The media often portray “gridlock” and political disagreement as driven by partisan politics, as if politics is simply about “my team” versus “your team.” But, in fact, most of the time the disagreements are profound and significant.
For instance, right now our politics is gridlocked over a deep disagreement about what stimulates economic growth. The Obama administration and Congressional Democrats believe that government drives and guides economic growth, both as a spender and as a regulator, and that the purpose of tax policy is to equalize economic outcomes by raising the tax burden on the wealthy and by lowering taxes on lower income Americans.
That’s why almost every time the President talks about economic growth he starts talking about teachers and firefighters, and it’s why Nancy Pelosi says unemployment benefits “create(s ) jobs faster than almost any other initiative you can name.” It’s also why the President championed an ill-advised reduction in the payroll tax.
Republicans, on the other hand, have a sincere and empirical belief that economic growth is driven by private sector investment. So they champion policies designed to increase investment by lowering taxes, and by making sure businesses can deduct investment in plant equipment and research & development.
Right now this disagreement is being played out in a high stakes political debate. The President argues for an extension of the “temporary” payroll tax cut, assuming that it is good for the economy, and wants to pay for it with a tax increase on the wealthy, since that’s what he thinks tax policy is for.
Republicans, on the other hand, think the payroll tax cut was a form of social relief rather than economic stimulus, because it does nothing to increase investment. They believe that higher taxes on the wealthy are in fact higher taxes on investment, and thus will further harm economic growth. Republicans believe taxes should be lowered, rather than raised, on the individuals and companies that drive economic growth and create jobs through investment.
Both sides can’t be correct. Meanwhile, the incentives for investment are about to get even worse. That’s because the Section 179 investment deduction for small businesses is scheduled to drop precipitously from $500,000 in 2011 down to $125,000 in 2012, and it’s expected to drop all the way down to $25,000 in 2013.
Make no mistake—if private sector investment drives economic growth, letting the Section 179 investment deduction drop so dramatically in 2012 and 2013 will lead to even slower economic growth and job creation.