Data released in the final days of 2004 and in early 2005 reinforce expectations for continued economic strength. Industrial production, which started to slide in mid-2000, began to recover again by the end of 2001 and reached a new high in December of 2004. Oil prices have fallen from their highs. And business optimism, as measured by a periodic survey released by the National Federation of Independent Business, reached a 20-year high in December, driven especially by business plans for new hiring.

Tax Relief: Why it Worked

The recent economic performance is remarkable considering that the U.S. economy was in a recession by early 2001, faced a major national emergency in September 2001, and endured the revelation of major corporate scandals and two wars. Yet the recession of 2001 was relatively short-lived and shallow, and it gave way to a robust expansion largely because the Congress responded to the President's call and enacted tax relief in 2001, 2002, and 2003.

Lower tax rates enacted in 2001 reduced obstacles to growth by increasing the incentives to work, save, invest, innovate, and start new businesses. In 2002, the President worked with the Congress to improve investment incentives, which reversed a two-year downward trend in business investment; as of the fourth quarter of 2004, business investment had increased seven consecutive quarters.

Contributions to Growth in Real Per Capita
Disposable Income

Average annual percent change

6

5

4

3

2

1

0

-1

-2

1991-1995

1996-2000

2001:2-2004:3 Taxes went from being an extra drag on the economy in the 1990s to becoming a powerful stimulus through the President's program.

In 2003, the President worked with the Congress to accelerate the 2001 tax relief. Also in 2002, an improvement in the tax treatment of small business investment helped many entrepreneurs put more of their capital to work in growing their firms. And the President won significant reductions in the tax rate on dividends and capital gains. This added tax relief reduced distortions arising out of the tax code that unfairly and unwisely subjected some forms of investment income to excessively high tax rates, and fundamentally improved the investment and saving climate in the United States. Lower dividend and capital gains tax rates also significantly reduced the incentives that previously drove businesses to rely unduly on debt financing.

POLICIES FOR A STRONGER ECONOMY

The economy has rebounded from its period of weakness, and even with a recent spike in energy prices and continued weak economic growth among our trading partners, it appears poised for continued strength. An extended economic expansion is far from assured; however, the Administration will continue to advance policies that promote growth, opportunity, and ownership. These steps will help America remain the world's best place to do business and create jobs.

Tax Policy

As outlined above, tax relief was a primary reason for the economy's rebound. In 2004, the President signed into law the fourth tax cut in as many years to maintain that tax relief, including

the new 10-percent tax bracket, the marriage penalty relief, the increase in the child tax credit, dividend tax relief, and other provisions that will continue at their current levels in most cases through 2010. The President has called on the Congress to make this tax relief permanent so that families and businesses can invest and plan with confidence.

Even with all the positive changes the President has signed into law, the Federal income tax code still discourages economic growth in many ways. For example, the income tax continues to discourage saving for many taxpayers, and so the President has proposed Retirement Savings Accounts, which would replace the complex array of retirement saving incentives currently in the tax code, such as IRAS, Roth IRAs, and similar saving vehicles. The President has also proposed Employer Retirement Savings Accounts to simplify the saving opportunities individuals have through their employers. The President also proposed Lifetime Savings Accounts that would, for the first time, allow individuals to save on a tax-preferred basis for any purpose. While important to all Americans, Lifetime Savings Accounts are especially important to low-income individuals and families who need to save, but cannot afford to lock up funds for retirement that may be needed for an emergency in the near-term. The President also proposed Individual Development Accounts that would give extra financial incentive to certain low-income families to set aside funds for major purchases, such as a first home.

For generations, the tax code has encouraged Americans to spend first and save second. These proposals would level the incentives to save and consume, thereby promoting a culture of saving in America that is essential to future prosperity.

These saving proposals would help address one of the tax code's many flaws, but they cannot address all the problems the tax code presents for the economy. Therefore, the President has called for a fundamental reform of the Federal income tax system to make it simpler, fairer, and more pro-growth. The Federal income tax code is not just a complicated mess; it is also a maze of special-interest loopholes that cause America's taxpayers to spend more than six billion hours every year on paperwork. Work, entrepreneurship, investment, ownership, and even education are discouraged by our tax system. Businesses routinely make decisions about the deployment of capital not on economic merits alone, but also on the relevance of certain chapters of our tax code.

The President appointed a bipartisan Advisory Panel on Fundamental Tax Reform to report to the Secretary of the Treasury by July 31, 2005, on options to reform the tax code. These options will form the basis of efforts to enact reforms that meet the President's objectives of simplification, fairness, and a more pro-growth tax system, while recognizing the importance of homeownership and charity to American society.

Litigation Reform

The costs of litigation per person in the United States are far higher than in any other major industrialized nation in the world. Lawsuit costs have risen substantially over the past several decades, and a significant part of the costs go to paying lawyers' fees and transaction costs-not to compensating the injured parties. The litigation explosion is clogging our civil courts and threatening jobs across America. Businesses with $10 million or more in revenue bear an average annual cost of $150,000 from litigation. Small businesses with less than $10 million in revenue bear 68 percent of business tort liability costs, even though they only take in 25 percent of business revenue.

The President is pushing the Congress to pass legislation that reduces the burden of frivolous lawsuits on our economy. The President supports enactment of medical liability reform, class action lawsuit reforms, and asbestos litigation reform to expedite fair resolutions and curb the costs of lawsuits for all Americans.

Frivolous lawsuits and excessive jury awards are driving many health care providers out of communities and forcing doctors to practice defensive medicine. This reduces access to medically necessary services and raises the costs of health care for all. The President has proposed proven reforms, such as common-sense limits on non-economic damages, to make the medical liability system more fair, predictable, and timely.

The President's proposed class action reforms seek to limit the abuse of large, nationwide class action cases and provide justice to the truly injured parties. Class actions are an important and intrinsic part of the U.S. legal system. However, class actions are heavily abused, which in turn harms affected parties and undermines the American judicial system. In particular, injured parties often receive awards of little or no value while lawyers receive large fees. The proposed class action reform legislation recognizes that large interstate class actions require Federal court jurisdiction because they typically affect more citizens, involve more money, and raise more interstate commerce issues than any other type of lawsuit. In addition, the President wants to end the practice of "judge shopping," where trial lawyers file cases only in jurisdictions likely to favor plaintiffs. These reforms do not alter the right of a plaintiff to bring a legitimate claim, or change controlling substantive law, but provide additional protection and information to class members.

Asbestos cases have generated the longest-running mass tort litigation in U.S. history and have led to the bankruptcies of at least 74 companies and to more than 50,000 lost jobs. Within the past few years, there have been sharp increases in the number of asbestos claims filed annually. The current system is costly to administer, with total projected costs estimated at between $200 and $265 billion. These costs have driven exposed defendants into bankruptcy and may leave little or no funds to pay future asbestos victims. The President has stressed the need for reform and urged the Congress to find a fair and permanent solution.

Regulatory Reform

Excessive regulations can prevent the creation and growth of new small businesses and the jobs they create; in the first term, the Administration slowed the growth of new rules by 75 percent. The President wants to streamline regulations further and reduce paperwork to alleviate the burdens that unduly handicap America's entrepreneurs and job creators. The Administration is taking action in several areas to streamline Federal regulations, while still moving forward with crucial safeguards for homeland security, human health, investor and environmental protection. Regulations should be analyzed based not just on their benefits, but also on their costs. When regulations are proposed, the scientific research supporting their enactment must be sound, and subject to careful scrutiny. And when regulations are out of date, they must be reviewed for relevancy, and to make sure the benefits they produce are at least equal to their costs.

Health Care Costs

The rapid pace of health care inflation slows job growth, reduces the growth rate of worker wages, and makes health care less accessible and less affordable for consumers. When employers have to pay more for health coverage for their workers, they can afford less for worker paychecks. Ultimately, the increase in overall labor costs to U.S. employers, as a result of rising health care costs, damages our economy's global competitiveness.

Some employers, especially small businesses, struggle to provide even basic health insurance for their employees. State and national rules often prevent small businesses from banding together to purchase health coverage at the same rates paid by large companies. The President proposes to address this problem through Association Health Plans, which would permit cross-State health-purchasing alliances of small businesses and other organizations. In addition, the President

would make health care more affordable by offering tax credits for employer contributions to Health Savings Accounts. These accounts allow employees to save tax-free for their out-of-pocket health costs, and are paired with high-deductible insurance policies that cover hospitalization and other major health care costs.

Among the drivers for health care inflation are the out-of-control costs that come from unnecessary medical liability lawsuits. As mentioned previously, the President has an aggressive plan to reform our medical liability system. These reforms are critical because frivolous lawsuits have already chased many doctors out of the practice of medicine and make health care less accessible for millions of Americans. And for the doctors who remain, these lawsuits are an ever-present fear. Doctors wary of getting sued practice defensive medicine, ordering more laboratory tests or examinations than are medically necessary, which ultimately drives up health care costs for everyone. And because of the number of lawsuits-even those that are dismissed-insurers for doctors and hospitals raise premiums, and these higher costs of practicing medicine are passed on to consumers. Even if your doctor has never been sued, and even if you rarely visit the doctor, your health care has become far more expensive because of the abuse of our medical liability laws. Those States that have adopted common-sense reforms, such as caps on punitive damages and limits on non-economic damages, have seen smaller and more manageable increases in doctor's liability insurance premiums. The President intends to work with the Congress this year to adopt similar reforms nationally.

The President also supports investments in and accelerated deployment of health information technology that will further help to control rising health care costs. These technologies can reduce medical errors, improve patient care, and save doctors and nurses time, ultimately saving our health care system dollars.

Another way to control rising health care costs is by closing loopholes that slow the movement of more affordable generic drugs to the marketplace. The Administration has taken action to improve access to generic drugs by: limiting the time a drug company can delay the marketing of a generic competitor; instituting rule changes to prevent drug companies from blocking the marketing of generic versions by using patents on minor features; and tightening the rules on patent applications so that false statements to get a patent result in criminal charges. These actions are bringing generic drugs to the market more quickly, and will save American consumers $35 billion over 10 years-savings that go not only to the consumers, but also to Medicare and Medicaid programs administered by the States.

Trade

President Bush's top economic priority is the creation of more jobs for American workers. Free and fair trade helps create more higher-paying jobs for American workers by opening new markets for American products and services, expanding choices for American consumers, and attracting foreign companies to invest and hire in the United States. America is economically stronger when we participate fully in the worldwide economy because 95 percent of the potential customers for American products live outside the United States.

Trade agreements like the North American Free Trade Agreement and the World Trade Organization (WTO) have generated benefits-lower prices and more choices-totaling $1,300 to $2,000 annually for the typical U.S. family. Lowering barriers to trade by even one-third will boost the world economy by as much as $613 billion—and the U.S. economy by $144 billion a year. To the typical family of four, that means an additional $2,000 or more a year in savings.

Exports have reached record levels during the Bush Presidency. President Bush, working closely with the Congress, won Trade Promotion Authority to enable quicker passage of trade agreements. This was the first time the Congress approved Trade Promotion Authority in eight years. Using this