The truth about tax cuts

Posted: Aug 30, 2000 12:00 AM
Al Gore would like voters to believe that the principal issue in the presidential campaign is whether George W. Bush's $1.3 trillion tax cut is too large. It will use up too much of projected surpluses, overstimulate the economy, and ultimately, raise interest rates, Gore's team argues. Interestingly, Gore has not offered any indication that he believes there will be any economic stimulus whatsoever from the $2.3 trillion of new government spending he has proposed. Presumably, this means that his massive increase in spending, which would completely wipe out the non-Social Security surplus, will have no impact at all on growth, inflation or interest rates. The implied Gore claim is, of course, ridiculous. In the economic models used by most economists, an equal increase in government spending and reduction in taxes have roughly the same impact on the economy. Indeed, the spending is actually slightly more stimulative because all of it will be spent, whereas some portion of a tax cut will be saved. Since spending is assumed to be the driving force in the economy, an increase in government spending is the most economically stimulative action the government can take. The fact that the Gore campaign has not extolled the growth enhancing impact of its spending plans implies that it believes there are none. Thus, the Gore campaign has unwittingly confirmed the view of supply-side economists, who have argued for 25 years that the correct economic model is exactly the opposite of what most economists believe. In the supply-side model, tax cuts are stimulative to growth, whereas spending increases are not. Now, apparently, Gore agrees. It may well be the case that most taxpayers would just as soon keep projected surpluses intact, neither increasing spending as Gore would do, nor cutting taxes as Bush would do. But that option is not available to them. In November, voters have only two choices: either increase spending by voting for Gore or cut taxes by voting for Bush. In 1962, President John F. Kennedy faced a similar dilemma. He knew that the economy needed fiscal stimulus, and he was under enormous pressure from his fellow Democrats to increase spending. But Kennedy believed that higher spending would "soon demoralize both the government and our economy." To maintain the confidence of the American people, he believed, the government "must not spend more than can be justified on grounds of national need or spent with maximum efficiency." By contrast, a tax cut did not have the drawbacks associated with higher spending. That is because a tax cut stimulated private sector growth, rather than growth of government. This was better for the economy, Kennedy believed. "The most direct and significant kind of federal action aiding economic growth is to make possible an increase in private consumption and investment demand -- to cut the fetters which hold back private spending," he said. "In short, to increase demand and lift the economy, the federal government's most useful role is not to rush into a program of excessive increases in public expenditures, but to expand the incentives and opportunities for private expenditures," Kennedy concluded. For this reason, Kennedy did not follow the advice of his liberal advisers, such as Harvard economist John Kenneth Galbraith, who urged him to support higher spending and oppose a tax cut. In 1963, Kennedy put forward one of the largest tax cuts in American history, and the only tax rate reduction ever initiated by a Democratic administration. Ironically, it was only Kennedy's assassination that got the tax cut through Congress the following year, as members, especially Democrats, were reluctant to oppose their slain leader's last major initiative. Had Kennedy lived, it is very likely that his tax cut would have failed to gain congressional approval, the victim of an unholy alliance between conservative Republican budget-balancers and liberal Democratic big-spenders. More recently, Federal Reserve chairman Alan Greenspan, the person more responsible than any other for our nation's current prosperity, has been asked on numerous occasions what he favors doing with the surplus. He has replied that his first preference is to continue paying down debt and neither cut taxes nor raise spending. But if his first preference is not available, Greenspan repeatedly has said that cutting taxes is a far better use of the surplus than raising spending. The Kennedy-Greenspan view is also supported by the American people. Last year, a poll done for the White House Bulletin asked people whether they favored raising spending or cutting taxes with the budget surplus. A clear majority of 56.3 percent supported tax cuts, while only 31 percent wanted more spending. Lately, Al Gore has managed to put George W. Bush on the defensive regarding his tax cut, contributing to a decline in Bush's poll ratings. Simply trying to explain his tax cut better is not going to help. Bush must forcefully attack Gore's big spending plans, making it clear that voters must choose between a tax cut and a massive rise in federal spending. Faced with that choice, Bush should be able to win a healthy majority of them.