Money deposited in an IRA account would not be tax deductible, but both principal and interest would avoid taxation when the money is withdrawn. Shifting the tax benefit to the “back end” would spur savings and investment.

Establish urban and rural enterprise zones. Tax and regulatory relief for would-be businessmen is one of the best tools for luring entrepreneurial energy and capital to some of the more depressed areas of the country. Such a strategy benefits both businesses and workers-and in light of the April riots in Los Angeles, it’s long overdue.

Housing and Urban Development Secretary Jack Kemp has been pushing enterprise zones for more than a decade, and my colleague Stuart Butler even longer than that, but the big-government paternalists have bottled up the legislation. Skeptics should look at the states: At least 37 states created more than 600 enterprise zones in the last decade, stimulating more than $28 billion in new investment and creating or saving more than 350,000 jobs. Strategies vary, but include investment tax credits, sales tax exemptions and property tax abatements.

Naturally, opponents of tax relief for families and tax reductions for businesses raise the specter of an even larger federal deficit. This is the hobgoblin of little minds that cannot change their way of thinking.

Deficits don’t result from tax cuts, but from spending beyond your means-now the defining feature of Washington. With plenty of help from a spend-happy Congress, federal domestic spending has grown more under the Bush administration than any other in U.S. history. By the end of Bush’s first term, domestic spending will have increased an inflation-adjusted 24.5 percent. If spending continues at that rate throughout a second Bush term, the government will have to raise-through higher taxes or borrowing-$3,000 more per household annually to pay for it.

If we’re going to repair the U.S. economic engine, we need to go back to the root causes for its breakdown. Wasteful government tops the list. The Heritage Foundation Prosperity Plan would change the political dynamics that prevent real spending reform. Under our plan, every dollar saved by reducing wasteful spending would be used to finance family and business tax cuts. For every $1 billion eliminated in wasteful spending, for example, $2,000 to $2,500 in cash could be rebated to about half a million American families through the tax credits. Call it a waste dividend. It may be the best incentive for taxpayers to vote-and send a bludgeoning message to the Beltway Budget Bandits.

There’s no question that federal spending can be cut: My colleagues have identified dozens of unnecessary federal programs that could be eliminated or reformed, from water subsidies to crop insurance programs. Meanwhile, if Washington-with a nudge from taxpayers-would merely hold domestic spending increases to 4 to 5 percent, slightly above inflation, the deficit would be checked and eventually erased. The country no longer can afford to wait until “next year” to curb Washington‘s addiction to spending. Next year never comes. Federal expenditures have skyrocketed from more than $808 billion in 1983 to an estimated $1.5 trillion in 1993-an 86 percent increase. As a result, the budget deficit has soared to nearly $400 billion, increasing more than 160 percent in three years.

If Washington does not get its economic house in order, sooner or later the house will collapse. Indeed, if the political leadership ignores the symptoms of the nation’s economic malaise, America‘s economic institutions-and the institution of the family-may crack under the strain. Only the next election will reveal whether there are enough political leaders with the vision and the courage to change course.

About edwin j. feulner