Deficit reduction and economic growth.

• Author: Roy, P. Norman
• Position: From the President

Analysts agree that in the November election Americans voted for change. FEI members have long believed that there is a need for change in national policy to promote long-term economic growth and to provide the structural foundation for achieving clearly defined national goals. To help in the debate over just what changes are needed, FEI's Executive Committee in January approved two position papers--on economic growth and health care reform--prepared by ad hoc committees composed of representatives from relevant FEI technical committees. These position papers have been distributed to members of the Administration and to Congress, and the key recommendations were published in the February 1993 Briefing.

FEI believes that the federal deficit must be eliminated if the United States is to enjoy long-term growth. We do not expect this to be accomplished overnight, and we do not propose specific spending cuts or tax increases. Instead, FEI proposes basic structural reforms in tax policy, government spending, budget process reform, regulation and federal financial management reform, a continuation of our longstanding view that this would eliminate much waste and abuse. The most controversial elements of the leading deficit reduction proposals, both within FEI and in the nation, are taxes and spending.

On tax policy, FEI's position maintains that there are three major flaws in the current tax system--its complexity and the enormous cost of compliance, its bias against savings and investment, and its bias against worldwide competitiveness for U.S.-based firms. FEI recommends that the existing federal income tax system be modified to minimize complexity and costs and to remove these biases, either by improving the current system or by replacing income as a basis for taxation.

Improving our tax system will not be easy. Economists have argued over the best type of tax system for more than 200 years. Adam Smith, in his 1776 Wealth of Nations, propounded a progressive income tax. In 1822, David Ricardo seems to have agreed, writing, "Almost all taxes on production fall finally on the consumer." But, by 1871, John Stuart Mill...