Commentary

Tax-Cutting Lies and Statistics

By Stephen Moore
This article appeared in the Washington Times on September 12, 1999.
President Clinton is expected to veto the Republican tax bill within the next week or so. But almost every White House statement attempting to justify that veto has been a half-truth, an artifact of historical revisionism, or an outright fabrication. What’s worse, the press has dutifully echoed the din of the White House’s class warfare grenades with casual unconcern about their veracity.

Let’s get the record straight about the Republican tax bill. Every statistic I present below comes from the Census Bureau, the United States budget, or other official government publications unless otherwise noted.

  • A “gigantic” tax cut. Virtually every news story labels the GOP tax plan “enormous,” “huge,” “massive,” and even “unaffordable.” Granted, $792 billion is a huge amount. But that number is misleading. The tax cut is spread out over a decade (when did Congress start imitating socialist China and Russia with ten-year plans?) and is taken out of an expected revenue flow of more than $20 trillion. In other words, federal taxes would be cut by less than four cents of every tax dollar collected. More important, in the first few years the tax cuts are imperceptible. In 2000, Americans’ taxes would be cut by 0.4 percent, in 2001 by 0.9 percent, in 2002 by 1.8 percent. The tax cuts are not scheduled to start providing real tax relief until the next two presidential elections have passed. That is a modest tax sliver, not a gigantic tax cut.
  • Tax cuts risk a return to high inflation and high interest rates. As Ronald Reagan would say, “There they go again.” In 1980 the major criticism of the Reagan supply side tax cut proposal was that it would cause inflation to rise—one of the most discredited predictions in the history of the dismal science. Still this remains the White House’s favorite mantra. Apparently, Clinton hasn’t bothered to read his own Economic Report of the President. In that report, one finds statistics showing that after the Reagan tax cuts in 1981, interest rates and inflation didn’t rise, they plummeted. The inflation rate was 11 percent in 1980 and by 1985 it had fallen to below 4 percent. In 1980 mortgage interest rates were 15 percent, but five years after the Reagan tax cuts, they were down to 7 percent. Moreover, in the 18 months after the Clinton 1993 tax increase, interest rates rose by more than 100 basis points. The past 20 years suggest that taxes have an inverse relationship on interest rates and inflation.
  • Tax cuts are skewed to the wealthy. The fact is that most of the federal income tax burden today is borne by the wealthy. According to the most recent IRS statistics, the top 1 percent of Americans makes about 16 percent of the total income but pay about 33 percent of the federal income tax. The top 1 percent pays more federal income tax than the entire bottom 50 percent—which is why the wealthy get a bigger tax cut.
  • The tax plan provides no relief for the middle class. More than half of American families now own stock. Most of those families will some day be subject to the capital gains tax. Many middle income two-earner families with children will save hundreds of dollars a year by avoiding the marriage penalty. If ever fully phased in, the tax cut will save many middle income families $1,000 or more.
  • Tax cuts will return America to the days of big deficits. Big deficits in the 1970s, 1980s and 1990s were a result of stampeding costs of federal entitlement programs like Medicare. The Reagan tax cuts in 1981 actually resulted in a doubling of tax revenues—from $500 billion to $1 trillion in the 1980s.
  • Taxes aren’t really that high on the middle class. The federal tax bite has increased from 18 to 21 percent of GDP in just the past six years. Taxes devour 38 percent of the median two-earner family budget today. That’s almost $20,000 in total federal, state and local taxes.
  • Debt retirement should come first. Even under the Republican tax cut plan, the national debt would be reduced by nearly $2 trillion over the next 10 years. The federal debt burden of GDP would fall to 25 percent, its lowest level since the 1930s.
  • Americans don’t want tax cuts. This is a lie that is perpetuated every day by the media. But recent polls by Gross Roots research show that two-thirds of Americans think that taxes “are too high.” But those same polls show that almost 80 percent of Americans—most of whom still remember George Bush’s “read my lips” pledge and are still waiting for Bill Clinton’s promised “middle class tax cut”—don’t think the politicians in Washington will really cut their taxes.
  • Americans do want their taxes cut, and they want it done evenhandedly. What offends Americans is not a tax cut that benefits all, but a tax cut that carves out special sweetheart deals to powerful political groups at the expense of the rest of us. (Memo to Republican leaders: get rid of the outrageous pork in this tax bill.) The Reagan tax cut was politically potent because all taxpayers got an equal percentage reduction in their tax burden. There were no windfalls; and there were no losers.

So those are the indisputable tax-cutting facts. As this debate proceeds into the fall, we ought to keep in mind a quip from Mark Twain as he responded to the allegations of a buffoon: “Sir, first you have to get your facts straight, then you can distort them as you wish.”

Stephen Moore is director of fiscal policy studies at the Cato Institute.