Two Do’s And Two Don’ts For ’09 That (Hopefully) Will Do No Harm

Investors Business Daily | Bailouts are all the rage, home prices keep dropping, consumer credit is getting tighter and the dollar looks weaker than a one-legged stool. To read the daily headlines it appears our nation’s economy has a cold.

As President-elect Obama tries to move quickly to rescue our economy, here are four policy suggestions — two do’s and two don’ts — that follow the Hippocratic oath to “first, do no harm.”

• Don’t: Raise tax rates on individuals or businesses.

Taxes are on the checklist for every major campaign. Why? Because they drive a wedge between what an individual or a business earns and what they get to keep.

Research tells us how important it is to keep taxes low. The five tax cuts enacted between 2001 and 2004 were responsible for much of the U.S. economic rebound from the 9/11 terrorist attack, hurricanes and sharp energy price increases that buffeted our economy, according to research by Allen Sinai, chief global economist and president of Decision Economics Inc.

Given the current state of our economy, keeping tax rates low is more important than ever. U.S. tax rates on individuals and businesses are already quite high compared with other industrial countries.

For example, the top U.S. marginal tax rate for individuals is 41.3%, compared with an average of 40% in 29 other industrial countries, according to the Organization for Economic Cooperation and Development.

Unfortunately, the U.S. corporate income tax rate is 35%, compared with an average of only 24% in other OECD countries. That makes investments in our country much less attractive.

Raising tax rates on some individuals or corporations in order to pay for tax cuts for others is likely to be self-defeating if stimulating an economic rebound is the goal, analogous to attaching leeches to an already anemic patient.

• Don’t: Push unrealistic energy and climate change policies.

We need energy to keep improving the world. U.S. economic growth and energy use go hand in hand; each 1% increase in U.S. GDP is accompanied by a 0.3% increase in energy use. The U.S. Department of Energy projects that the U.S. will need approximately 30% more energy by 2030 to accommodate our growing population, higher levels of employment and economic activity.

Meanwhile, popular opinion has caught up to economics on the issue of drilling. Allowing increased access to both offshore and onshore areas for drilling and exploration would also have a positive impact on U.S. energy supplies.

At the same time, many are rushing to legislate regarding global warming. Climate change is a global problem and meaningful reductions in greenhouse gas emissions will require the participation of developing and industrializing countries such as India, China, Brazil, Indonesia and others whose emissions are growing rapidly.

Politicians should avoid imposing tight mandatory emission reduction targets in the U.S., however, because that move could significantly reduce economic and employment growth while sharply raising electricity and other energy prices.

• Do: Promote education reform.

The widely reported shortcomings of our educational system undermine the productivity growth needed to increase U.S. living standards and make it harder for U.S. companies to compete in the global marketplace. A recent survey by the Program for International Student Assessment revealed that U.S. high school students ranked 17th out of 30 OECD countries in science and 24th in math.

Education reform is a complex issue, but better-trained and better-paid teachers, combined with more stringent standards for students’ promotion to the next grade, would be useful starting points. Maintaining the competitive position of the U.S. in the global economy requires strengthening primary and secondary education and raising proficiency standards.

• Do: Promote broader health care coverage.

Everyone agrees our health care system can be improved, while many call our current situation a crisis. About 45.7 million people are not covered by public or private health insurance, according to a recent U.S. Census Bureau report. While those people who have insurance (253.4 million) are, for the most part, satisfied with their plans, the gap between those with and those without health insurance is large.

Improving health care coverage for Americans is cited as a priority in most recent polls, but making the changes will require patience and bipartisanship. An important goal of any health insurance expansion should be to avoid adding new taxes and regulations on business to pay for the expanded coverage. Such an approach would merely make it harder for U.S. companies to maintain or expand employment.

What characteristics do these do’s and don’ts share? They require policymakers to focus on big problems with common-sense solutions to unlock American economic growth. But above all, remember: Do no harm.

Thorning is senior vice president and chief economist at the American Council for Capital Formation, a nonprofit, nonpartisan organization promoting pro-capital formation policies and cost-effective regulatory policies.