Senate should learn from history about tax cuts

Posted: Apr 01, 2003 12:00 AM

It is understandable that a majority of Democrats want to oppose President Bush's tax cuts, but it is incomprehensible when Republicans do. Last week, three Republican senators (Olympia Snowe, Maine; George Voinovich, Ohio; John Chaffee, Rhode Island) walked away from Bush's economic growth program by voting with a united Democratic front in the Senate to cut the president's tax proposal in half. They voted for an amendment proposed by Sen. John Breaux, D-La., to cut the tax cuts in half because he thinks it is wrong to cut tax rates "when you have a $300 billion deficit, and then added on to that, we're at war and we don't know how much it's going to cost."

Senate Democratic Leader Tom Daschle, from South Dakota, reflected this sentiment when he said, "We still think (the current tax-cut level) is way too much, given the need for sacrifice in this country."

Sacrifice? What, and to what purpose? Daschle doesn't seem to comprehend that by keeping tax rates too high and "sacrificing" economic growth, we don't help the war effort, we hinder it; we don't get more revenue, we get less.

It is precisely when deficits are increasing due to sluggish economic growth and we suddenly confront emergency spending needs that tax rates should be slashed to speed growth and increase the size of the economy to pay for the new spending. The temporary increase in the deficit contemplated by the president's tax proposals is minuscule in the first five years (less than 1 percent of GDP) and thereafter will be completely offset - and eventually reversed - by higher growth. Vice President Cheney said "... the president's package will generate new growth, it will expand the tax base and thus increase tax revenue to the federal government ultimately."

That's what President Kennedy proposed, and it is really inexplicable and disappointing that Democrats never seem to learn from the experience of Kennedy's tax cuts. It's also disappointing, and unfathomable to me, that some Republicans will not learn from the success of President Reagan's tax rate reductions in the early 1980s.

In 1963, as the military buildup in Vietnam was beginning and defense spending was on the rise, Congress enacted Kennedy's tax-rate reductions.

Economic growth picked up and the deficit fell. By 1965, economic growth had increased sufficiently that in spite of increased defense spending, the budget was essentially balanced. Except for one year (1968), the deficit was 1.5 percent of GDP or less throughout the decade, even as defense spending averaged 8.5 percent of GDP, which is more than twice the 4.4 percent we will spend on defense this year, including the president's emergency request for an additional $75 billion.

In the aftermath of years of stagflation and then back-to-back recessions in 1980-82, Reagan stood steadfast in his insistence that we both cut tax rates and increase defense spending to confront the Soviet Union. The deficit soared to 6 percent of GDP in 1983 but economic growth revived, and our military buildup allowed us to stand firm internationally until the Soviet Union collapsed.

Just last week, the Congressional Budget Office released an analysis of the president's budget in which it found that the tax-rate reductions would "increase labor supply, investment in productive capital (such as factories and machines), and the economy's output." This means faster economic growth and more jobs. Unfortunately, CBO also concluded that the vast amount of new spending in the president's budget (more than $700 billion) would act as a drag on economic growth.

It was disappointing that CBO did not separate out the economically positive effects of the tax-rate reductions from the offsetting economic drag created by the budget's new spending proposals, which would compete for available resources in the economy and "crowd out" investment. The Heritage Foundation did, however, estimate how individual elements of the president's program would affect the economy. Heritage found that the president's tax-rate reductions would produce an annual average of 844,000 new jobs between 2004 and 2013. Moreover, the added economic growth that would result from the increased incentives to work, save, invest and take risks would recoup about 57 percent of the so-called "revenue loss" that the static estimate of the congressional Joint Committee on Taxation projects said would occur - $274 billion versus a "static" cost of $638 billion.

Some people may find it crass, indeed some may say selfish and "unpatriotic," to worry about the economy during a time of war. Those who do don't understand the vital role free-market capitalism plays in creating and sustaining modern civilization.

If we have any hope of restoring peace to the world, we must have the strength to assist countries like Afghanistan, Iraq and the soon-to-be created Palestinian state to build market economies and democratic institutions. We won't be ready to win the peace if we don't first restore our economy to vitality.

Now is no time to go wobbly on the economy. The Senate should restore the president's full tax cuts to the budget so we can get about the business of making America economically strong enough to bear the burdens that will soon be upon us.