January 21, 2009

January 21, 2009 | Commentary on Taxes, Energy and Environment

Toward the Right Path

Clearly, the single most important challenge for the Obama administration and the new Congress is to revive our ailing economy. Our arcane tax code, apparently too complex even for two of the government's most important tax officials -- House Ways and Means Committee Chairman Charles Rangel and Treasury Secretary-Designate Timothy Geithner -- should be the primary target of all that pent-up legislative energy on Capitol Hill. Now's the ideal time to comprehensively reform our tax system.

Properly done, this reform will accomplish two important goals. It will (1) spark economic growth by increasing the incentives for Americans to work, save and invest and (2) remove the needless complexity in the tax code that drags down our economy, stifles innovation, and dismays so many of America's entrepreneurs.

How best to accomplish these twin goals? Reduce the top federal tax rate on individuals and employers by 10 percentage points and reduce other income tax rates by similar amounts. Economists at the Heritage Foundation estimate this would create 1 million new jobs by 2010 and increase gross domestic product by $130 billion.

Struggling employers, especially those competing with overseas firms, would be overjoyed by this reform. Why? The United States imposes one of the highest tax burdens on businesses in the industrial world. In fact, aside from economically moribund Japan, America's top tax rate (the combined state-federal rate is 40 percent) is the worst among our 30 largest trading partners. Lest you dismiss the significance of this self-imposed albatross, bear in mind that in 2007 the total value of U.S. trade with these nations (exports plus imports) was a cool $2.7 trillion, almost 90 percent of all U.S. trade.

Washington's new ruling elite also must unleash the full might of America's domestic energy potential. With global energy prices having come back down to earth, there is no better time for lawmakers to drive reforms that will pay dividends in the decades to come.

Legislation introduced last Congress by Arizona Rep. John Shadegg would remove the regulatory obstacles that have stifled development and production of domestic fossil fuels. Heritage Foundation economists calculate that, if implemented, Mr. Shadegg's approach would increase U.S. energy output by up to 2 million barrels of oil equivalent per day, lead to creation of 270,000 new jobs (almost all of them well-paying positions in our besieged manufacturing sector), and boost GDP by $164 billion. Not bad.

Ushering in what some have dubbed a "nuclear renaissance" also should top the new president's agenda. This means removing the arduous regulatory impediments to building new nuclear power plants, opening the Yucca Mountain storage facility for spent nuclear waste, introducing market reforms to nuclear waste management, and stopping all energy subsidies.

According to a study by the nonprofit American Council on Global Nuclear Competitiveness, a nuclear investment plan that consisted of 52 reactors, a nuclear-fuel recycling plant and four enrichment plants by 2030 would create 350,000 jobs and provide clean, inexpensive power to more than 50 million American homes.

Finally, our military must be prepared to meet a more diverse and uncertain list of threats - terrorism, rogue regimes that possess the capability to produce weapons of mass destruction, high-seas piracy, securing American borders, or responding to natural disasters at home or abroad - than at any time in our history. As has often been noted, however, our armed services are overstressed.

First, we need a larger military. At the beginning of the Clinton administration the Army was nearly twice as big as it is today. By 1996, the Army's force structure had been slashed from 18 divisions during Operation Desert Storm to only 10 - its size today.

America's military hardware and platforms, moreover, also need to be replenished. In the late 1980s, the Navy boasted 566 ships. Today, it struggles to sustain a fleet of only 283 ships, 30 short of the 313-ship threshold that the Navy's top brass says will be required by 2020. Likewise, our fleet of B-52 bombers dates from the early 1960s. The current plan, due to funding shortfalls, is to deploy the B-52 until the mid-2030s. Flying the B-52 in combat in 2030 would be as ridiculous as flying the B-17 bomber, built in the late 1930s, in combat today.

The bottom line is that keeping America safe is the federal government's first and most legitimate responsibility. Lawmakers and the new administration must dedicate whatever it takes (the most reliable estimate is at least $50 billion per year) to address these unmet national security needs.

This isn't an easy agenda. But then, these aren't easy times. Let's all hope President Obama and his partners on Capitol Hill are up to the arduous tasks ahead.

Mike Franc is Vice President for Government Relations at The Heritage Foundation.

About the Author

Michael Franc Distinguished Fellow
Government Studies

Related Issues: Taxes, Energy and Environment

First Appeared in the Washington Times