With the election still a week away, Congressman Barney Frank (D-MA), chairman of the House Financial Services Committee, is already setting the stage for drastic cuts in defense spending, higher taxes, and bigger government. In a meeting with the editorial board of The Standard-Times, a local Massachusetts newspaper, Rep. Frank said he would support a 25 percent cut in military spending, a tax hike on the wealthy, help for state healthcare expenses, food stamps, and extended unemployment benefits. Congressman Frank’s plan hardly represents economic stimulus.
This misguided proposal is based on two incorrect assumptions. First, that military funding is excessive, and second, that tax and spending hikes will stimulate the economy.
Cutting National Defense
In order to conclude the military deserves an enormous cut in funding, one must assume the military is currently over-funded. This is not the case. In fact, current spending levels are below historical averages despite the wars in Iraq and Afghanistan. Even after the September 11th attacks, national defense spending has only risen 1 percentage point, from 3 percent to 4 percent of GDP. When compared with spending during the cold war in the 1980s of 6.2 percent and the Vietnam War of 9.5 percent, current levels are hardly excessive.
Further, providing for the common defense — as prescribed by the Constitution — is a fundamental responsibility of government. Indeed, it is the first responsibility without which all other priorities would not be possible.
Tax and Spending
Growing the size of government through tax and spending increases will not stimulate the economy. Congressman Frank doesn’t deny his intensions, flatly stating: “We’ll have to raise taxes ultimately.” His plans include extending unemployment insurance and increasing funding for infrastructure projects among others. While this spending may be well intentioned, infrastructure spending shifts resources from one part of the economy to another, creating little new employment. Other spending, such as increases in unemployment insurance could actually exacerbate the situation by allowing unemployed workers to stay out of work longer to collect benefits, and encouraging employers to wait longer to rehire laid-off workers. Congressman Frank seems to ignore pro-growth policies that may actually lead to sustainable economic growth.
Heritage Proposes a Pro-Growth Approach
There is a better way. Bill Beach, Director of Heritage’s Center for Data Analysis (CDA), laid out a pro-growth tax, energy, and spending policy that would lead to better results than misguided tax increases. His plan urges Congress to:
Make the 2001 and 2003 tax reductions permanent. “Since nearly all major capital undertakings last beyond this three-year period, it is likely that making all or most of the Bush tax reductions permanent would stimulate economic activity today as well as in 2011. If Congress increases taxes, then investors will find more favorable economies to support and business owners will, as much as they can, locate their expanded activities in other countries with more favorable tax regimes.”
Accelerate Tax Depreciation. “Past economic slumps have proven that accelerating the tax depreciation of capital equipment and buildings or the one-year expensing of business purchases that would otherwise be depreciated over a longer period of time for tax purposes can help during periods of slow growth.”
Lower the Corporate Profits Tax. “Such a policy would enhance our competitive standing worldwide and significantly reduce the incentive for U.S. firms to relocate to lower tax countries.”
These changes, in combination with energy and long-term spending policies that encourage growth, will effectively stimulate the economy. Beach asks a simple question when assessing various stimulus plans: “Is the proposal likely to raise the economy to a sustained, higher level of growth?” Congressman Frank’s plan fails the test.