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Politics Masquerading as Economics


An important debate in Washington over how best to structure a tax cut to support a fragile economic recovery is fast devolving into a political slugfest between ideologues. Republican supply siders demanding big, permanent tax cuts are attacking deficit hawks in the GOP and Democratic Party. President George W. Bush's new appointee, CSX Corp. Chairman John W. Snow for Treasury Secretary and former Goldman, Sachs & Co. co-director Stephen Friedman, his expected choice for National Economic Council head, have already become ensnared. To anyone who values pragmatic solutions over ideology--and that includes most businesspeople--the ferocity of debate going on inside the Beltway casts more heat than light (page 28).

Both sides of the debate share the same goal: to promote economic growth and prosperity. Those who want to make permanent the $1.3 trillion in tax cuts on income and inheritance think budget deficits will take care of themselves. When people receive more of their earned income, they're more productive, the economy grows, and higher tax revenues fill government coffers. Tax cutters believe that higher deficits do not automatically lead to higher interest rates and point to the Reagan years in the '80s and the two years under George W. Bush as proof. Rates fell even as deficits rose sharply.

Deficit hawks disagree. They point out that President Bill Clinton raised the top marginal rates on income taxes, and the economy boomed, much to the chagrin of supply-side tax cutters. Higher taxes combined with robust growth generated tax revenues that turned Ronald Reagan's big budget deficits into surpluses. This lowered interest rates and transferred capital from public to private use. CEOs and investors prospered from capital gains and stock options, while real wages rose for employees.

The truth is, neither side can prove that its argument is correct. In the end, this supposedly economic debate is really an ideological one. It isn't about which fiscal tools are most effective in stimulating growth but about the role and size of government in the economy and society. What we're really seeing is politics masquerading as economics.

We prefer the sensible center in this debate. We think the economy needs significant tax cuts in the months ahead, especially given the geopolitical uncertainties America faces. Moving the 2004 and 2006 tax cuts forward and ending double taxation of dividends are good ideas. A six-month payroll-tax holiday for both employers and employees would also provide a strong fiscal kick.

We do worry about the long-term deficit. The disappearance of a $5.7 trillion surplus overnight shows how little anyone really knows about the economy and budgets. Back then, no one realized how dependent federal and state budgets had become on the stock market. Today, we don't know what the real cost of battling terrorism will be. Terrorism raises the risk factor, but we don't know by how much. We also don't know the cost of a war in the Middle East. If the U.S. is serious about spreading democracy and modernity throughout the Mideast, it could cost $1 trillion. Finally, we worry about the real cost of baby boomer retirement. Washington is in denial on this.

It just makes sense given all the uncertainties that we be prudent and practical, not ideological and political. Tax policy shaped by the desire to reelect a President or to further political agendas isn't what's best for the nation. Let's be honest about this.


Silicon Valley State of Mind
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