Why Tax Cuts Won't Work!
By Tom Adkins (06/03/03)
Not so fast, folks!
Debates are raging over the 330 billion dollar tax cut passed last week. Democrats squealing about the "cost" of the tax cuts. Republicans crow about the doubtless "boom" that will result. It's time someone threw a bucket of water on the rhetoric. They're both wrong. Here's why…
First, let's take on the Democrats claim that tax cuts "cost" revenue, with a little history. In 40 years, no tax cut (Kennedy, Reagan, Clinton 95, Bush II) has resulted in less treasury income. Never. With the exception of the miniscule 2001 cut (flat revenue so far), every cut dramatically boosted treasury revenue. And they all boosted economic growth, including Bush II, which arguably saved the economy from the Greenspan/9-11 mini-recession. (Five straight quarters of positive growth, a respectable 3% average). And every tax increase (Carter, Bush I, Clinton 93) slowed the economy and revenue growth. Remember, Clinton's retroactive tax hike barely gave us 1% growth for two years. Apparently, conservatives are right about the famous Laffer curve, which shows you can get the same tax receipts with two different tax rates, proving growth beats the cost of tax cuts.
But what about the conservative prediction that the latest tax cuts will boost the economy and send revenues soaring? Sorry, supply- siders, not this time. It's important to understand a few facts here. First, a $330 billion tax cut sounds massive. But that's measured over ten years, only $33 billion per year. Compared to a 2 trillion dollar budget? That's less that a 1.6% cut, a mere deck chair off the Queen Mary. Exactly how will that turn the ship around? And we're still fighting a war. But it gets worse.
The GOP front loaded the cuts, with sunset provisions. In other words, they end in 2-3 years and revert back to the current higher rates. Then, Republicans will dare Democrats to raise those taxes back up in the 2004 elections, gambling on a position play. If the economy is booming, they'll claim the tax cuts get credit, and we should do it again. If the economy is slow, they'll claim the larger cut was needed, and dare Democrats to demand higher taxes in an election year. Great politics. Bad economics.
The reason the last three tax cuts worked is because they were permanent. People knew they could buy a car, house, or invest money with a future tax rate that was predictable. And long-term tax predictability meant businesses could invest their new profits, expand, know the future net from their write-offs and profits and (drumroll, please) hire people. That's why the Kennedy, Reagan and Clinton 95 tax cuts worked so incredibly well, and the Bush I and Clinton 93 tax hikes crushed the economy.
On the other hand, consumers can't gamble on a large future purchase if tax cuts are temporary. If a family is debating a car purchase, they'll hesitate if the marriage penalty is lowered for only two years. How will they make a payment in year 3, 4 and 5? And businesses? They can't plan anything with only two years of certainty, especially with large-dollar equipment investments. In short, this small, temporary tax cut will lead to small, temporary results.
It seems as though Republicans folded without fighting all that much. They certainly didn't make the case as if their political lives depended on it, gambling that a smaller temporary tax cut will be successful in an election year without knowing what the interim brings. And Democrats are cheering their "victory" over the President while tacitly acknowledging tax cuts work, ignoring the obvious logic that a larger cut would work better. And Neocons will need additional revenue -and public support- to complete their vision of pre-emptively attacking our global enemies for national security. In a lame-duck second term, Presidents have far more latitude to conduct adventurous foreign policy. But not without money.
The irony is that higher growth and higher revenue is good for each party. Republicans would ratify their fiscal philosophy of lower taxes and staying atop the global food chain. Democrats would get more money to experiment with, possibly learning how to add some common sense to their compassion. But without permanent tax cuts, neither will reach their goals.
And we haven't even addressed wasteful spending. But if an American Congress can't grasp a minor tax cut, you can bet they'll endlessly debate how much the taxpayers fork up to keep their political oxen in the barn, away from the gore.
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