Timothy Wood
American notes
In January United States President George W Bush was regarded as an illegitimate usurper who would stumble in the absence of an authoritative mandate. In May he is having an early last laugh with a budget and tax relief package that is nearly everything he campaigned on.
Intriguingly, the battle over the US budget has been paralleled by conservative victories in other parts of the world that echo Bush’s conservative economics.
In Italy, Silvio Berlusconi’s Forza Italia has achieved, despite the Economist’s best efforts, a popular mandate once unthinkable in the mess of post-war coalition politics. Likewise, the people of British Columbia, Canada, threw out the long-entrenched New Democratic Party that pandered to populist causes and resorted to fiddling the budget to hide massive debt.
The changes have been driven by voters finally taking the time to observe stark economic differences between success and failure.
The Republican Party now wants to drive these differences home in the US and the message is clear to the rest of the world the US is looking forward to ferocious merit-based competition. The sentiment was captured in a landmark interview the Financial Times did with Secretary of the Treasury Paul O’Neill last week.
“More and more in the broadest sense we are in competition with the rest of the world, and to the degree that we burden our individual citizens and our companies with costs that effectively raise the prices now in a global sense compared to the prices of other places we are unfairly disadvantaging our income- and wealth-producing activity.
“We’re putting on a burden that’s unnecessary and limiting in terms of our world competitiveness.”
The message may seem rather mercantilist, but it is undergirded by a philosophy that resonates with informed voters. Bush’s economic right hand, Larry Lindsey, put it best when he said recently: “There is a general moral question about how much of a person’s labour a government has a right to in peacetime.”
O’Neill has made it clear that the new administration wants to ensure that government does not crowd out individual achievement.
To that end, the first order of business has been to slash taxes in a way that hard-core Ronald Reagan supply-siders might cheer. Marginal tax rates are being reduced, the marriage penalty is being done away with and estate taxes are under review.
To be sure, the $1,35-trillion saving to taxpayers over 10 years is infinitesimal against what the government soaks up each year, but it is an important step in reforming a half-century old entitlement mindset in Congress. Year after year the government assumed it had a right to an inflation-adjusted increase in its spending. No longer.
But O’Neill wants to go even further, seeking a flat tax and perhaps abolishing capital gains and even corporate taxes in an effort to ensure that the government’s portion of the economy falls much lower than the current 18% of gross domestic product it accounts for.
The flat tax has been an undercurrent in the US for a long time, becoming quite popular in the mid-1990s. But it has never had a real champion beyond flamboyant publisher and presidential hopeful Steve Forbes.
The idea is simple and powerful in O’Neill’s words: “The tax code is 9 500 pages and while every word has a reason and a sponsor and every piece of punctuation has a reason and a sponsor, when you put the 9 500 pages and punctuation together it’s just an abomination.”
Abolishing corporate taxes is anathema to many, but O’Neill is undeterred: “The clear economic truth is that businesses and corporations don’t pay taxes, they just collect them for the government.
“However much people might not like to believe it taxes that are collected by businesses and corporations come from the prices that people pay for the goods and services,” he says.
Getting rid of corporate taxes fits snugly in the simplification idea. Both payers and collectors waste enormous sums of otherwise useful cash on managing tax affairs. It is really just another tax that gums up the economy and raises consumer prices.
The capital gains tax, introduced to South Africa when it is being abandoned worldwide because of its negative impact, is also on the chopping block because it is an impediment to capital formation and saving.
O’Neill’s challenge is one South Africa needs to take seriously. For everything the country has achieved politically, its economic and fiscal policies are far too timid. Globalisation is merely an everlasting contest for the allocation of wealth-creating investment.
Get sentimental or coy about competing and you simply surrender your supper to another country. The US is hungry.