Cutting taxes can once again spur our economy

How much of your income–or anyone’s income–do you think governments from all levels should take? In a recent Reader’s Digest survey, Americans of all backgrounds overwhelmingly selected the figure of 25 percent. In truth, we are far past that amount. Indeed, high taxes have become one of the main reasons that Americans find it so hard to get ahead and that the economy is so anemic.

But this is not a major theme in Washington, D.C., this winter. Democrats and Republicans are preoccupied over the budget, understandably enough, and to the extent taxation is discussed, it usually is in terms of the flat-tax idea. But, though budgetary discipline is vital and the flat-tax concept is fascinating, the country also needs lower tax rates overall. It was a lesson understood by Democratic President John F. Kennedy in the 1960s and Republican Ronal Reagan in the ’80s. Their policies led to booms.

Economists at the Business Leadership Council in Washington, D.C., are trying to persuade politicians that it once more is economic growth–sparked by tax reductions–that will best produce the revenue increases government needs to achieve a balanced budget with minimal pain. Indeed, the council wanted last month that failure to enact tax reform, along with spending reductions, could tip the nation into a recession. A still more serious downturn could follow early in the new century as the baby boom reaches retirement age and starts taking more out of the U.S. Treasury than it puts in.

Oh, but pain is necessary, some economists say. Let spending cuts do the whole job of reaching a balanced budget. Besides, tax cuts would just make the budget deficit bigger and widen the gap between the rich and the poor. That is almost a journalistic mantra now. But in the present political environment, the Republicans cannot even get agreement on a budget that only reduces the rate of growth in government spending, let alone one that would make real cuts. For political as well as economic reasons, therefore, you cannot expect to balance the budget solely through surgery.

To typical media political analysts such as Elizabeth Kolbert of The New York Times, however, insistence on lowering today’s high tax rates to increase revenue is just “Alice-in-Wonderland optimism.” In a recent profile of presidential aspirant Steve Forbes, Kolbert states that “when supply-side thinking was put to the test during the Reagan administration, the revenues declined and staggering deficits were produced.”

Statements like Kolbert’s are as false as they are familiar. Tax revenue did not decline in the Reagan years. From the time the Reagan budget constraints and tax cuts took effect in 1982 and early 1983, they and the Federal Reserve’s tight money policies led to tremendous economic growth. For 7 1/2 years, Treasury figures show, the average increase in federal revenues was 8 percent a year. Some “decline,” Kolbert!

As Wall Street Journal editor Robert L. Bartley writes in his book “Seven Fat Years,” “(Federal Reserve Chairman) Volcker’s tight money killed inflation (and) Reagan’s tax cuts revived growth.”

• The Gross Domestic Product grew 31 percent, the equivalent of adding the whole economy of West Germany to our own;
• The standard of living, as measured by disposable per capita income, grew 18 percent;
• Civilian employment grew 19.5 percent;
• Manufacturing went up 48 percent, exports 92.6 percent
• Charitable giving, contrary to predictions, rose an average of 5.1 percent a year, as opposed to 3.5 percent annually during the previous quarter century.

Of course, these same years found a huge increase in spending on defense and social programs. You may criticize some of those increases, but you cannot lay responsibility for their contribution to the deficit on the Reagan tax cuts!

Deficits, in fact, were headed down at the end of the Reagan administration. They started back up under President Bush. In 1990, the Democratic Congress cut a deal with Bush to increase income taxes, supposedly in return for tighter controls on spending. But instead of shrinking the budget deficit, these tax increases helped precipitate a recession that increased the deficit.

Eventually, you’d think people would recognize that you have to consider the effects of taxation in terms of incentives and disincentives; that you have to use dynamic analytical models, not static ones, to forecast the effects of tax changes.Nonetheless, despite running for office in 1992 on the promise of a “middle-class tax cut,” Bill Clinton in office neglected to do so. Instead, he raised taxes, albeit mainly on the upper middle class and rich. Meanwhile, throughout the late ’80s and early ’90s, local and state governments also raised taxes, sometimes steeply.

Today, many middle-class families are in the 28 percent to 33 percent federal income tax bracket, pay a total payroll tax of 15 percent (if you correctly count the employer contribution with that of the employee), high state sales taxes (8 percent and more in this state) and/or state income taxes, plus property and excise taxes, and various fees. All told, according to the Tax Foundation, the total amount surrendered to government can approach 40 percent of income.

Do you think that in the difference between the 25 percent fairness ideal that Americans cited in the Reader’s Digest survey and the 40 percent reality that more and more people experience, there. might be some explanation for the growing tax-reform movement?