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Tax Cuts:  Like Father, Like Son?

By Scott Gillette
sgillette@politicalusa.com

12/19/2000

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The advent of the Bush Administration should mean that some sort of tax reduction is in the cards. But the key word there is “should”. If one takes the adage “like father, like son” to heart, then W.’s commitment to tax cuts in the heat of political negotiations should not be taken for granted.

You only need to remember what happened in 1990, when Budget Director Richard Darman convinced President George Bush Sr. that tax increases were needed in order to shrink the budget deficit. Bush agreed, and increased the top marginal rate from 30% to 33%, and even worse, raised the capital gains tax.  This decision delighted Democrats: they were able to achieve their policy goal without having to suffer the political rebuke that comes with such an agenda. Moreover, Bush Sr. not only defied his own signature promise (“Read my lips, no new taxes”), but also provoked a mild recession by raising taxes, and actually increased the deficit to boot. This double whammy led to his defeat in 1992.

Now I recognize that the year 2000 is not 1990 in two significant ways. First, the elder Bush’s advisers and the Democratically-controlled Congress were pushing Bush Sr. in a direction without a sufficient countervailing force against tax increases. (Interestingly, Newt Gingrich’s campaign to oppose those tax increases was unsuccessful, but increased his prominence enough so that he ultimately would become Speaker of the House in 1995.) Today, it is almost inconceivable that the newly elected Congress would increase taxes, although its commitment to tax cuts appears to be shallow. Moreover, Vice-President elect Cheney, who appears as if he will be a co-President of sorts, is committed to lowering tax rates as sound public policy, and will not allow W. to be lulled into believing that tax hikes can have a positive impact. Finally, both W. and his father are well aware of what happened in 1990, and would be unlikely to repeat the same mistake.    

Second, in 1990, the federal government had a budget not only in deficit, but also burdened by the fallout of the savings and loans crisis; moreover, the economy was suffering from sluggish growth as well as inflationary pressures. Today, our economy has experienced a significant long-term boom, and it is difficult to argue that tax cuts would bring back deficits with a straight face. (Although I actually saw Senator-elect Hillary Clinton proclaim on the stump that tax cuts would not only make the surplus disappear, but also promote a recession as well. Yikes.)

The biggest reason that W.’s tax cut plan could not bring back deficits is that his plan is simply not big enough. Let’s just say for argument’s sake that tax cuts do nothing to improve the economy by increasing the incentives for individuals to work, save and invest. In other words, let’s say that a dollar of tax cuts means a dollar of revenue loss. Now, Bush’s tax plan is said to cost $1.3 trillion, but the tax cuts are implemented bit by bit over a ten-year period of time. His tax cuts amount to a 1% cut in income taxes each year for the next 10 years. The government collects about $1 trillion income taxes each year, so that means that W’s cuts mean $10 billion in less revenue each year.

Now, if the current surplus of $237 billion suddenly became $227 billion, how could that make the deficit disappear, or threaten Social Security recipients, or somehow cause a recession, regardless of which economic theory one espouses? Simply put, that tax cut would do nothing of that sort, and to say otherwise is to be disingenuous.

Unfortunately, the debate over the budget has favored the interests of liberals and Democrats, and the last few years have proved that point. What happens is that the Republicans offer a tax cut package, and the Democrats declare that we cannot afford such a cut. Then the Republicans give up their tax cut plans. Then, when it comes to significant spending increases, all of the sudden there is enough money to go around. Moreover, many Republicans want to get the pork back to their Congressional districts, so they play along with the charade. In the end, the government wins, and the people who fund the government lose, year after year after year.

It does not have to be this way under the Bush Administration. It now appears that W. will have to pass on income tax reductions, but there will be reductions in the estate tax and the marriage penalty tax. This is mild stuff, but it’s a start. But in order to have real tax reform, there has to be a paradigm shift in economic thinking in Washington.

Supply-side economics culminated in Reagan’s tax cuts of 1981, which led to the vastly improved economy we have today compared to that period of time. Supply-side economists posit that if one sufficiently reduces the barriers to economic activity by reducing certain tax rates, a society can experience far stronger economic growth and greater government revenues over the long-term. This is why saving Social Security programs for the Baby-Boomers, and insuring that lower-income communities have a shot at the American Dream, and reducing the debt burden in the coming decades all require significant tax cuts.

This is why the estate tax, the capital gains tax, and taxes on Social Security income should be eliminated. This is why enterprise zones in poorer areas of the country should experience tax burdens of no more than 8% for thirty years, instead of three. Finally, this is why income tax rates should be reduced by 10% or more each year, instead of 1% a year. None of this will happen soon, but by cogent persuasion and sustained activism, the tax burden can be lowered to insure not only stronger economic growth and opportunity, but also greater government security as well. The public policy arena has few better causes. 

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© Scott Gillette, 2000

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