Nick Smith, February 2, 2003

The United States economy and most of the other industrialized countries are mired in what might be called a growth recession. While our economy is expanding in terms of goods and services produced, many factories have moved out or downsized. Employment fell by 273,000 in December, leaving the unemployment rate at 6%. As with most economic doldrums, weak investment is a major culprit. Companies are reluctant to take on more debt in an uncertain environment, and thus even low interest rates have not been the stimulus that some might have expected.

Our system of free enterprise has helped make the U.S. the strongest economy in the world. However, government can and has put up roadblocks to economic expansion with high taxes and overzealous regulations. The Republican tax plan removes some of those roadblocks by allowing more business to deduct the cost of equipment and facilities in the year of purchase (expensing) and eliminating the current double taxation of corporate profits. A business pays tax on profits, and when those profits are distributed to the company's investors/owners as dividends, they are taxed again. This results in several economic distortions - in particular, it makes it less attractive to purchase stock.

Some have mischaracterized these portions of the plan as a tax break for the rich. Instead, the point is to reduce the cost of expanding businesses. With expensing, purchases of new equipment and facilities are cheaper, current employees are more secure, new employees are hired, and increased productivity makes the company more competitive and makes raises possible.

Economists predict that tax changes that encourage business expansion will not only grow the economy and jobs but also result in new tax revenues for the government. Appealing to low-income voters by suggesting a temporary reduction in the Social Security payroll tax has two disadvantages. First, it doesn't correct the distortions we now impose on business for growth and productivity. Secondly, it jeopardizes the mandatory savings for Social Security that is already projected to have less revenue than needed for benefits by 2015.

The President is also suggesting a speed up of scheduled tax reductions in the law. This includes doing away with the marriage penalty tax, increasing the child tax credit and changing the brackets to reduce overall taxes. The richest pay the most taxes, and so an analysis by income class will find a larger dollar benefit for the wealthy. However, under the President's proposal, high-income taxpayers will end up paying a larger percentage of total taxes.

Another important part of the President's overall strategy for economic recovery that he emphasized in the State of the Union address is holding the line on government spending. In recent years, spending has increased at two to three times the rate of inflation when it shouldn't increase faster than an average family's income.

The President's tax proposal is appropriate to reduce the excessive taxation and regulation now slowing our economy. By letting people keep more of their own money and encouraging business expansion, we can remove some of the government roadblocks and make sure we continue to have the world's most competitive economy.

Congressman Nick Smith represents the 7th District Congressional of Michigan in the U.S. House of Representatives.