The econ­omy and the Congress

The Washington Times Weekly - - Commentary -

If Sen. Barack Obama is elected pres­i­dent of the United States, do you know what will hap­pen to fed­eral tax rates and gov­ern­ment spending? If you an­swered “yes,” then you have not been pay­ing at­ten­tion, be­cause Mr. Obama and his ad­vis­ers keep chang­ing what they say they are go­ing to do. Even more im­por­tantly, un­der the U.S. Con­sti­tu­tion, Congress has the sole power to tax and ap­pro­pri­ate funds, not the pres­i­dent. Congress al­ways rewrites pres­i­den­tial tax and spending pro­pos­als, even when the pres­i­dent and con­gres­sional ma­jor­ity are of the same party, and hence no pres­i­dent gets to dic­tate fis­cal pol­icy.

The ques­tions we should be ask­ing are: What changes is Congress likely to make in the tax law, the level of spending, and en­ergy pol­icy if Mr. Obama is elected, and like­wise if Sen. John McCain is elected? The ac­com­pa­ny­ing ta­ble shows what hap­pened to the econ­omy dur­ing the past quar­ter of a cen­tury when each party con­trolled (or shared con­trol of) Congress.

The econ­omy had its best growth when the Democrats con­trolled the House and the Repub­li­cans con­trolled the Se­nate in the mid­dle Rea­gan years, and when the Repub­li­cans con­trolled both the House and Se­nate dur­ing the last six years of the Clin­ton ad­min­is­tra­tion. The deficit was low­est, and the sur­plus occurred, when the Repub­li­cans con­trolled both houses of Congress un­der Demo­crat Pres­i­dent Clin­ton. The Repub­li­cans fool­ishly threw away their hard­earned rep­u­ta­tion for fis­cal re­spon­si­bil­ity dur­ing the first few years of the Bush ad­min­is­tra­tion, and then the Democrats, rather than cap­i­tal­iz­ing on the Repub­li­can mis­takes, in­creased the deficit even fur­ther since gain­ing power two years ago.

If the Repub­li­cans were smart, they would point out over and over again that Pres­i­dent Clin­ton in­her­ited an econ­omy that was grow­ing and left it in re­ces­sion. The Repub­li­cans have the op­por­tu­nity to go off de­fense, by point­ing out that fewer peo­ple now lack health in­sur­ance than in 2000, dur­ing the last year of the Clin­ton ad­min­is­tra­tion, and that the econ­omy is not, and has not, been in a re­ces­sion but, in fact, grew at a re­spectable 3.3 per­cent dur­ing the sec­ond quar­ter of 2008.

The Bush tax cuts will ex­pire in 2010, so the tax writ­ing com­mit­tees of Congress are go­ing to be busy no mat­ter who is elected. For in­stance, at var­i­ous times, Mr. Obama has said he is in fa­vor of rais­ing the max­i­mum cap­i­tal gains tax rate from the cur­rent 15 per­cent to ei­ther 20 or 28 per­cent, but also elim­i­nat­ing the tax for small busi­ness start-ups. Mr. McCain fa­vors re­tain­ing the cur­rent 15 per­cent rate, rather than let­ting it re­vert to the pre-Bush 20 per­cent. Thus, we know for cer­tain that there will be a big de­bate in Congress over the cap­i­tal gains tax rate. The forces of eco­nomic rea­son who un­der­stand that higher cap­i­tal gains tax rates will re­sult in loss of both tax rev­enues and jobs for Amer­i­cans should be able to per­suade the Congress that no mat­ter who is pres­i­dent, it is sui­ci­dal to go to a 28 per­cent rate. Keep­ing the rate at 15 per­cent un­der Pres­i­dent McCain will be eas­ier than un­der Pres­i­dent Obama, but will de­pend in ei­ther case on the re- sources the ad­vo­cates of the 15 per­cent rate are will­ing to com­mit to the bat­tle.

Mr. Obama has also called for in­creas­ing taxes on peo­ple mak­ing more than $200,000 per year, in or­der to “pay” for his var­i­ous tax cuts and tax credit pro­pos­als and for all of the ad­di­tional spending he has pro­posed. The prob­lem is that the num­bers just plain do not add up. Congress could ap­ply a 100 per­cent tax rate on all in­come over $200,000 and they still could not get enough rev­enue to pay for all of Mr. Obama’s pro­posed tax re­duc­tions and spending. (A 100 per­cent tax rate would, of course, bring in zero ad­di­tional tax rev­enue be­cause no one would be will­ing to work at those rates. In fact, the ev­i­dence is that the cur­rent max­i­mum tax rates are al­ready above the rev­enue max­i­miz­ing rates so that any new sig­nif­i­cant rev­enue from rais­ing rates is un­likely to oc­cur). Given its past be­hav­ior, Congress is likely to pre­tend that it can get some rev­enue from rais­ing tax rates, but is also likely to scale back some of Mr. Obama’s pro­posed tax credit and rate cut pro­pos­als for lower in­come peo­ple, and cut back many of his pro­posed spending in­creases. Even so, Congress is likely to pass enough of his pro­gram to cause the econ­omy to slow.

If Mr. McCain wins, he will prob­a­bly be able to get Congress to ex­tend most of the Bush tax cuts, par­tic­u­larly for low- and mid­dle-in­come earn­ers; but if Democrats con­trol both houses, he will not have much abil­ity to keep Congress from let­ting the top rate re­vert back to the 39.6 per­cent rate that ex­isted when Pres­i­dent Bush took of­fice. Given re­cent his­tory, it is rea­son­able to ex­pect that the eco­nomic growth rate might be about 40 per­cent higher on av­er­age (4.1 per­cent vs. 2.8 per­cent) if the Repub­li­cans man­age to cap­ture ei­ther the House or the Se­nate.

Richard W. Rahn is a se­nior fel­low at the Cato In­sti­tute and chair­man of the In­sti­tute for Global Eco­nomic Growth.

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