A Tax Cut Deal That could Work

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As luck would have it, the first trial of conservative resolve by victorious congressional Republicans will be one of their most important tests: preventing the so-called Bush era tax cuts from expiring and therefore unleashing the largest tax increase in U.S. history in the midst of a recession.

To make the test even more difficult, they will likely have to achieve this in a postelection session when Democrats still hold power in both chambers of Congress.

What’s at stake? Growing our economy and putting people back to work should be our top priority, but therein lies the problem: Our nation’s economy will not be brought back to life by increased consumption. It will be brought back to life by increased production.
It is in producing more goods and services that new employees are hired and new facilities are built. We cannot spend ourselves back to economic health. We need genuine growth and expansion.

Small businesses account for three-quarters of all new jobs in this country. If the extension of the tax cuts is too temporary and watered down, small business may not have the certainty it needs to encourage it to invest and hire.

Building facilities and hiring people requires the expenditure of capital — at a time when banks are not particularly willing to lend. However, businesses may not feel they can afford to expand if the tax burden is too high — and if there is a risk that it could increase once a new facility is completed.

Two years into one of the most difficult recessions in our nation’s history, one thing is clear: Pumping demand by government priming hasn’t worked — unless you consider a 9.6 percent unemployment rate "success." We have followed the theories of John Maynard Keynes, and the only place they have led us is deeper into the debt wilderness.

As has become painfully clear, Keynesian economics doesn’t work in every situation. In fact, some economists now believe that the simulative effect of government spending is even more muted in highly indebted nations such as today’s United States.

Contrast this to tax cuts, which Obama’s former top economic adviser, Christina Romer, found generates $3 in growth for every $1 in relief. The fact is we have to generate real private-sector growth, not fake government growth to get our economy moving in the right direction and on a sustainable path.

Here is the compromise Congress should be working toward: Extend the full Bush-era tax cuts for three years, drop the small-business tax rates to 25 percent and then secure a guarantee to a more permanent overhaul and simplification of the U.S. tax code. This would send a clear message for the economy during a difficult time while also laying the groundwork for a debate around how to secure real and sustainable prosperity for our nation’s future.

The bottom line? You don’t raise taxes during a time of recession. And not only has massive government stimulus failed to get our economy moving again, but a second round will make our nation’s addiction to debt and spending even worse.

What we need is a clear and unambiguous message to the American people that we will support them and their businesses in growing our economy. That may require Democrats to give some ground on the tax issue (and Republicans to move a little too), but a strong signal of cooperation and progress will go a long way.

Jim Gilmore, former governor of Virginia, is president and CEO of the Free Congress Foundation.