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Dem Demagoguery
Tom Daschle is dead wrong on taxes and the economy.


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Larry Kudlow

Once again Senate Majority Leader Tom Daschle has the story dead wrong on taxes and the economy. “We will never bring up the permanent tax cut the president is advocating,” Daschle said at a recent news conference. “It’s bad policy, it’s wrong, and it compounds the budget disaster we are now facing.”

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Election-year rhetoric or not, Democrats will be chagrined to learn that this economic recovery is going to be V-shaped — not anemic. That means economic growth in the next three years is likely to range around 4%. As a consequence, budget surpluses will re-emerge as early as next year, and will continue as far as the eye can see. Democrats should put the bi-election arrow they’re aiming at President Bush back in their quiver. Recessionary deficits are not going to happen.

The Congressional Budget Office numbers tell a couple of different stories, and the Democrats seem to have compiled a fictional forecast. Right now, the CBO baseline shows slower-than-normal recovery growth, and therefore a weaker-than-necessary outlook for long-term budget surpluses. Historically, the first three years of recovery produce an average yearly growth rate above 4%. But the current budget baseline shows annual growth of only 2.6%, with the next eight years generating a 3.1% long-term growth trend (even though the post-World War II economy has produced average yearly growth of 3.5%).

But the CBO also publishes an optimistic scenario that conforms more closely to the U.S. historic record. By raising real GDP growth by a mere 0.3% per year and thus taking account of President Bush’s tax cut, the budget forecast shows a $301 billion surplus by 2005, a $1.3 trillion surplus by 2012, and a cumulative 10-year surplus of $5.9 trillion. Those surpluses would wipe out all publicly held Treasury debt by 2010, and leave an unbelievable $2.4 trillion of “uncommitted funds” — read more money than they would know what to do with — by 2012.

All this illustrates why up-and-coming House member Paul Ryan (R., Wisc.) has a much better grasp of the situation than the Tom Daschle pessimists. He notes that the 2001 tax cut would be sunsetted at the end of 2010, which means that unless this tax relief is made permanent, the U.S. would suffer “the largest overnight tax increase in U.S. history.” Ryan has a better plan. He proposes to make the tax relief permanent in order to boost economic growth and job creation, generate greater certainty for investment decisions, and protect families and small businesses from a devastating blow.

Small-business tax burdens are especially important to the health of the American economy. This sector creates between two-thirds and three-fourths of all net new jobs, according to the Small Business Administration. Roughly 90% of all U.S. businesses are classified as small businesses, partnerships, and solely owned proprietorships for IRS purposes. And they are especially sensitive to personal tax-rate changes.

According to a research paper authored by Princeton University economic professor Harvey Rosen, and published by the non-partisan National Bureau of Economic Research, small-business sales revenues exhibit an elasticity of 84% with respect to individual tax rates. This means that lower taxes cause an expansion of small-business sales that in turn open the door to more job creation. Using professor Rosen’s data, it turns out that 88% of the so-called static revenue loss from a small-business tax cut is actually recouped in the very first year of the tax cut. So, as Democrats continue to whine about tax cuts for the rich, they’re ignoring the huge job-creating benefits of giving tax relief to small businesses — the real backbone of the U.S. economy.

And how about telling the truth about taxes and the “rich”? Successful upper-end income earners are already shouldering a massive tax burden. For 1999, the most recent year for which complete Internal Revenue Service statistics are available, 6.3 million taxpayers, whose incomes were in the top 5%, paid nearly 60% of all income taxes, according to AP reporter Kurt Andersen. This group had adjusted gross incomes above $120,846 a year, meaning that a fireman and his schoolteacher wife — each earning about $60,000 — would qualify among the nation’s richest. Meanwhile, the wealthiest 1% of Americans pay more than a third of all taxes, and the taxpayers in the bottom half — those who earn less than $26,415 a year — pay only 4% of total income taxes.

This is the bulletproof, high-priority argument for making President Bush’s tax cut permanent. This tax cut wouldn’t merely prevent the wealthy from paying an even greater share in future years, it would free up the great-American, small-business, job-creating machine that will increase economic growth and generate more wealth in the next decade.



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