 omorrow,
President George W. Bush will deliver his first State of the Union
Address. Undoubtedly, a major theme of the speech will be to defend
his tax cut against increasingly shrill Democratic attacks. A new
report from the Congressional Budget Office explains why the tax cut
was needed and why it must be preserved.
In recent days,
Democratic Senators Tom Daschle and Ted Kennedy have blasted the
Bush tax cut enacted last year. Predictably, the usual left-wing
groups immediately chimed in with analyses blaming the tax cut for
obliterating the surplus, and explaining why only the rich would
suffer if the remaining portion of the tax cut was repealed.
What these
analyses always leave out is context. They never really explain
what the alternative is. The fact is that taxes as a share of the
gross domestic product were at a postwar high when the tax cut was
enacted last year, and would have continued to rise without legislative
action. Moreover, even with the cut, taxes remain well above their
historical average as a share of GDP. In short, there is simply
no evidence whatsoever that the tax cut deprived the federal government
of the resources it needs to do its job.
The CBO report
provides the data lacking in the studies by Citizens for Tax Justice,
the Center on Budget and Policy Priorities, and other liberal groups.
It shows that individual income taxes consumed 10.2% of GDP in 2000.
This percentage increased steadily throughout the Clinton Administration,
rising from 7.8% in 1992 to 8.5% in 1996 and 9.6% in 1999. By the
time Bill Clinton left office, income tax revenues were almost 2
percentage points of GDP above their long-term average of 8.3%.
Although Mr.
Clinton's 1993 tax increase bears much of the blame for the growing
tax bite, our progressive tax system also bears much of the blame.
Because tax rates rise with income, economic growth pushes people
up into higher tax brackets. Thus taxes will automatically rise
as a share of income unless they are cut periodically. Economists
call this "fiscal drag" and it was the main reason John
F. Kennedy gave for cutting taxes in 1963.
According to
the CBO, had there been no tax cut last year, income taxes would
have remained above 10% of GDP indefinitely, and would have continued
to climb to 10.5% by 2011. The latest estimates, incorporating the
budgetary effects of the tax cut, still show income taxes remaining
well above 9% of GDP for the entire forecast period. In other words,
taxes will be considerably higher than their historical average
for the foreseeable future even with the tax cut.
Another point
nearly always ignored by left-wing tax-cut opponents is that there
is a major tax increase already programmed into current law. Because
of idiotic Senate budget rules, the tax cut is, in fact, repealed
in 2011. Every single provision that Senators Daschle and Kennedy
want to get rid of automatically disappears after 2010. As a consequence,
income taxes will jump from 9.4% of GDP in 2010 to 10.2% in 2011
and 10.6% in 2012, according to the CBO.
The left-wing
tax grabbers talk a lot about budget surpluses, as if they are the
magic elixir that creates growth. Senator Daschle even went so far
as to suggest that the tax cut actually deepened the recession.
In his Jan. 4 speech, he seemed to say that without the tax cut
the government would have had more revenue with which to cut taxes
in order to fend off the recession.
This has to
be the silliest example of circular logic on record.
In any event,
the main cause of lower surpluses is not the tax cut, but slower
growth caused by the recession and the events of Sept. 11. This
accounts for 40% of the decline in the surplus between now and 2011.
The tax cut accounts for 32% compared to CBO's projections one year
ago. The remainder results from higher government spending. Even
if one apportions higher interest payments resulting from the tax
cut, its share of the total surplus decline only rises to 41%.
Together, all
these factors will reduce future surpluses by $4 trillion. Yet,
we still have surpluses. This year and next, small deficits are
expected. But in 2004, surpluses return, rising to $300 billion
by 2010. Moreover, the federal debt as a share of GDP declines every
year of the forecast period, from 33% this year to 15% in 2010.
The truth is
that even if Senators Daschle and Kennedy had their way, we wouldn't
have the large surpluses that they say would exist without the tax
cut. That is because they would simply spend the money on additional
government programs. Senator Kennedy had a long list of such programs
in his Jan. 16 speech that he would fund with all the money raised
by repealing the tax cut.
The case for
the tax cut is still strong. Mr. Bush should not be shy about making
it on Tuesday.
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