Politics & Policy

Tax Cuts, The Right Way

The big-spending GOP Congress is off course.

Sometimes, I feel like Pandora. She was a figure from Greek mythology who was good, but was given a box containing all the world’s evils. When her box was opened, these evils were unleashed on the world and there was nothing she could do to stop it.

My Pandora’s box is tax cuts. Back in the 1970s, while working for Jack Kemp, I was among those who got Republicans to embrace them. Thirty years ago, Republicans would not support tax cuts unless accompanied by spending cuts, lest the deficit rise as a consequence. While admirable, the effect of this philosophy was to make government larger and larger. Revenues rose automatically as inflation pushed taxpayers into higher tax brackets, which fueled ever greater spending and slowed economic growth.

It was absolutely essential to break this cycle of tax-and-spend and revitalize the economy, and tax cuts were the only way to do it. Yet most Republicans, in the name of fiscal responsibility, actively opposed them and often endorsed tax increases. They had become tax collectors for the welfare state.

It took many years and Ronald Reagan’s leadership to change this Republican mentality. Today, the party has lost all its inhibitions and enthusiastically embraces tax cutting. Whereas tax cuts used to be enacted only about once a decade, now they take place annually. I’ve lost count of how many tax cuts have passed the House this year and at least one for corporations is likely to become law.

The problem is that the original objective of tax cutting has been completely forgotten. Republicans now promote tax cuts simply for their own sake, with no concern for their structure, economic impact, or fiscal consequences. As a result, I think they are creating a grave mess that eventually is going to have terrible repercussions.

In brief, the case for tax cutting made by Kemp and others was to increase incentives for work, saving, and investment. In this regard, the marginal tax rate — the tax on each additional dollar earned — was paramount. We rejected tax cuts that would have been easier to pass because they simply reduced revenues without improving incentives. We even worked to get rid of tax cuts already in law, such as the Investment Tax Credit, because they did not affect marginal incentives and did not belong in a neutral tax system — one that neither encouraged nor discouraged economic behavior — which was our ultimate goal.

Although it was not part of Kemp’s agenda, he would not have been successful if other Republicans didn’t also view tax cuts as a way of constraining the size of government — taking away its allowance, as Reagan used to put it. That is why pillars of the GOP establishment like Alan Greenspan and Herb Stein supported the Reagan tax cut in 1981.

In the 1980s, both sides of the tax-cut coin worked together. Marginal tax rates were reduced for all taxpayers and the top rate was slashed from 70 percent to 28 percent. Domestic spending was cut and the growth path of total spending, which had grown relentlessly for decades, slowed and finally began to fall. This would not have happened without tax cuts, which starved the government beast of nourishment.

The problem now is that both original rationales for tax cutting have been completely forgotten by virtually all Republicans. They now cut taxes willy-nilly without any concern for their economic impact. The vast bulk of tax cuts since 2001, in revenue terms, have gone for tax rebates, kiddy credits, and other measures having no impact on marginal incentives. True, rates have also been cut, but the rate cuts are being phased-in slowly, thus pushing their economic benefits into the future.

Moreover, the old starve-the-beast theory is completely dead. Not only do Republicans make no effort to even restrain spending, let alone cut it, they have actually gone in the opposite direction and now raise spending for just about anything they think will buy them a vote. They have morphed into a caricature of 1960s Democrat, but with even less concern for deficits than Lyndon Johnson had.

I am not by any means a deficit hawk. But with federal revenues at just 15.8 percent of gross domestic product — well below their historical level of 18 percent — I don’t think our economy is suffering from overtaxation. And with outlays rising from 18.4 percent of GDP in 2000 to 20 percent this year, the beast is getting fat once again.

I fear that the chickens are going to come home to roost sooner rather than later. When that happens, we could see a complete reversal of everything good that has been done in tax policy over the last four years and an imposition of a tax increase of monumental proportions.

– Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.

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