The evolution of tax cuts

Posted: Mar 02, 2001 12:00 AM
WASHINGTON -- Watching our Gentleman President deliver his message of growth and tax cuts to a joint session of Congress the other night, I thought how relentless history's motions are ... and silent. The clapping pols on both sides of the aisle are now all for economic growth. Yet neither the Republicans nor the Democrats have acknowledged their change of heart. The same Democrats who hooted at Ronald Reagan's economics now silently accept the core of that economic position, namely economic growth is crucial and tax cuts are the elixir of growth. And on the Republican side of the aisle we do not hear any talk about tax cuts being "voodoo economics. In delivering his speech, GWB brought to mind Ronald Reagan in two ways. As mentioned above, his message was a growth message with echoes from the Reagan 1980s. Then, too, his style brought Reagan to mind. Just as Reagan was characterized by his opponents as a dim bulb, the forty-third president has been characterized as a dim bulb and inarticulate. Yet as with Reagan, this president speaks well and knowledgeably on matters he cares most about. Obviously he cares about getting the country over this Clinton economic slowdown. He spoke persuasively and with genial confidence. In time even critics as cerebral as Senator Edward Kennedy and the Rev. Jesse Jackson will have to acknowledge that the president is not exactly a dim bulb. The Democrats' acceptance of tax cuts is amusing. Though they accept this Reaganite truth, they do not offer any explanation for how it will help the economy. This is because they do not know how tax cuts help an economy. If they did, they would not be exhorting against tax cuts for the rich. We cut taxes across the board to trigger more economic activity. More economic activity means more jobs, and more prosperity, particularly if productivity goes up as it has been owing to the new technology. But there is an added advantage to the increased economic activity that is triggered by tax cuts: tax revenues go up. A relatively unacknowledged consequence of the Reagan tax cuts of the 1980s is that tax revenues went up. They increased more than 30 percent. Today, owing to bracket creep and the Clinton tax increase, federal taxes, as a share of the economy are higher than they have ever been during peacetime. They munch on 20.7 percent of the economy. But taxes have accounted for the present government surplus by putting a tremendous burden on economic growth. Moreover the surplus has only emboldened pols to spend more. That brings to mind another truth of the Reagan years, to wit: do not leave money around; the pols will spend it. Over the past few years the rate of federal spending increase has been over 6 percent -- and that was during good times when presumably the nanny state did not have to minister to our needs. The tax cut proposed by our Gentleman President will lessen the tax burden on all Americans. It will increase economic growth, and it need not slow government growth. In other words, the Bush tax cut might appeal to taxpayers and politicians alike. By stimulating economic activity it will increase federal revenue. That ought to put a smile on every politician's face. For years the evidence has been piling up that lower tax rates actually stimulate government growth. Some years ago the World Bank released a report on the cost of low tax rates for government revenue. It found that countries with the lowest tax rates, for instance Hong Kong, had the revenue to increase government spending three times as fast as countries with high tax rates. The key is to have the overall economy grow faster than government. Hong Kong managed it and Ronald Reagan managed it. Bush II hopes to also. Our Gentleman President is proud of his ability to work with all sides. With the budget he announced this week he has a splendid opportunity to do so. Democrats and Republicans want growth, and his tax cuts will ensure growth. He ought to remind the Democrats that this means government growth also. They can have their futile government projects if he gets his tax cuts. On that the record is clear. Under Reagan the economy grew and so did the government. My advice to GWB is to stifle the urge to cut programs. That only irks the Democrats whose support will make his life easier. Stress growth. With enough growth from lower taxes there will be plenty of federal revenue. Cut taxes and eventually the happy Democrats will understand.