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.
© Scott Gillette, 2000
View expressed are those of the author and do not necessarily reflect those of Political USA.