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December
9, 2002, 11:00 a.m.
Vacancies & Opportunities
The
O’Neill and Lindsey resignations are good, but not equal.
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ast week's resignation of Treasury Secretary Paul O’Neill, while a bit
of surprise, was not unexpected. By all accounts O’Neill was a major roadblock
on the path to eliminating the double taxation of dividends. His resignation
paves the road for some pro-growth tax reform.
The resignation of
White House economist Larry Lindsey was a bit more of a surprise. He favored
lower taxes, but he couched his arguments in Keynesian terms. Nevertheless,
Lindsey wanted to put money in people’s pockets in order to stimulate
the economy, and his thinking was sound.
Lindsey's money-in-the-pocket
approach would equate a dividend exemption capped at some number (say
$1,000) with a rate cut. That's a good view. The tax cut implies lower
government spending, therefore the net impact on aggregate demand is zero.
Thus, if a tax-rate cut had any effect it would be because it altered
the economy’s incentives to work and produce. Lower tax rates, and not
the dividend exemption, that take us to the “Promised Land.”
While the loss of
Lindsey is much less welcome than the loss of O'Neill, the two resignations
are a great opportunity for the Bush administration. Now Bush will be
able to appoint a pro-growth Secretary of the Treasury. Combine that with
the appointment of people who believe in dynamic scoring at the CBO and
we have the makings of a major inflection point in tax policy.
The administration
will be able to propose lower tax rates and the CBO will be able to score
them using dynamic estimates. The tax rates will be larger than they would
have been under the static scoring system, and lower rates without caps
will be more likely. The caps would eliminate much of the feedback that
is so important to dynamic scoring.
If George W. Bush
appoints pro-growth people to these vacant posts we could be in for a
great economic ride.
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