The Magazine

A Detour Past Congress

What Bush can do for the economy.

Jan 22, 2007, Vol. 12, No. 18 • By CESAR CONDA
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While the prospects for pro-growth legislation--tax reform, personal retirement accounts, pro-trade deals, and legal reform--may have ended with the election of the new Democratic Congress, there is an array of actions that President Bush could take to help the economy, without having to go through Congress.

To be sure, the situation in Iraq will continue to dominate the president's agenda for the rest of his term. But the economy remains a top concern among voters, despite solid growth and low unemployment. For instance, a December poll by the American Research Group found 7 percent of Americans say that the national economy is getting better, 43 percent say it is staying the same, and 46 percent say it is getting worse.

Fortunately, there are unilateral actions President Bush can take on the economy. Here are five pro-growth measures to start with:

* Instruct the Treasury Department to index capital gains to inflation. Since 1913, the Treasury has ignored the effects of inflation when calculating capital gains taxes. As a result, the effective tax rate on real gains is about twice the current rate of nominal gains, according to estimates by the Congressional Budget Office. The failure to index capital gains taxes to inflation punishes individual investors by reducing their real returns and discourages long-term investing.

Former Reagan Assistant Attorney General Charles Cooper has long argued that because Congress left undefined the term "cost" in the capital gains section of the tax code, Treasury has the power to issue a regulation changing the definition of "cost" from nominal dollars to inflation-adjusted dollars. Granted, this would be a highly unorthodox move. But if the Congress objects, it can pass a bill to prohibit indexing.

* Revive the presidential task force on regulatory relief. All too often, the cost of government regulation on the economy outweighs the purported benefits. According to economist Mark Crain, the cost of regulation in 2005 was $1.127 trillion, exceeding the $894 billion in taxes paid by individuals and $266 billion paid by corporations. Under the Bush administration, the number of Federal Register pages--the depository of all proposed and final regulations--increased from 64,438 in 2001 to 73,870 in 2005.

In 1981, President Ronald Reagan issued an executive order establishing the Task Force on Regulatory Relief, chaired by Vice President George Bush, to oversee the regulatory process and establish an appeals mechanism if agencies disagreed with the Office of Management and Budget's regulatory relief proposals. The Reagan-Bush task force was a success: Federal Register pages were cut from 57,736 in 1981 to 50,616 in 1988.

High level White House clout is the key to getting agencies to conduct more rigorous cost-benefit analyses and to actually reduce excessive regulation. President Bush should revive the regulatory relief task force that his father once chaired, because cutting costly regulations amounts to cutting hidden taxes on the economy.

* Withdraw IRS regulation on bank deposit interest reporting. Three days before the Clinton administration left office, the Internal Revenue Service proposed a regulation that would require U.S. banks to report the interest they pay to all foreigners with bank accounts in this country, despite the fact that Congress deliberately has chosen not to tax deposit interest paid to foreigners in order to attract capital (according to the latest Treasury data, foreigners have more than $3.5 trillion in U.S. financial institutions). The supposed goal of this rule was to catch U.S. citizens who classify themselves as foreigners in order to avoid taxation. But there has been no evidence of such tax avoidance; it is more likely the Clinton administration wanted to help foreign governments track--and tax--flight capital.

If approved, this proposed regulation would cause money to leave the U.S. economy to other nations that would roll out the red carpet to welcome this capital. A study from the Mercatus Center estimates that $87 billion of deposits would flee. Withdrawing this regulation would send a signal to the world's investors that the Bush administration welcomes capital to our shores and supports the notion of tax competition between nations.