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Smaller surplus projections no reason to abandon tax cut

By W. James Antle III
web posted July 23, 2001

Question: When did policy makers who take their cues from Keynesian economics begin to obsess over balanced budgets? The answer is the 1980s, when the budget deficit was a convenient tool for discrediting serious tax cuts. Since then, every major proposal to lower tax rates or provide any significant tax cut that was not offset by "refundable credits" (i.e., transfer payments) to those who don't pay income taxes has been opposed on the grounds of budgetary restraint.

Ronald Reagan's tax cuts were blamed for record deficit spending, the first George Bush was pressured to break his "no-new-taxes pledge" to demonstrate good faith in fighting the deficit, Bill Clinton's tax increase was portrayed as an overdue act of fiscal discipline, Bob Dole's proposed tax cut in the 1996 presidential campaign was going to "blow a hole in the deficit," and George W. Bush's 2000 campaign tax cut proposal was going to "blow a hole in the surplus." The premise of these objections is that the only way to keep the federal budget in the black is to have as much revenue as possible flowing into the national Treasury.

This notion leaves unexamined several key assumptions. The first is that all federal spending, or at least the current level of federal spending, is justified. If it can be demonstrated that some of this government spending is wasteful, or on programs that have either failed in their purpose or produced negative unintended consequences worse than the original problem, or exceeds the powers assigned the federal government by the Constitution, then perhaps we don't need all this money to go to Washington. A more responsible fiscal policy would be to cut spending.

The second is that the government should morally have some preemptive claim on taxpayers' income, with all shortfalls to be resolved in the government's favor. Perhaps it is taxpayers, as workers and wealth-creators, who are struggling and government should look elsewhere (again, possibly spending cuts) to resolve imbalances. The third is that keeping taxes as high as politically possible always maximizes revenues. Increasing the amount of income subject to taxation, by increasing economic growth, reducing incentives to evade or avoid taxation and enlarging the tax base, may increase revenues while lowering tax rates. Capital gains tax cuts have a long history of increasing rather than reducing collections from this levy, as recently as the latest such tax cut in 1997.

It is in this context that we look at the declining US budget surpluses and how they are fueling the Democrats' push to diminish or reverse the tax cut President Bush recently signed into law. With great fanfare, the first rebate checks are being mailed out. How can those who opposed the Bush tax cut be heard above this music to taxpayers' ears? By pointing to the shrinking surplus numbers as evidence that the tax cut was in fact irresponsible and will return us, in Sen. Kent Conrad's (D-ND) words, "to the deficit ditch."

The Associated Press reports that the federal budget surplus shrank during the month of June and was lower than the projections that were the consensus among private economists. The $31.9 billion surplus is 43 percent lower than the monthly surplus for June 2000. The Bush administration, through OMB Director Mitchell Daniels, has lowered its projection of the surplus for this year to $160 billion, down from $239.6 billion in fiscal 2000. The federal government has run a $168.9 billion surplus for the first nine months of this fiscal year, down from $176.5 billion during the same period of the preceding budget year. Is Bush's risky tax cut blowing a hole in our surplus?

Upon more careful examination, these developments do not clearly militate against tax reduction. The surplus is indeed shrinking because of lower federal tax receipts. But this appears to be primarily due to the weakness of the economy, which has not been helpful to capital formation and has lowered corporate profits. The economy grew at a paltry 1.2 percent rate in the first quarter of this year. Consequently, corporate income tax revenues dropped 26 percent from last June and personal income tax receipts were down 6.8 percent. Even some Keynesian economists concede the Bush tax could increase economic growth by 1 to 1.5 percent.

Lower tax rates encourage productive economic behavior by increasing incentives and influencing relative prices in ways favorable to work, savings and investment. A faltering economy means lower incomes, less wealth and lower profits. Even rebates, which are not exactly a supply-sider's dream tax cut, transfer money from government to the private sector to be spent more efficiently. When marginal rates are lowered, barriers to wealth creation, capital formation and production are lifted. The surplus was created by economic growth rates as high as 4 percent annually and is today being reduced by an under-performing economy. A pro-growth tax policy is the only fiscally responsible solution.

In reality, the choice has never been between tax cuts and budget surpluses. The real debate is between those who believe the federal government should spend an endlessly increasing share of the national income and those who believe more of the national income should remain in the productive hands of the people who earn it. The reality is that the politicians who are most exercised about the "irresponsibility" of tax cuts are frequently the first to advocate spending increasingly large amounts of the surplus. National health care, federally subsidized child care and an enlarged federal role in education are not cheap.

Much of this spending is totally frivolous. In the last year, we have seen the number of pork barrel projects almost double to an eye-popping 18,898 projects, roughly 43 per congressional district. These appropriations would not only exceed the president's budget requests but the caps set by the budget agreement with the previous administration. This is no surprise, following a year in which the spending caps were exceeded by $94 billion and discretionary spending increased by a rate more than double inflation. This year appears to offer more of the same. According to Citizens Against Government Waste, pork barrel spending has increased 297 percent since 1997 with the number of projects increasing 46 percent between fiscal 2000 and fiscal 2001 alone. The transportation appropriations bill by itself contains some 900 pork barrel projects.

Senate Appropriations Committee Chairman Robert Byrd (D-W. Va.) wants to increase agriculture, water and energy programs by another $3.4 billion. The Senate Democrats are looking to increase federal education spending on the disabled by $181 billion over the next ten years while adding $22 billion to the president's education reform bill. We are witnessing a complete and utter failure of fiscal discipline on Capitol Hill, yet it is the tax cuts that are the scapegoat.

President Bush must hold firm. Instead of backing off further tax cuts, he should continue to press the case for economic growth rather than growing government. The reason President Reagan was able to endure Democratic critiques of the deficit was that his tax cut was large enough to produce real economic gains. It is difficult to make charges of fiscal recklessness stick when a recession is ended and GDP grows by a third while manufacturing productivity growth triples, real per capita compensation increases by nearly one-fifth, exports double and civilian employment rises 19.5 percent. That was the result of the Reagan agenda and it can be the result of a more aggressively pro-growth Bush administration.

Even if further tax cuts are impossible with a Democratic Senate plurality, the president must make clear to the American people that the Democrats want to repeal the tax cut Congress just passed. He should fervently support legislation introduced by Sen. Phil Gramm (R-Tex.) to make the current Bush tax cut permanent. The Democrats would like to nullify it now and let it expire in a decade.

The president must stay true to his commitment to limit most non-defense domestic spending to a 4 percent increase. This means vetoing appropriations that substantially exceed his requests or that are laden with pork. Difficult choices regarding entitlements, such as Medicare and Social Security, will be impossible if we cannot resolve to oppose spending $500,000 on reducing the smell of pig feces today. This is even an occasion for President Bush to forge an alliance with Sen. John McCain (R-AZ).

There is no pressing economic need for the federal government to run progressively larger surpluses every year, especially in a time of anemic GDP growth. A surplus itself is a tax overpayment, and there is little case for forcing the American people to pay more in taxes than even our current exorbitant appropriators can spend. Keeping taxes as high as possible while the economy is growing slowly just to have a larger surplus makes as much economic sense as raising taxes to balance the budget during a recession -with neither tax increases nor a recession being outside our current realm of possibility. Nevertheless, the state of the surplus owes more to the performance of the economy than the inadequacy of present tax rates. This surplus can be increased by faster economic growth, which can be made possible by lower taxes and fewer regulations.

The inconvenient reality is that true fiscal responsibility is incompatible with endlessly escalating federal expenditures. Policies that free families to meet their goals, individuals to pursue excellence and innovators to reap the rewards of private enterprise are manifestly responsible, as are checks on federal spending. The real producer of red ink is limitless government, not low taxes.

W. James Antle III is a senior writer for Enter Stage Right and can be reached at wjantle@enterstageright.com.

Other related articles: (open in a new window)

  • Tax cut nullification: Regulations rob taxpayers of any gains by Alan Caruba (June 4, 2001)
    Feeling good because that $1.35 trillion, ten-year tax cut finally passed? Alan Caruba says you shouldn't even expect a thin dime in savings
  • Both taxes and spending must be cut by W. James Antle III (April 16, 2001)
    A $1.6 trillion tax cut over ten years, albeit small, is nice, but a $1.96 trillion budget for the next fiscal year isn't. W. James Antle III argues that both taxes and spending must be cut
  • Double trigger for tax cuts by Bruce Walker (April 2, 2001)
    Bruce Walker will go Democrats one better...he'll give them a double trigger to reverse tax cuts




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