Pass the Bush tax cut now

By W. James Antle III
web posted February 12, 2001

Shocking as it may be to those who use the New York Times editorial page as their source of all economic information, the following proposition is self-evident to most: Lowering taxes gives the American people more choices and improves the economy.

It should be painfully obvious to all but the most unreconstructed statist dunderhead that the private sector, not government, is the engine of economic opportunity. The best way to unleash the creative forces of the market and expand these opportunities is to loosen the government's grasp on innovators, entrepreneurs and wealth-producers. In doing so, products are improved, businesses are born, investments are made, jobs are created and real wealth is generated.

Proponents of income redistribution may momentarily satisfy clients drawing government checks, but they have never improved a nation's overall material conditions through legalized plunder. All the fiery speeches in the world by Ted Kennedy do not create a single job or add to Americans' material wealth. The end result may be legislation that slices the economic pie differently, perhaps more thinly, but that pie doesn't get any bigger. Even the voters who returned Kennedy to the Senate for a seventh term understand this; in the very same election, a three-fifths majority of the Massachusetts electorate voted to roll back the state income tax rate from 5.85 percent to 5 percent.

This is the context in which we consider President George W. Bush's tax-reduction proposal. To hear the soak-the-rich crowd, one would think the president has suggested dismantling the government to pay for a program buying new Lexus's for millionaires. Far from it. If anything, the Bush tax cut is too modest and allows government to grow too much. President Bush will leave the top marginal income tax rate higher than it was after his father's ill-fated 1990 tax increase and has himself said that government should feel entitled to no more than one-third of any taxpayer's income. One-third? What gives the political class a presumptive claim on any percentage of anyone's income? Politicians are to be commended for helping themselves to only one-third of what other people earned? Even as recently as Newt Gingrich, domesticated Beltway conservatives had been talking about limiting taxes in general to 25 percent of a taxpayer's income.

Oh well. Given the recent past, perhaps it should be refreshing to hear a president acknowledge that there is any limit to the percentage of income government should take. In any event, the economy is slowing and may be on the verge of recession. The manufacturing sector already is in recession. Bush is hardly to be faulted for wanting to cut taxes, however slightly.

And for all the bleating about reckless budget-busting tax cuts, the Bush plan is historically slight. President Bush's tax cut amounts to 1.1 percent of the economy, compared to the 2 percent President Kennedy's tax cut comprised and the 3.3 percent President Reagan's tax cut represented. Even if congressional conservatives succeed in making the tax cut larger, their proposals (dubbed Bush Plus by the National Taxpayers' Union) would only amount to 1.7 percent of the economy.

Static analysis projects that the Bush tax cut would reduce anticipated revenues by just 6 percent. Yet static analysis is often wrong. These same projections, which assume that changes in tax policy do not modify behavior, predicted that reducing the capital-gains tax rate from 20 percent to 15 percent would cost $50 billion. In fact, increased by $100 billion as the economic growth rate increased and produced the first surplus since 1969. So much for the idea that tax cuts must necessarily bring back the deficit. Even the Reagan tax cuts, so often blamed for record budget deficits, coincided with a doubling of federal revenues over the 1980s. Personal income tax receipts increased 5 percent annually from 1983, when the Reagan rate cuts were first fully phased in, to 1989 after being adjusted for inflation. The deficit fell from 6.3 percent of GDP to 2.9 percent over the same period.

In fact, the Reagan tax cuts generated $3 in economic growth for every $1 they cost in foregone revenue. These rate reductions helped grow the economy by one-third after inflation during the 1980s. Similarly, the Kennedy-Johnson tax cuts produced 5.8 percent annual economic growth rates during the 1960s boom. The Harding-Coolidge tax cuts coincided with an unbelievable 59 percent inflation-adjusted economic expansion during the 1920s. President Bush is relying on the evidence of economic growth stimulated by the three major tax reductions of the 20th century.

Yet there actually are people, a disproportionate number of whom wield power in Washington, who believe that in recent years the United States has actually grown its economy by raising taxes and punishing achievement. Their version of history is this: In 1993, taxes were increased on the wealthy to reduce the deficit. These tax increases eventually balanced the budget and this reduced interest rates. Lower interest rates caused a fantastic economic boom and created millions of jobs. Cutting taxes will endanger all that by bringing back deficits, enriching the rich at the expense of the poor and raising interest rates. The economy will go back in the tank, where Bush Senior left it.

There is a word for all this - crap. First of all, the recession ended in March 1991 and the economy was growing at a nearly 4 percent annual rate in the last quarter of George H.W. Bush's administration. Following the Clinton tax increase, the economy grew 2.4 percent annually through 1996 and was projected to grow at a 2.6 percent annual rate through 1999. Only after the capital gains tax was cut in 1997 (and after the Fed began pumping new money into the economy like mad) did the economy resume a 4 percent annual growth rate. Second, the increase in the top income tax rate produced far less revenue than was statically predicted. Anticipated revenue boosts as high as $35 billion annually in fact yielded only $7 billion per annum in added tax collections. Third, interest rates fell throughout the monstrous deficits of the 1980s and early '90s. They were raised seven times following the Clinton tax hike and began falling again after the Republicans took Congress in 1995.

Even on its own terms, this economic analysis leaves much to be desired as an antidote to our possible recession. Keeping interest rates artificially low, increasing the money supply and extending credit to un-creditworthy business ventures is part of what got us into the present malaise, if you will pardon the expression. Pumping more money into the economy will only fuel more bad investment decisions not dictated by the market and produce more failures of the dot-com variety. Having businesses that cannot succeed on market terms get the money they need to lure employees and investors and then fail en masse is the very stuff that recessions are made of.

Reducing taxes is the best way to facilitate the creation of actual wealth and have the economy reach its growth potential. Would-be central planners and welfare-state bureaucrats cannot compete with the progress and material improvement that a rapidly growing free-market economy offers. Bush's tax cut may have flaws, but being too big or too radical is not one of them. This economy needs a tax cut, the bigger and sooner the better. The president's plan is both politically possible and an economically prudent starting point. Americans would be well served by its enactment.

W. James Antle III is a former researcher for the Rhema Group, an Ohio-based political consulting firm. You can e-mail comments to wjantle@enterstageright.com.




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