Getting real about tax cut numbers

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

President Bush's tax-reduction package passed its first major hurdle when the House approved his proposal for lower marginal rates. There is much left to be done before the surplus is returned to its rightful owners, with some modifications in administration strategy likely to help along the way.

Much has been made of the $1.6 trillion tax cut and its relationship to the $5.6 trillion surplus over the same period. The Democrats would rather spend the bulk of the surplus and conceal their motives with canards about debt reduction, so they have countered with smaller, "more targeted" tax cuts. Some conservatives, including House Majority Leader Dick Armey (R-Tex.), have called for an even larger tax cut. Even Sen. Robert Torricelli (D-NJ) would like to add a capital-gains tax cut to the final package.

The president, however, insists that his $1.6 trillion figure for tax relief is "just right." He not only rejects calls from the Democrats to shrink his tax cut, but rebuffs conservative calls from within his own party to cut taxes more deeply. President Bush has asserted that his tax cut was formulated only after being carefully weighed against his administration's other priorities and the national economic realities.

Strong as the case for a tax cut along Bush's lines is, the $1.6 trillion figure is in fact arbitrary. It may be true, as the president and his aides forcefully claim, that it allows the other things the administration wants to do to be funded. But the dollar amount of the tax cut has remained unchanged since it was unveiled during the campaign, when economic conditions were different, the price tag of Bush's spending proposals was still escalating, the composition of Congress and its priorities uncertain and surplus projections smaller. This needn't be a liability; if anything, it argues for a larger tax cut.

After all, the economy is now in need of greater stimulus than it was when Bush first made his proposal during the campaign. The surplus is now projected to be larger. The administration is even delaying its increase in defense spending and restraining overall growth in non-defense discretionary spending to 4 percent annually, less than half last year's rate. The present tax cut would leave the top marginal income tax rate higher than it was following the elder George Bush's dreaded 1990 tax increase. There is ample room for a larger tax cut to jolt the economy out of its impending stagnation.

Depending on how the economic circumstances continue to evolve, Bush's tax cut as presently constituted may be too timid to avert a recession. It spreads too much of the tax cut over too long a period of time, negating some of its pro-growth effect. Recall that President Reagan's tax-rate reduction was phased in over three years and income taxes were not indexed to inflation until 1985. Bracket creep prevented many taxpayers from seeing a net tax cut until 1983, two full years after the measure's passage, while the tightening of the money supply to curb inflation occurred faster than the Reagan administration had anticipated - 75 percent in a single year, according to Paul Craig Roberts. While the Reagan tax cuts were pivotal in the American economic renaissance, the way they were constructed failed to avert the 1982 recession.

Furthermore, Federal Reserve Chairman Alan Greenspan hints that he will continue to add liquidity to the money supply and thus postpone the economy's day of reckoning. This activity, though encouraged by leading economic conservatives, will serve only to fuel the rise of un-creditworthy businesses that will ultimately fail and lay off their work forces. Zero interest rates have failed to revive the Japanese economy, unrestrained credit creation is not a solution to our woes. If President Bush wishes to counter this recklessness, even as some of his own advisers cheer it, a more aggressive tax-cut strategy is required.

Worst of all, if a recession does come toward the end of Bush's term and the result is that he is defeated in 2004, his present tax-cut proposal is vulnerable to Democratic nullification at the time when its rate reductions were likely to begin having an effect. It is easier to repeal a tax cut that hasn't happened yet than one Americans have already benefited from. This would definitely pour salt in our wounds!

Limiting the tax cut to $1.6 trillion isn't even smart politics in the context of winning Democratic support for Bush's plan. If there is a ceiling on tax relief, there is no longer as powerful an incentive for Democrats to move in Bush's direction on the tax cut. The Democrats have shifted from supporting a paltry $350 billion in tax cuts during last year's budget negotiations to proposing cuts as large as $1 trillion. By showing that he is willing to accept a bigger tax cut more congenial to conservatives, Democrats might continue to inch in the president's direction. Legendary liberal Tip O'Neill's alternative to the Reagan tax cut involved a comparable percentage of the economy to Bush's plan.

Ultimately, the reliance on dollar amounts like the vaunted $1.6 trillion is itself useless and self-defeating. Critics of the Bush tax cut like to point out that the surplus projections are just predictions that may not materialize. Thus, they argue tax cuts should be limited or avoided on the basis of that uncertainty. However, it is equally true that the $1.6 trillion figure is just a projection based on the assumption that economic behavior will continue unchanged following the tax cut. Much of the revenue reduction may not materialize because of more rapid economic growth and an enlargement of the tax base.

Just as the surplus numbers, however defensible the methodology at arriving at them may be, can be derided by critics as fictitious, so is the dollar amount of Bush's tax cut (and all other tax cuts). No one knows what tax revenues will be ten years from now, nor do they know the precise effect Bush's tax cut will have on tax collections. What we do know is that lowering marginal tax rates on capital formation, work, investment and other productive activity will encourage more of the same. Workers earn more in anticipation of higher after-tax incomes; lower marginal rates offer higher after-tax incomes and increase incentives for valuable, job-creating economic activity. Additionally, we know that the private sector can spend a dollar more efficiently than the government (the only debate is over how much). Whether the tax cut is saved, to the benefit of capital investment funds, or spent by consumers, allocating resources more efficiently, it will have a positive impact on the economy.

Fixating on the size of the tax cut in dollars, when the ultimate size as measured in foregone revenue is uncertain, plays into the hands of liberal opponents of tax cuts. This tax cut must be promoted in terms of incentives, opportunity and economic growth. This is a tax cut that will increase incentives. It will lower rates across the board. It will encourage charitable giving and offer relief to families with children. But most of all, by lowering marginal rates it lowers barriers to capital formation and wealth-creation.

Class warfare rhetoric similarly seizes on dollar amounts. But when groups like the horrendously misnamed Citizens for Tax Justice talk about how much of the tax cut will go to the top 1 percent of income-earners, they are not referring to any real income reporting. Their figures are based on projection that may turn out to be as illusive as the surplus figures they pooh-pooh.

George W. Bush is correct in his desire to give over-taxed Americans a refund. He must now rescue his plan to do so from minutiae that could bury it.

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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