From an economic standpoint, President Clinton made one serious misstep during his eight years in office: his tax increase of 1993. That one piece of legislation cost the Democrats dearly in the 1994 midterm elections. Bill Clinton, following the advice of advisor Dick Morris, reversed course immediately after that vote, and for the next six years did a great job on the economy. (That was lucky-as events unfolded, he needed a strong economy to keep himself in the public’s good graces.)
The history of tax cuts, politics and prosperity couldn’t be clearer. In fact, it was a tax increase in 1990 that cost Bush’s father the presidency in 1992. Ronald Reagan was elected in 1980 on the promise of tax cuts. He was reelected in 1984 because he did what he said he would do and it worked-the economy soared. I could go on and on, but the lesson is always the same: Progrowth tax policies do wonders for the economy and for the president who champions them.
One criticism being thrown at Bush about his proposed tax plan is its perceived lack of fairness. Paraphrasing Sen. Tom Daschle, Bush’s tax cut will give someone who earns $300,000 a year enough extra money to buy a Lexus while someone who makes $50,000 gets only a muffler. It’s a reverse Robin Hood approach, critics charge.
The other main criticism of Bush’s proposal is that it costs way too much; $1.6 trillion over 10 years. Implicit in this point is that we have more important uses for $1.6 trillion than tax relief.
Both charges incorrectly presume that people don’t change their behavior when tax rates change. When tax rates are adjusted, people move to take advantage of the new rates. If people didn’t change their behavior, I think most of us would agree that the only “fair” tax policy would be to tax people who earn more than the national average income 100%; on the excess and use the revenue to increase the incomes of those making under the average. We’d all end up with equal shares of our national pie.
Of course, the flaw in this logic is that the average income would quickly fall to zero. People don’t work to pay taxes. People work to make an after-tax income for themselves and their families.
Conceding the fact that people do change their behavior when tax rates change, the proper issues are: who are these people? How much does their behavior change? And how long does it take?
Judging from the past and from volumes of research, those who most noticeably-and most quickly-change their behavior are those people whose tax rates are the highest. They take advantage of the reduction to increase spending and investment.That’s why high-income people, who face the highest marginal tax rates, are the principal targets of progrowth tax cutters.
By cutting tax rates across the board, President Bush has attempted a delicate balance between perceived fairness and actual effectiveness. He has bent over backward to offer the olive branch to those who argue that we shouldn’t cut taxes for the rich. Bush has compromised enough.
You don’t have to go beyond Econ 101 to realize that if government taxes people who work and pays people who don’t work, we’re going to have a lot of people not working.
Cutting the highest tax rates, the inheritance tax and addressing the marriage penalty are the primary elements of the proposal’s good economics. Because of these features, the 10-year budget impact of Bush’s proposal will turn out to be far less than $1.6 trillion. Because taxpayers will work harder and smarter and use fewer tax shelters, the revenue losses to the government will be dramatically less than the politicians now forecast. Welfare spending and income-support programs will also be commensurably less as the economy expands.
The poor, minorities and the disenfranchised will have the best form of welfare-good, high-paying jobs. Bush’s tax proposal will not only cost a lot less than anyone currently believes, but it is also the best way to help the poor. The risks are low because of our large budget surpluses and the need is great because of the economic slowdown. Trust me, I know. I’ve been there before.
