WASHINGTON -- There are two fundamental things that need to be done to restore America's economy to its former health: reduce government spending and thus shrink its debt, and increase federal tax revenues by boosting economic growth, new-business formation and job creation. A lot of attention is understandably being focused on the former, which is good, but far less on the latter, which would in fact reduce the deficit much faster than the spending cuts.
President Barack Obama and the Democrats have failed on both counts over the past two years. Spending has soared to nearly $4 trillion a year under their wasteful, big-government policies, driving the budget deficit to $1.6 trillion and pushing the national debt to more than $14 trillion.
We're in the midst of a pivotal debate about cutting out-of-control spending -- with Republicans calling for deep budget cuts and the Democrats pushing for much more modest reductions. What has been sorely missing from this debate is a clear, strong voice for tax incentives, which would boost faster job-creating economic growth and raise enough revenues to pound the deficit into submission.
Obama still thinks raising taxes will bring in more tax revenue, and he continues to blame the previous Bush administration's tax cuts for all of his fiscal and economic woes (which Obama has made worse on several counts): higher long-term unemployment, budget deficits, government debt and weaker federal revenue.
Last month, in a speech at George Washington University here, the president continued to blame George W. Bush for the ills that still afflict his presidency -- more than 9 percent unemployment in nearly half the nation's states and an anemic economy barely growing at a feeble 1.8 percent in the first three months of this year.
"We increased spending dramatically for two wars and an expensive prescription-drug program -- but we didn't pay for any of this new spending. Instead, we made the problem worse with trillions of dollars in unpaid-for tax cuts," Obama declared.
When Obama talks of "paying for the tax cuts," he means raising taxes, something many Democrats opposed in the midst of a fierce recession. But it never occurs to him that if he's looking to raise tax revenue, fueling faster economic growth is the way to do it. And if he's looking for a role model that shows how this works, he need only examine the much higher federal-revenue numbers in the last five years of Bush's presidency. A look at the record shows that soon after Bush accelerated his tax cuts in 2003, the economy entered a five-year period when the unemployment rate fell to 4.6 percent and federal tax revenues rose by hundreds of billions of dollars -- sharply cutting the budget deficit.
Here's the story: When Bush was running for office in 2000, the economy was in the midst of a high-tech, dot-com economic boom (largely because of the Republicans' capital-gains tax cuts that President Clinton signed into law). Then the bubble burst in 2001, and the economy fell into a recession. Bush pushed through an across-the-board reduction in income tax rates that would be phased in over several years.
But as the recession worsened, unemployment -- then at a low 4.7 percent -- rose to 5.8 percent in 2002 and 6 percent in 2003. Federal tax receipts, which had hit a high of $2 trillion in 2000, fell to $1.9 trillion in 2001, $1.8 trillion in 2002 and $1.7 trillion in 2003.
Clearly, the recessionary economy needed a much faster-acting booster shot, and that's when Bush and Congress stepped up the tax cuts in 2003. The economy responded.
Contrary to Obama's leftist, anti-cut ideology, the government's tax revenues did not fall as a result of Bush's income-tax cuts, which affected every tax bracket, including a new, lower rate for lower-income people. Revenues rose to $1.88 trillion in 2004, $2.15 trillion in 2005, $2.4 trillion in 2006 and to $2.6 trillion in 2007 (a record that stands today).
In other words, tax revenues rose by more than $800 billion in just four years, caused by the reduction of tax rates and the surging economic growth that pushed the Dow Jones Industrial Average index to a record 14,164 points on Oct. 9, 2007.
At the same time, the national unemployment rate plunged as the economy expanded: dropping to 5.5 percent in 2004; 5.1 percent in 2005; and down to 4.6 percent in 2006 and 2007. As the government's revenues increased, Bush's budget deficit fell sharply, dropping to a tame $161 billion in 2007 -- a record that trillion-dollar Obama can only dream about.
Then the subprime-mortgage-induced recession struck in 2008, and revenues fell to $2.5 trillion, and the jobless rate rose to 5.8 percent.
Nevertheless, the Bush tax cuts helped get our country through some tough economic times not of his making, and even Obama grudgingly saw the wisdom in renewing them for another two years. There's a lesson in all this for Obama and for our still fragile economy. But the president shows no signs that he has learned it.