Dole's Tax Plan Promotes Economic Liberty
By Leila D. Bate
Republican Presidential candidate Bob Dole and Vice Presidential candidate Jack Kemp have created an impressive blueprint for our economy that would cut taxes while keeping the federal government on track to a balanced budget by 2002. However, liberals are saying it can't be done. "We can't afford it," they tell us. Opponents of the Dole-Kemp plan are dusting off the same old myths and repeating the same old claim that the deficit will balloon with tax cuts.
Let's take an honest look at history.
The point to remember is that tax receipts grew 20 percent faster with tax cuts in the 1980s than with tax increases in the 1990s. After President Ronald Reagan cut taxes, federal income tax revenues climbed by 56 percent from 1981 to 1989. However, federal expenditures grew by 69 percent during this period, eclipsing the substantial increase in revenue. So, the deficit problem of the 1980s was really born of a government addicted to ever-increasing spending habits. Liberals conveniently ignore the fact that revenues actually increased with tax cuts, and that unabated government spending was the real culprit.
In addition to how much more money the government brought in, it's important to look at how much more money people brought in. The fact is that economic growth was much stronger in the 1980s. During the Reagan expansion, Gross Domestic Product (GDP) grew at an average rate of 4.2 percent. Comparatively, over the past four years, GDP has grown at an average rate of only 2.3 percent. A small percentage difference here or there may not seem like a lot; but with federal budgets of $1.6 trillion and more, the cumulative effect of higher spending and slower growth has stifled the economy and left a legacy of debt.
Now, let's take a look at the future.
The Dole-Kemp economic plan would enact a 15 percent cut in personal income tax rates, a 50 percent cut in the capital gains tax rate, a Balanced Budget Amendment to the U.S. Constitution, and stay committed to a balanced budget by 2002. The tax relief would stimulate economic growth, job creation, and national savings and investment, while the budget reforms would restore fiscal sanity to the U.S. Congress. Taken together, the tax and budget measures complement each other and provide a complete agenda for fiscal reform.
Today, the average American family pays more in taxes than on food, clothing, shelter, and transportation combined. National Tax Freedom Day, the day Americans stop working to support the government and start working to support their families, was May 7th this year, later than it has ever been in history. The Dole-Kemp plan recognizes that all Americans need and deserve tax relief, whether or not they go to college, hire a welfare recipient, sell their home, or engage in some other form of the Washington elite's "targeted" behavior. All in all, the Dole-Kemp tax relief package would enable American taxpayers to keep $548 billion more of their hard-earned dollars over the next six years.
Liberals say that this is too much. However, they should be reminded that the money being talked about in this debate does not belong to the government, it belongs to the taxpayers who have worked hard and invested wisely. They should be trusted to spend, save, and invest according to their priorities, not Washington's.
To offset their proposed tax cuts, the Dole-Kemp plan estimates that 27 percent of the tax cut would be compensated by greater economic growth. This is a very moderate estimate by historical standards and is by no means a suggestion that these tax cuts will pay for themselves. In fact, the Dole-Kemp plan outlines a strategy to rein in big government, including the elimination of Cabinet departments and the sale of government assets. Furthermore, the proposal would cut the non-defense administrative costs of government and slow the rate of growth in federal spending to $110 billion over the next six years. Considering that the American people have had zero wage growth since Clinton took office, it seems more than reasonable to limit government spending sprees.
The next President will also have much greater power to cut government spending even if a recalcitrant Congress fails to kick its spending habit, thanks in large part to Dole's efforts in passing a law giving the president a line item veto. Few American leaders have been -- or would be -- in a better position to work at deficit reduction and balancing the budget than Dole. He will, if elected, have the power to cut wasteful, inefficient spending.
Most important, however, is the promise of the Dole-Kemp plan to "end the IRS as we know it" by replacing the current tax system with one that is "simpler, flatter, and fairer." As strong proponents of a flat tax, Citizens for a Sound Economy is especially encouraged by the priority given to fundamental tax reform.
The American people should be trusted to exercise their own creative genius and follow their own personal dreams. A real plan for a stronger, freer economy should give Americans the respect they deserve in choosing their own path. Fundamental tax reform would celebrate this entrepreneurial spirit because it would enable people to keep more of their earnings and spend less time trying to please or placate their elected officials.
Will America be poised at the threshold of the 21st century with an antiquated tax system that handicaps growth? Or will our nation adopt a flatter, fairer tax system with lower rates that will allow us to look upon a new horizon of opportunities and maximize our economic potential? This is the real choice.
Bate is Director of Tax and Budget Policy at Citizens for a Sound Economy Foundation in Washington, D.C.
Don't Repeat The 1980s Mistake
By Dean Baker
Bob Dole has spent much of the last 15 years of his political life ridiculing supply-side economics and working in the Senate to reduce the deficits created by the Reagan experiment in supply-side economics. Senator Dole's ridicule was on target: the Reagan-era tax cuts did serious damage to the economy and the nation. Bob Dole's tax plan would likely have the same effect.
Like the Dole tax cuts, the Reagan cuts were supposed to increase economic growth by providing more incentives for households to work and save, and for firms to invest. The tax cuts completely failed to achieve their goal. The savings rate fell in the 1980s to its lowest level in the post-war era.
Careful statistical tests show no evidence that the tax cuts had any effect in increasing work effort. New business investment plummeted in the 1980s, falling to less than 2 percent of GDP (Gross Domestic Product) by 1989. This is less than half the levels of the 1970s. As a result there was no upturn in economic growth. Economic growth over the business cycle from 1979 to 1989 was just 2.7 percent. This is actually somewhat lower than the 2.9 percent growth rate over the oil-shock ridden business cycle from 1973-79.
It is important to note that these measurements are from business cycle peak to business cycle peak. This is the standard way that economists measure growth, regardless of their political leanings. Taking a measure from different points in the business cycle, for example from the trough in 1982 to the peak in 1989, gives a very deceptive picture. It would be comparable to trying to prove the case for global warming by pointing out that it was warmer in July than in January.
The tax cuts did not lead to additional growth, but they did lead to large deficits. The deficit ballooned to over 5.0 percent of GDP in 1985 and 1986. The tax cuts also helped create a huge trade deficit by driving up the value of the dollar. The nation still has not recovered fully from either of these effects. In fact, if it weren't for the interest payments on the debt built up by the Reagan era tax cuts, the budget would be in balance today. Also, the trade deficit continues to remain a problem, even though it is down from its peaks in the late 1980s.
Like the Reagan era tax cuts, the Dole tax cuts will go primarily to the richest Americans. According to Citizens for Tax Justice, a Washington-based research group, the average tax break for the richest I percent of families will be $28,900 a year. Middle-income families will get just $330 a year on average. Tens of millions of Americans will actually see their taxes increased under the Dole plan, since he proposes to reduce the earned income tax
credit for moderate-income workers.
Like Reagan, Dole also promises that he will balance the budget while cutting taxes. Like Reagan, he uses rosy growth projections to show that this will be possible. If Dole actually carried through with his tax cuts, and without the rosy growth projections, it would take cuts of nearly 50 percent in most areas of domestic spending to reach his target of a balanced budget in 2002. This would mean 50 percent cuts in nearly everything the government spends money on, including popular government programs such as education, veterans benefits, drug enforcement, environmental clean-up, and air safety. Cuts of this magnitude would be nothing short of disastrous for the nation.
Instead of promoting unrealistic tax schemes, the presidential campaigns should be focused on the nation's real problems. For the last fifteen years the incomes of the bottom 80 percent of American families have been stagnant or declining. This has been partly because of lower growth and partly because of an upward redistribution to the richest segment of the population. We should be looking for policies that will help the 80 percent who have been hurt, not the 20 percent at the top who have continued to prosper.
This would include a trade policy that promotes manufacturing employment, a policy of public investment in infrastructure and education that would spur productivity growth, and a monetary policy that allows the unemployment rate to fall below 5.1 percent. Such policies offer vastly more hope for most Americans than proposals to give more tax breaks to those at the top.
It might have made sense to experiment with supply-side economics in 1980, whatever the risks, in the hope of spurring more rapid growth. It makes no sense in 1996 to bring back a policy that is a proven failure.
Baker is an economist at the Economic Policy Institute, a Washington-based think tank.