I'm continually amazed by the half-baked arguments made against George W.Bush's $1.5 trillion tax-cut plan. Has the Left learned absolutely nothingover the past couple of decades about how taxes impact the economy? Or, arethe Democrats so fixated on denying George W. Bush a political victory thatthey will resort to even the most nonsensical arguments to prevent it fromhappening? I'm convinced that ignorance and malice are about equally toblame for the flim-flam attacks against the Bush tax plan.
With the key House vote on the income-tax rate cuts coming today, nowis a good time to dispose of the peskiest and most oft-repeated andarguments of all. The reader will doubtless discover that some of thecharges levied against the tax bill contradict each other. Herewith acounterassault:
Anti-tax cut argument #1. "Tax cuts won't stimulate the economy, because themoney will be saved, not spent."
Now, there's a very legitimate argument to be made (in fact, I make it allthe time) that the Bush tax-rate cuts are too puny to provide a short-termeconomic stimulus to the economy. But that isn't the complaint we'reconfronted with here. This is more of a standard, discredited Keynesiananalysis. The Wall Street Journal's Al Hunt wrote last week that the tax cutwouldn't work because "the tax relief is too slanted toward the rich whowill save the money, rather than the working class who would spend it."Thomas Mann of the Brookings Institution echoed this baffling logic the nextday in a USA Today editorial. He criticized the plan on the grounds that itwouldn't elicit a burst in consumer spending. (In that same editorial Mannalso wrote that he likes to pay taxes!) When I testified before the SenateBudget Committee last month, I was surprised to hear my fellow panelist,former Clinton OMB Director Alice Rivlin, tell the Senators that in orderfor this tax cut to stimulate the economy, it will have to get people to goout and spend the tax cut for the economy to be jolted back to life.
No, no, no, a thousand times NO. The purpose of a supply-side tax-ratereduction is not to put more money in people's pockets so they can rush outto the mall and spend it. (Admittedly, if they did spend every new dime,this would arguably increase overall economic efficiency. After all, I canspend my own money more efficiently than the government can. I assume youcan, too.)
Tax-rate reductions are economically beneficial because a cut in tax ratesreduces the negative effects of the tax on economic behavior. A tax-rate cutincreases the after-tax rate of return on capital investment, on starting abusiness, on saving, and on working. When you tax something, you get less ofit. When you tax something less, you get more of it. This is why every timewe've cut federal tax rates in the U.S. we've seen a spurt in productivity,employment, investment, asset values, and output. Bush was right to invokethe examples of JFK and Reagan. Both those tax-rate cuts were followed byrecord economic expansions, namely, in the production of goods and services.
Anti-tax cut argument #2. "The adverse consequences of the death tax can besolved by simply raising the exemption."
Wrong. The death tax has the most injurious economic-disincentive effects onsaving and investment of any federal tax. That's primarily because the 55percent death-tax rate is high in its own right, but is also levied on moneythat was already taxed when it was originally earned. The National CenterforPolicy Analysis has shown that the effective tax rate on saving at the endof one's life can reach the 70 percent to 80 percent range because of thisconfiscatory regime. Now you know why the super-rich spend millions ofdollars on tax attorneys and estate planners to find ways around paying thetax. It's nutty to raise the death-tax exemption but not to lower the taxrate as quickly and steeply as possible with the goal of someday getting tozero.
Anti-tax cut argument #3. "The tax cut will squander the budget surplus,reduce national savings, and raise interest rates."
This is the Robert Rubin special. The former Clinton treasury secretary saysthe Bush plan will reverse the "hard fought fiscal discipline of the 1990s"and cause higher interest rates. But wait. When Reagan cut taxes in the1980s, interest rates fell very dramatically even as demand for credit wasrising. (In 1980 the mortgage-interest rate hit 20 percent, remember?) Andin the two years after Clinton raised taxes, interest rates rose. Highertaxes usually lead to higher, not lower, interest rates.
In any case, this argument contradicts the first. In the first line ofattack, the Left complains that the tax cut won't work because people willsave the money, not spend it. But if that's true, then how can the tax cutreduce national savings and thus raise interest rates? If the tax cut isprimarily saved, then we would be simply reducing the government rate ofsavings (i.e., the surplus) by roughly the same amount that private savingswould rise. In other words, in argument one, the tax-cut adversaries warnthat it would be bad for people to save the money from their tax cut, and inargument two they say that it would be harmful if people spend their taxcut. If both of these things are true, then we really are doomed.
The historical evidence indicates that tax cuts almost always lead to asurge in national savings. Why? Because the propensity to spend an extradollar of income is nearly 100 percent for the government, but much lowerforindividuals. If you give Congress an extra dollar, it will spend every pennyof it. If you give Americans an extra dollar, they might only spend 90 centsof it. Almost none of the tax-cut opponents really doubt this. In fact, manyare quite open about their desire not to cut taxes so that the federalgovernment can spend the money on health care, child care, the schools,foreign aid, congressional pay raises, etc. Dick Gephardt and Tom Daschlehave conceded that they would rather spend the $1 trillion Bush hasearmarked for tax cuts on more social programs.
Wealth creation is the ultimate form of saving. Tax-rate cuts fueledstock-market booms in the 1920s, the 1960s, and the 1980s in the wake ofsupply-side tax cuts. After the Reagan tax cuts, the wealth of Americancitizens ballooned by more than $10 trillion, as the stock market soaredfrom 800 on the Dow Jones to more than 10,000 today.
In the past 18 months, Japan, Germany and France have all cut their incometaxes. They're on to something. European economic ministers have started tobegrudgingly concede that their taxes are simply too high to competeinternationally. They finally seem to have taken off their socialistblinders to discover that taxes matter a whole lot in today'shyper-competitive global economy. Is it asking so much to expect America'sLeft -- inspired by Dick Gephardt and Tom Daschle -- to acknowledge theirbullheaded economic thinking?
It probably is.