Tax issue reemerges

Posted: Aug 28, 2000 12:00 AM
After being relatively quiet for several months, the tax issue has reemerged as a hot topic in the presidential race. This was to be expected, because up until now, the political debate has primarily been within each political party. For the most part, there is no serious debate within the parties on tax issues. Democrats generally do not favor tax cuts and only support those that are targeted to specific taxpayer behavior. Republicans, by and large, support tax cuts and prefer tax rate reductions over targeted cuts. These facts have been submerged in the national political debate because both Al Gore and Bill Bradley accepted the Democratic conventional wisdom in opposing significant tax cuts, and Republicans George W. Bush and John McCain were unified in their desire to cut taxes across the board. So it is not surprising that Gore leveled his first major post-convention attack on Bush saying that the latter's tax cut is too big. Gore countered that his economic plan would cut the surplus much less than Bush's, thereby leaving more of it for debt reduction. In taking this tack, Gore knows that a plurality of Americans favor debt reduction over either a tax cut or increased government spending. He is hoping to appeal to this constituency, while at the same time keeping his liberal base happy with promises of dozens of new federal spending programs. The only problem, of course, is that Gore's numbers don't add up. According to a careful study by the nonpartisan National Taxpayers Union, Gore's spending promises to date come to $2.3 trillion, more than enough to completely wipe-out the non-Social Security surplus. His $500 billion tax cut would further reduce future surpluses. Still, some fiscal conservatives may remain uneasy about the size of Bush's tax plan, which is estimated to reduce federal revenues by $1.3 trillion over 10 years. (The liberal Citizens for Tax Justice, a union-backed group, puts the cost somewhat higher at $1.8 trillion.) According to NTU, Bush has proposed $425 billion in new spending, putting the total impact on the surplus at $1.7 trillion to $2.2 trillion. To put these numbers in context, it is important to remember that the total projected surplus over the next decade is estimated at $4.7 trillion, according to the Congressional Budget Office. (Incidentally, this estimate assumes a fairly substantial rise in spending over the spending caps in current law, adherence to which would yield a surplus of $5.7 trillion.) Of this, $2.4 trillion is attributable to the excess of Social Security taxes over benefits. Both Gore and Bush have ruled-out touching this part of the surplus. That leaves $2.2 trillion of projected surpluses, which are now the focus of debate between Gore and Bush. To summarize, it appears that Gore's tax and spending plans would reduce the surplus by $2.8 trillion over the next 10 years, while Bush's plans would lower it by as much as $2.2 trillion. This means that there is no truth to Gore's claim that his plan would leave more money for debt reduction than Bush's plans. Some fiscal conservatives, who would rather see all of the surpluses devoted to debt reduction, may lament either choice. But unfortunately for them, that option is not on the table. In the end, they must choose between Gore's big spending plans and Bush's large tax cut. Even if Gore's and Bush's plans had the same identical "cost" in terms of their impact on the surplus, I believe that the fiscally conservative thing to do is cut taxes. That is because cutting taxes has a very different economic impact from increased spending, and because history shows that congresses and presidents are far more willing to raise taxes or undo tax cuts than they are to cut spending. As Harvard economist Martin Feldstein explains, it is really a misnomer to even talk about tax cuts having any cost at all. "From the nation's point of view," he says, "cutting taxes produces gain, not a cost. Instead of talking about the cost of the tax cut, it would make more sense to say that a reduction of tax revenue of $100 billion a year raises real national income by $50 billion to $100 billion, in addition to allowing taxpayers to keep $100 billion more of their money." And should the Congress err by cutting taxes too much, it is a relatively easy matter to change course. Although Ronald Reagan is best remembered for his big tax cut in 1981, it is less well remembered that in 1982 he initiated one of the largest tax increases in American history, when large deficits emerged unexpectedly. He also supported many smaller tax increases throughout the 1980s. By contrast, spending programs, once enacted, tend to have a life of their own. If Gore should err on the side of proposing too much spending, can we expect him, like President Reagan, to reverse course and ask Congress to later cut spending on his initiatives? I think not. If there were a need to deal with deficits under a Gore administration, it is safe to say that higher taxes, not spending cuts, would be the prescription. In conclusion, those who consider themselves fiscal conservatives, who prefer debt reduction over either tax cuts or spending increases, should know that cutting taxes is unquestionably better than raising spending from their point of view, even if the impact on the surplus is the same.