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Congress doubts the need for substantial tax relief, it should ponder
the historic relationship between federal finances and the economy.
The data for
federal receipts and outlays suggest that government spending isn't
a major determinant of economic expansion or contradiction. Taxation,
though, does directly bear on economic performance. Taxes as a GDP
percentage rise in good economic times before hitting a wall —
a rate above which the economy can't cope with the heavy tax burden.
(Keep in mind that special factors, such as the 1973 oil embargo,
also affected GDP.) Bigger and bigger tax takes simply don't allow
for sufficient retained earnings to keep an economic expansion going.
Clinton's 1993 tax hike, with its new top marginal rates of 36%
and 39.6%, combined with the sharp rise in earnings by higher income
households to produce the surge in federal revenues of the 1990s.
Total receipts rose from 17.6% of GDP in fiscal 1993 to a record
20.6% in fiscal 2000. Federal outlays, in contrast, have generally
declined since an upturn in 1990-91. They peaked at about 23% of
GDP in the first half of 1982. By the second quarter of this year,
spending had dropped to nearly 18% of GDP.
While the Clinton
administration's tax policies created prosperity for government,
they ultimately caused a downturn in the private sector, which slipped
into recession in the first quarter of 2001. The fiscal surpluses
produced by higher marginal tax rates raised government saving at
the expense of private saving. Ergo, as federal debt fell, private-sector
debt rose.
In 2000, for
instance, federal debt decreased at an 8.0% annual rate, while total
household debt increased 8.4% and business debt climbed 10.0%. By
the second quarter of this year, according to Federal
Reserve data, federal debt was down 6.4%, while household debt
was up 9.2% and business debt was 7.2% higher. In addition, consumer
debt-service
payments, apart from mortgages, increased from 5.97% of disposable
income at the end of 1992 to 7.79% in the second quarter of this
year.
The above charts
depict the relationship between the federal tax burden and economic
contractions (shaded areas), as defined by the National Bureau of
Economic Research, and the absence of a clear correlation between
government spending and economic performance. With the prospect
of slower business and consumer demand and less surplus income available
for investment, companies naturally pull in their horns. Capital
spending is deferred; fewer employees are hired, and cost-cutting
is the mantra of the day as companies look to protect their bottom
lines.
The problem
can easily become a vicious cycle: In cutting costs, companies lay
off workers; unemployment climbs, and rising joblessness undermines
consumer confidence. Consumer spending dips, exacerbating businesses'
bottom-line woes. The cycle can keep replaying itself until lawmakers
recognize the need for fiscal reform. An economy can bear only so
much taxation before growth is extinguished.
A
Dem Smokescreen
The Senate seems in no rush to vote on a stimulus package. Majority
Leader Tom Daschle expects to get a bill to the president by Thanksgiving.
Odds are the Democrat-led Senate will resist many of the tax-cut
provisions of the House-approved bill. Instead, Senate Democrats
want to extend unemployment benefits, including a federal subsidy
to help the jobless keep their health insurance, and raise public-works
spending. It ultimately will be left to conferees to hammer out
a compromise.
What must be
understood in this partisan dispute is that the Democrats' arguments
against tax cuts are a smokescreen. They have said, for instance,
that tax cuts would raise interest rates. Fact is, they are only
using this argument, which they know strikes a nerve in voters,
to disguise their true intent — namely, to keep as much money
in Washington's hands as possible. For example, Congress just recently
raised farm subsidies by 70% to $170 billion over the next 10 years.
So much for "fiscal discipline." On Capitol Hill, "fiscal
discipline" is now a code word for "big spending."
While the House
tax package is a step in the right direction, it's a far cry from
the thorough overhaul of the tax code needed to put the economy
back on an even keel. Lawmakers must be reminded that government
is supposed to be the servant of the people — and not vice
versa. That will take leadership that only the president can provide
— leadership on fiscal reform that goes far beyond anything
seen thus far from the Bush administration.
EDITOR'S
NOTE: Click
here for Part I of Clinton's Untenable Taxation.
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