Bush Plan Promotes Investment

For every rule, there is an exception that proves it. "There’s no such thing as a free lunch" is a good example. There is a "free lunch" when you discover that its makings are already bought and paid for but foolishly wasted or spoiled before they can be combined into a nourishing meal. If you change whatever is causing the waste and spoilage, presto, you’ve got a free lunch.

When it comes to tax rates, Art Laffer made the point back in the 1970s that you get no revenue at both a 0% and a 100% tax rate. The purpose of leadership is to find the point in between where people maximize their output and willingly pay their taxes.

We are now at a point where the tax rates are so high they discourage some people from the work, saving, investing and risk-taking that would maximize output and produce more revenue. Output is lower than it could be and so are revenues.

President Bush illustrated this when he proposed a package of changes to the tax code that would reduce impediments to capital formation.

"Businesses hire when they grow," he said, "and they grow when they invest, and our proposal will promote capital formation."

I can’t remember another President in my lifetime explaining what capital formation is all about. Without capital, workers don’t have the tools and equipment they need, and capitalism is just an abstraction. Education is capital; what parents teach their children is capital. Capital is the best friend of labor because a truck driver’s wages are higher when he has a truck to drive.

It is amazing and disheartening that the party of economic growth-the Republican Party-has trouble explaining and articulating this. Some Republicans in Congress and even some in the White House want the President to give up on many of his capital-formation proposals.

By double-taxing dividends and saving, the current tax code punishes thrift and undermines people’s resolve to defer immediate gratification and save for the future. The President proposes to stop squandering the nation’s capital and spoiling people’s incentive to save by eliminating the double taxation of dividends and by creating three new saving initiatives that would eliminate punitive regulations and reduce the double taxation of saving.

For shareholders, the President proposes to stop double-taxing their dividends. For savers, the President proposes to reduce double taxation of the returns they earn on deferring gratification and saving for the future. Bush’s Lifetime Savings Account (LSA) and his Retirement Savings Account (RSA) would allow everyone, no age or income restrictions applied, to save up to $7,500 a year in each account with rules similar to the Roth IRA, where tax is paid on the income before it is put into the accounts and earnings are allowed to accumulate within the accounts tax-free and are not taxed again at withdrawal.

Money may be withdrawn from the RSA after the individual turns 58, while he may withdraw money from the LSA for any purpose at any time since tax already will have been paid on the money before it goes into the account. The $7,500 annual maximum contribution limits would be indexed for inflation.

The third saving proposal would consolidate the existing hodgepodge of employer-based retirement savings accounts into a single simplified and streamlined Employer Retirement Savings Account, which would make it possible for more small businesses to offer retirement benefits to more workers.

The left grouses that these proposals will benefit the rich because many low-income workers won’t be able to afford to save all $7,500, while the rich will now be able to shelter more of their future unearned income from taxation. Envy blinds the left to the fact that when double taxation of saving and investment is reduced, the so-called rich, who face progressively higher tax rates as their income increases, will have more incentive to realize and pay taxes on income they currently squirrel away in unproductive tax shelters.

Another beauty of the President’s proposals is that the "cost," i.e., the taxes not collected, will be deferred well into the future, by which time the larger economy produced by the availability of more capital will more than compensate for the fictitious revenue loss that the bean counters assume will occur because they ludicrously presume that the President’s proposals will fail to raise economic growth and increase output.

Republican Party leaders who pronounce the President’s savings initiatives dead on arrival are squandering the best chance yet to put their party on the side of growth-the best chance in a generation to put their party on the side of jobs and capitalism for every person. John Kennedy said a rising tide lifts all boats, and he was right. But when boats are sunk and stuck in the mud on the bottom, it takes an infusion of capital to dislodge them and give them enough buoyancy to rise to the surface.

That’s what the President is trying to do, and it is a crying shame that members of his own party are standing in his way. Republicans must not go wobbly on the Bush tax proposals.