Hoary economic fallacies

Posted: Jun 23, 2003 12:00 AM

Here's a "man-bites-dog" story. I recently testified before the Democratic Policy Committee chaired by Sen. Byron Dorgan of North Dakota. The hearing was centered on the economic effects of President Bush's tax reforms. It was commendable - and gutsy - for Dorgan to invite me, and I am sorry the White House didn't also accept the invitation to testify. It was real theater: Kemp vs. the Democratic Party establishment defending the Bush tax cuts.

I did it for two reasons. First, I believe in the Bush plan. Second, for our democracy to be strong, both political parties must be strong and capable of competing for votes on the field of ideas. Before Ronald Reagan came along, Republicans couldn't propose ideas to move America forward because the party was obsessed with deficits. Richard Nixon and Barry Goldwater opposed the Kennedy tax cuts - exactly the situation the Democratic Party finds itself in today. If John F. Kennedy were in the Senate today, he would support Bush's tax cuts, and there would be a healthy competition between the two parties on what is the best way to get America moving again.

As an old quarterback, I've always rejected pessimism, but even I became temporarily depressed at the DPC hearing as I listened to the Democratic leaders fall prey to economic fallacies.

Former Clinton Labor Secretary Robert Reich's testimony before the DPC illustrates what I mean. Reich said, "The problem of the federal debt is clearly a growing problem. What Jack Kemp keeps saying to you is don't worry about the debt because these tax reductions are going to grow the economy ... so fast that the debt shrinks in proportion to the total economy. Now that was the argument we heard in the 1980s. We ended up the 1980s and the early 1990s with, as you recall, this $300 billion debt, as deficit, as far as the eye could see and an economy that basically ground to a halt."

Reich's encapsulation of economic history is a distortion and in some instances an outright fabrication. Economic growth soared after the Reagan/Kemp/Roth tax-rate reductions took effect, and the federal budget deficit - temporarily swollen by a deep and lengthy recession that occurred before the tax cuts even took effect and exacerbated by excessive spending and collapsing inflation - was virtually identical the day President Reagan left office (2.8 percent of GDP) to the day he was inaugurated (2.7 percent).

The recession and the slow economic recovery of the early 1990s were the consequences of Congress and two successive administrations abandoning the sound economic program, inaugurating a regulatory jihad, going on a spending binge and raising taxes twice in five years. It was only after Republicans regained congressional control in 1994, put a brake on spending growth and convinced President Clinton to cut tax rates, specifically the capital gains tax rate, that the economy took off again, and growth-driven revenues turned deficits into surpluses.

Dorgan gets it. He explained how he learned from his grandfather as a boy the harmful consequences of excessively high tax rates: "My grandfather, a great boxing fan, explained to me when I was a little boy that Rocky Marciano fights only once a year because Al Wyle, his manager, says that if he fights a second time - tax rates were 90 percent - he only gets 10 cents of every dollar, the government gets 90 cents. So I'm not unsympathetic, Mr. Kemp, to your proposition."

Exactly! That's why JFK said it's a paradoxical truth that high tax rates cause low tax revenues and the best way to raise revenues is to lower tax rates.

As to the national debt, not only is it not a problem currently, it will continue to fall as a share of GDP even after two back-to-back tax cuts and even in the face of temporary deficits caused by the recession and several years of slow economic growth. The Congressional Budget Office has not yet officially projected the effects of this year's tax reforms on revenues and debt, but CBO did make estimates of the effects of Bush's original tax-cut proposal, which was about twice as large. Assuming the president's original tax-cut proposal was enacted into law, CBO projected that GDP would equal $18 trillion in 2013 while the national debt would decline almost 13 percent, from 37 percent of GDP in 2004 to 32.2 percent in 2013.

To appreciate just how small the so-called revenue loss from this year's tax cuts is - even when calculated under the unrealistic, static assumption that lower tax rates won't increase economic growth - compare the 10-year $800 billion "revenue loss" the tax cuts are expected to produce if they are made permanent to the $146 trillion in GDP that CBO projects the economy will generate during the next decade. It amounts to a minuscule 0.5 percent.

In 1962, Kennedy led and Republicans begrudgingly followed. Today, Bush is leading, and Democrats are reluctantly trailing in his wake. Until Democrats reject the politics of class envy and replace it with the politics of economic growth and individual opportunity, they will continue to lose elections.