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Surplus, Shmurplus: Cut Taxes Now!

Why economic growth should always be the highest priority.

by James Leroy Wilson
March 7, 2001

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Surplus, Shmurplus: Cut Taxes Now!_James Leroy Wilson-Why economic growth should always be the highest priority. The ideological make-up of the Republican and Democratic parties change over time, due to circumstances and leadership. This is why they remain dominant as broadly-based coalition parties while ideologically more coherent parties wallow in obscurity. Currently, there are two main issues on which the two major parties disagree. The first is interpreting the Constitution and the role of the federal judiciary in solving social and moral problems (abortion, flag-burning, prayer in school), but that is not today's topic. My topic is the second disagreement: fiscal policy and the role it plays in the economy.

From about 1945 to 1980, the public sector was idealized and a large federal government was taken for granted by members of both parties. In that age, Republicans weren't necessarily against Democratic policies - in fact they usually supported them. What they attempted, when in power, was to keep the costs down to prevent large deficits.

Ronald Reagan changed the picture. Ideally, he would have preferred balanced budgets, but there were higher priorities. Increased defense spending to roll back communism and cutting taxes to stimulate the economy were more important, and to get Democratic votes to support him on these, he went along with their spending increases elsewhere. The net result, as we all know, was a near-tripling of the national debt during his eight years as President. At the same time, however, federal tax revenues increased 50% and over the course of the 1980's the Gross National Product doubled.

The disagreement, then, is on cause-and-effect. Republicans believe that deficits are caused by too much spending. Further, they believe that strong economic growth over time is the best tax collector. The rich, with the money saved in taxes, have more to spend and invest, which in turn creates jobs - i.e., more taxpayers. And made wealthier by investments, they get richer, so that while their tax rates are lower, their tax bill may be higher because their income is higher. Taxing the rich at a lower rate will, in the end, get the rich to pay more, for the very reason that they got richer. And they will also provide more and better jobs for everyone else, who in turn will pay taxes.

But I'm not so sure that tax cuts alone create an economic boom. The percentage change in both economic and federal revenue growth were far greater during the malaise of the 1970's than in the 1980's. Obviously, factors outside of fiscal policy provide the bulk of economic growth. Innovation that creates new products and produces more at less cost is a more important factor than tax cuts in economic growth. Even during the high-tax post-WWII years the economy chugged along.

Democrats, on the other hand, believe that deficits are caused by the taxes being too low, that raising taxes can increase government revenue, and that any economic growth can be traced to higher taxes, more government, and lower deficits. Bill Clinton's most significant legacy is that he actually convinced a large number of Americans that tax cuts were a bad idea.

But, with most other things Clintonian, I don't buy it. Of course, the government is instrumental for the generation of wealth. The infrastructure provided by the government is the foundation on which economic growth is possible. (That includes money itself.) But providing the playing field and officials is different from forcing the players to do what you think is best for them. Too much government burdens the people when government should be freeing them. The government's tax burden does the same. A high tax rate is inherently risky to the economy. When there are signs of a slow-down, the managers and entrepreneurs of the highest tax bracket will obviously react and plan differently depending on how high that rate is. A millionaire or a corporate CEO would make different choices - more cautious, job-cutting choices - if taxes gobbled up nearly 70% of his income instead of 28%.

And that might be the strength of tax cuts. They prolong periods of prosperity, and diminish the length and impact of recessions, because taxes play less of a role in economic planning - not just for the rich but for everyone. Tax cuts don't by themselves cause innovation, but with money saved by reduced taxes, a computer company can hire more engineers who devise better, cheaper products. It's no accident that the tech boom and the transformation of the economy still did not lead to as strong a rate of growth in the 1990's as in the 1980s - taxes were raised on the rich twice. Cutting taxes may or may not produce a long-term revenue windfall for the government, but it is a reliable pro-growth economic engine.

And economic growth should be a higher priority than paying down the national debt, or even than trying to "save" Social Security. The economy over the last eighteen years was not seriously hurt by the high deficits of the period. The national debt forces us to pay interest that equals roughly twenty percent of the federal budget, but just 3.6 percent of the Gross Domestic Product. That really isn't much, and reducing the debt burden does not require paying down the debt. All it entails is maintaining a generally balanced budget with robust economic growth over time. That keeps the dollar value of the interest payments steady while the GDP gets ever larger, hence a lesser percentage burden. And the national debt can't be paid off without destroying the bond market. So it makes more sense, for the economy and for national stability, to live with the debt and return all surpluses to the taxpayer in the form of tax cuts.

And saving Social Security is a joke. Social Security is a demographic problem - too many old people, not enough workers to support them. No surplus can "save it" because all a surplus does is pay down the national debt. For Social Security to absorb the Baby Boom retirees with fewer workers, the best solution is to see those workers be more productive. Overtaxing us now is far more dangerous to Social Security because it inhibits the rate of economic growth over the long term. Tomorrow's elderly will have to be supported by tomorrow's workers and it is in the interests of both to leave them a legacy of economic growth so that they will have the resources to solve their problems. What we do today may prove the difference between doubling, tripling, or even quadrupling the size of the economy over the next three or four decades. Overtaxing, overspending, or reducing the national debt now won't do any good for them or for us.

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