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 'm
continually amazed by the half-baked arguments made against George
W. Bush's $1.5 trillion tax-cut plan. Has the
Left learned absolutely nothing over the past couple of decades
about how taxes impact the economy? Or, are the Democrats so fixated
on denying George W. Bush a political victory that they will resort
to even the most nonsensical arguments to prevent it from happening?
I'm convinced that ignorance and malice are about equally to blame
for the flim-flam attacks against the Bush tax plan.
With the key House vote on the income-tax rate cuts coming on Thursday,
now is a good time to dispose of the peskiest and most oft-repeated
arguments of all. The reader will doubtless discover that some of
the charges levied against the tax bill contradict each other. Herewith
a counterassault:
Anti-tax cut argument #1. "Tax cuts won't stimulate the economy,
because the money will be saved, not spent."
Now, there's a very legitimate argument to be made (in fact, I make
it all the time) that the Bush tax-rate cuts are too puny to provide
a short-term economic stimulus to the economy. But that isn't the
complaint we're confronted with here. This is more of a standard,
discredited Keynesian analysis. The Wall Street Journal's
Al Hunt wrote last week that the tax cut wouldn't work because "the
tax relief is too slanted toward the rich who will save the money,
rather than the working class who would spend it." Thomas Mann of
the Brookings Institution echoed this baffling logic the next day
in a USA Today editorial. He criticized the plan on the grounds
that it wouldn't elicit a burst in consumer spending. (In that same
editorial Mann also wrote that he likes to pay taxes!) When I testified
before the Senate Budget Committee last month, I
| “If
you give Congress an extra dollar, it will spend every
penny of it. If you give Americans an extra dollar, they
might only spend 90 cents of it. Almost none of the tax-cut
opponents really doubt this.” |
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was surprised to here my fellow panelist, former Clinton OMB Director
Alice Rivlin, tell the Senators that in order for this tax cut to
stimulate the economy, it will have to get people to go out and
spend the tax cut for the economy to be jolted back to life.
No, no, no, a thousand times NO. The purpose of a supply-side tax-rate
reduction is not to put more money in people's pockets so they can
rush out to the mall and spend it. (Admittedly, if they did spend
every new dime, this would arguably increase overall economic efficiency.
After all, I can spend my own money more efficiently than the government
can. I assume you can, too.)
Tax-rate reductions are economically beneficial because a cut in
tax rates reduces the negative effects of the tax on economic behavior.
A tax-rate cut increases the after-tax rate of return on capital
investment, on starting a business, on saving, and on working. When
you tax something, you get less of it. When you tax something less,
you get more of it. This is why every time we've cut federal tax
rates in the U.S. we've seen a spurt in productivity, employment,
investment, asset values, and output. Bush was right to invoke the
examples of JFK and Reagan. Both those tax-rate cuts were followed
by record economic expansions, namely, in the production of goods
and services.
Anti-tax cut argument #2. "The adverse consequences of the death
tax can be solved by simply raising the exemption."
Wrong. The death tax has the most injurious economic-disincentive
effects on saving and investment of any federal tax. That's primarily
because the 55% death-tax rate is high in its own right, but is
also levied on money that was already taxed when it was originally
earned. The National Center for Policy Analysis has shown that the
effective tax rate on saving at the end of one's life can reach
the 70-80 percent range because of this confiscatory regime. Now
you know why the super-rich spend millions of dollars on tax attorneys
and estate planners to find ways around paying the tax. It's nutty
to raise the death-tax exemption but not to lower the tax rate as
quickly and steeply as possible with the goal of someday getting
to zero.
Anti-tax cut argument #3. "The tax cut will squander the budget
surplus, reduce national savings, and raise interest rates."
This is the Robert Rubin special. The former Clinton treasury secretary
says the Bush plan will reverse the "hard fought fiscal discipline
of the 1990s" and cause higher interest rates. But wait. When Reagan
cut taxes in the 1980s, interest rates fell very dramatically even
as demand for credit was rising. (In 1980 the mortgage-interest
rate hit 20 percent, remember?) And in the two years after Clinton
raised taxes, interest rates rose. Higher taxes usually lead to
higher, not lower, interest rates.
In any case, this argument contradicts the first. In the first line
of attack, the Left complains that the tax cut won't work because
people will save the money, not spend it. But if that's true, then
how can the tax cut reduce national savings and thus raise interest
rates? If the tax cut is primarily saved, then we would be simply
reducing the government rate of savings (i.e., the surplus) by roughly
the same amount that private savings would rise. In other words,
in argument one, the tax-cut adversaries warn that it would be bad
for people to save the money from their tax cut, and in argument
two they say that it would be harmful if people spend their tax
cut. If both of these things are true, then we really are doomed.
The historical evidence indicates that tax cuts almost always lead
to a surge in national savings. Why? Because the propensity to spend
an extra dollar of income is nearly 100% for the government, but
much lower for individuals. If you give Congress an extra dollar,
it will spend every penny of it. If you give Americans an extra
dollar, they might only spend 90 cents of it. Almost none of the
tax-cut opponents really doubt this. In fact, many are quite open
about their desire not to cut taxes so that the federal government
can spend the money on health care, child care, the schools, foreign
aid, congressional pay raises, etc. Dick Gephardt and Tom Daschle
have conceded that they would rather spend the $1 trillion Bush
has earmarked for tax cuts on more social programs.
Wealth creation is the ultimate form of saving. Tax-rate cuts fueled
stock-market booms in the 1920s, the 1960s, and the 1980s in the
wake of supply-side tax cuts. After the Reagan tax cuts, the wealth
of American citizens ballooned by more than $10 trillion, as the
stock market soared from 800 on the Dow Jones to more than 10,000
today.
In the past 18 months, Japan, Germany, and France have all cut their
income taxes. They're on to something. European economic ministers
have started to begrudgingly concede that their taxes are simply
too high to compete internationally. They finally seem to have taken
off their socialist blinders to discover that taxes matter a whole
lot in today's hyper-competitive global economy. Is it asking so
much to expect America's Left — inspired by Dick Gephardt and
Tom Daschle — to acknowledge their bullheaded economic thinking?
It probably is.
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