June 7, 2006
By Daniel J. Mitchell, Ph.D.
Assuming no unexpected surprises on the road
to confirmation, Henry M. Paulson Jr. of Goldman Sachs will soon be
America's next Treasury secretary. Some observers wonder why
Paulson agreed to leave a prestigious Wall Street position to serve
in the last couple of years of a lame-duck administration, but many
big policy decisions have yet to be made.
A strong Treasury secretary can wield enormous
influence. What remains to be seen, though, is whether Paulson
decides to get involved and fight on the right side. Some key
Extending supply-side tax cuts. Paulson already
has a good track record on tax policy. He has favorably commented
on the pro-growth impact of the 2003 tax cut, particularly the
reduction in the double-taxation of dividends and capital gains.
With luck, this is a sign that he will vigorously push to make
these cuts permanent. In a competitive global economy, it's crucial
that America avoid mistakes that would increase the tax burden on
work, saving and investment.
Implementing dynamic scoring. It is difficult to
implement good tax policy in Washington in part because the
revenue-estimating process deliberately assumes that taxation
doesn't affect economic performance. This is preposterous, as
America's strong growth after the 2003 tax-rate reductions proves.
Economists have long urged that the revenue-estimating process be
modernized to reflect the fact that lower tax rates on productive
behavior yield some revenue feedback. This doesn't mean tax cuts
necessarily "pay for themselves," but it does mean that the revenue
consequences of pro-growth tax cuts can be much less than currently
Protecting the dollar. Paulson has made some
unwise statements suggesting that he doesn't believe in a strong
dollar. Indeed, this may be why financial markets didn't react
positively to his nomination. No nation has ever increased its
long-run prosperity by debasing its currency. Some protectionists
say a weaker dollar would reduce the trade deficit, but this
foolishly assumes that a trade deficit - which largely exists
because America is growing faster and has more income than our
major trading partners - is a bad thing.
Restoring fiscal sanity. The Treasury secretary
normally handles the tax side of the fiscal equation. While that is
more than enough to keep anyone busy, there is a desperate need to
get spending under control. The budget has ballooned by 45 percent
since George W. Bush became president, and most of the increase has
gone for domestic programs and departments that should be
abolished, not expanded. Putting the brakes on spending - and
figuring out reforms that will protect taxpayers from giant
increases in entitlement spending once the baby boomers retire -
are critical challenges. These decisions also have a big impact on
tax policy, since there's no way America can have a pro-growth tax
system if we eventually wind up with a French-size welfare
Steering international bureaucracies in the right
direction. One of the Treasury secretary's less visible
roles is to be the U.S. government point man in dealing with
bureaucracies such as the World Bank and International Monetary
Fund. These institutions are supposed to promote global growth, but
they generally use their influence to encourage statist policies in
the developing world. At a minimum, Paulson could insist that these
bureaucracies concentrate on policies - such as lower tax rates,
deregulation and spending reductions - that lower the burden of
Avoiding senseless regulation. The Treasury
Department has substantial regulatory authority. Sometimes this
power is used wisely, such as the current effort to rein in
scandal-plagued government-favored entities such as Fannie Mae and
Freddie Mac. In other cases, Treasury imposes heavy costs.
Anti-money laundering rules are a good example. They cost the
economy $7 billion annually and make it more difficult for poor
people to access the banking system. Yet Treasury continuously
makes these regulations more onerous even though there's no
evidence that they hinder crime in general or terrorism in
particular. Paulson lacks a track record on these issues, but his
association with some left-leaning environmental organizations
leads some to worry that he may not understand the valuable role of
Henry Paulson can be a caretaker Treasury secretary if he wants to.
But one certainly hopes that a man with his resume has much bigger
goals. Being Treasury secretary for the world's most powerful
nation is a unique opportunity to create a lasting legacy for
America. From tax policy to entitlement reform, Paulson can play a
critical role in making the United States more competitive and
Mitchell is the McKenna senior fellow in Political
Economy at The Heritage Foundation.
First appeared in the Philadelphia Inquirer
Assuming no unexpected surprises on the road to confirmation, Henry M. Paulson Jr. of Goldman Sachs will soon be America's next Treasury secretary. Some observers wonder why Paulson agreed to leave a prestigious Wall Street position to serve in the last couple of years of a lame-duck administration, but many big policy decisions have yet to be made.
Daniel J. Mitchell, Ph.D.
McKenna Senior Fellow in Political Economy
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