A road map for future U.S. prosperity

Economic growth is not a mystery. The rule of law, property rights and sound money are necessary to create the right foundation for productive activity. Low tax rates and a limited burden of government build upon that foundation by minimising the barriers to work, saving and investment, says the Heritage Foundation.

Therefore, to enhance economic performance, the U.S. Congress should make the pro-growth portions of the Bush tax cuts permanent and implement reforms to shift the Internal Revenue Code closer to a simple and fair flat tax, says Heritage.

Congress should also cap the growth of federal spending:

Government is too big and is growing too fast; after falling to 18.5 per cent of gross domestic product (GDP) at the end of the Clinton years, the burden of government has since jumped to 20.6 per cent of economic output and most of the additional spending is unrelated to national defence and homeland security.

The federal budget should be significantly reduced, but even a modest level of spending restraint would shrink the burden of government as a share of economic output.

If the Bush Administration had simply let spending grow at the same rate as it grew during the Clinton Administration, federal outlays today would consume only 16.9 per cent of the economy.

This degree of fiscal discipline would have produced a $184 billion surplus.

However, there is still hope for the future, says Heritage. Merely holding spending increases today to 4 per cent annually – approximately the rate of inflation plus population growth – would reduce the burden of government to about 19.1 per-cent of GDP by 2011 – 1.5 percentage points below its current level.

Source: Daniel J. Mitchell and Michelle L. Muccio, Tax Rate Reductions Strengthen the Economy, But Excessive Government Spending Threatens Long-Run Performance, Heritage Foundation, Backgrounder #1975, September 28, 2006.

For text: http://www.heritage.org/Research/Economy/bg1975.cfm

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 10 October 2006