Throughout its existence, the United States has taken pride in its economic system, which is based on low taxation and a tight budget. That is the basis of the American dream. Come, build a business, work hard and the government will behave with restraint, taking a modest bite of the fruits of your labor and leaving you with the lion's share.
The American approach birthed an explosion of entrepreneurial spirit and impressive economic growth over decades and decades. Americans learned that low tax is the best growth driver in town. Thanks to low tax, they achieved the famous prosperity on which America's might, in peace and in war, is based.
Then along came Barack Obama and changed direction. Last week, he presented a gigantic budget for the year 2011, characterized by a terrifyingly large deficit. His budget boils down to the very antithesis of the American dream.
America's budget for 2011 is $3.8 trillion, and the deficit is projected to run at 11% of America's gross domestic product, or around $1.6 trillion. Never before has the United States run figures like that, at least during peace time. It has during war - for instance during the U.S. Civil War of 1861-1865 or during World War II. But then the working assumption was that after the war, spending would drop, and the budget would return to normal.
This time, there's no such working assumption. When presenting his plan, Obama remarked, "We won't be able to bring down this deficit overnight." And with that the president of the United States shut down the growth engine of the American economy and condemned the nation to a protracted depression.
One of the worst things about a gargantuan deficit is the need to raise taxes. Obama's plan is to raise marginal tax from 36% to 39.6% and also to hike taxes on capital gains and dividends.
So far Israel has gone the opposite direction. We have been cutting expenditure and lowering tax, to make our economy more attractive. Investors flocked in and the economy flourished.
Here, too, some claimed that government spending couldn't be lowered any more, so taxes shouldn't be cut any more.
The ones saying that are people who have spent their entire adult lives in civil service (at the Bank of Israel, the Finance Ministry) or in academia. As far as they're concerned, the country's public sector is satisfactorily efficient and thrifty. So if the aim is to improve service to the citizen, there's no choice but to increase budgets. Balderdash, of course.
Take the example of the astronomical pay raises now being handed out at the Bank of Israel, while the private sector tightens its belt to survive. Maybe the top people at the Bank of Israel should drop by an actual factory to see how real people live.
Recently, the head of the treasury's budget department, Udi Nissan, has been making worrisome noises. He's no fan of more tax cuts. But before he lavishes more money on government, he'd do well to seriously tackle the waste and redundancies in the defense, education and other ministries. We'd have billions to redistribute.
In other words, service to the citizen could be improved through streamlining the civil service,not heaping more money on it. But that would be difficult and unpopular.
Tax cuts are immediately beneficial for the economy. We saw that in 2003, when the budget was cut and taxes were, too. The economy boomed, achieving 5% growth a year.
Then, too, the opponents of the budget and tax cuts wailed, and the very same people are moaning today, the same professors and central bank officials. They erroneously think that economics is a static science, so for them it's just a question of dividing the pie, not thinking of ways to increase it. In 2003, the Bank of Israel claimed the budget cuts would merely increase the deficit and therefore the national debt. What happened was the opposite.
The tax cuts wound up increasing total tax revenue because of the surge in economic activity (as Laffer curve theory - taxable income elasticity - postulates). When tax revenue increases, the lot of the poor can be improved, which is what happened here under Ehud Olmert. He had more tax revenue and therefore more to spend on the old, the Holocaust victims, on children at risk, on welfare and education and, yes, defense too.
That year, 500,000 people joined the workforce as demand for workers increased. Most were lower or middle class. So how can one claim that growth doesn't filter down? It does, and it's the only thing that can counter poverty and inequality.
Netanyahu and Steinitz must ignore the bad example set by the leaders of the West. They should continue to streamline government and cut taxes. In other words, they must do exactly the opposite of Obama.
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