Cut Taxes, Help the Economy, Win the PresidencyCommentary by Pete du Pont
June 05, 1996
As Ronald Reagan reminded us, ideas have consequences. And sometimes very quickly.
Barely a month ago, on April 29th, Bruce Bartlett, formerly at the Treasury Department and now a Senior Fellow with the National Center for Policy Analysis, put forth a simple idea: cut personal income taxes 15% across the board.
Why a 15% cut? Because that would bring the government's share of the nation's gross domestic product back to about what it was in 1992, before President Clinton took office. In Bartlett's words, "In the first three years of the Clinton administration, Americans have paid $151.1 billion more in taxes than if federal receipts had remained at their 1992 level as a share of gross domestic product."
Bartlett had the inspiration after he saw recent Commerce Department figures that showed that more than one out of every three dollars produced by the American economy last year went to government. At the federal, state and local levels combined, government consumed 31.3% of all national output; the largest share of GDP ever taken by government. Even in 1945, with the country fighting and paying for World War II, total taxes only amounted to 30% of GDP.
Bartlett calculated that since Bill Clinton took office, personal income taxes have increased 1.6 times faster than the country's economic growth, as measured by GDP, and corporate taxes have increased 3.5 times faster.
Three weeks later, on May 20th, Bartlett could report that Bob Dole, soon to be the Republican nominee for president, was giving his idea serious consideration. Dole has been a deficit hawk during his career, but history, politics and economic theory are all on the side of a tax cut; and that may be enough to sway him.
There is historical justification for a tax cut now. The increasing government share of output caused by bracket creep during the high inflation 1970s led to the Reagan tax cut. For that matter, the high percentage of state output that was being taken by taxes in California was what prompted Proposition 13 in California in 1978 and the beginning of a nationwide revolt against state and local tax levels.
Political justification? Well, there's the Reagan proposal in 1980 for a 30% across-the- board reduction that helped him beat Jimmy Carter. More recently, Christie Whitman came from behind to win election as governor of New Jersey in 1993 after she too pledged a 30% tax cut. Further, that 15% figure represents a repeal of President Clinton's tax increases, so it should have some symbolic importance to Dole and the Republican Party.
The magic of a tax cut pledge is that it gives a campaign a focal point. (After 1988, it's pretty safe to say that just pledging "no new taxes" is not going to be a vote-getter.) For Republicans, whose agenda is less regulation, smaller government, and increased personal responsibility, a tax reduction proposal provides philosophical underpinning for all their policies.
Perhaps the most compelling justification, however, is economics. Because personal and corporate income taxes are graduated; the more money one makes, the higher tax percentage one pays; the tax burden increases as the economy grows. To hold it steady as a percentage of the national economy requires periodic tax cuts. Further, reducing marginal tax rates provides an incentive to earn more money, freeing up more dollars for saving and investment and stimulating economic growth.
"But," as the liberals (and moderate Republicans) are fond of saying, "what about the deficit?" That argument was dealt a body blow by Democrat Felix Rohatyn in the April 11th Wall Street Journal: After listing our most serious economic and social problems, Rohatyn wrote: "Even though all of these require different approaches, the single most important requirement to deal with all of them is the wealth and revenues generated by a higher rate of economic growth. John Kennedy was right: A rising tide lifts all boats. Although it may not lift all of them at the same time and at the same rate, without more growth we are simply redistributing the same pie."
So how can Dole, as a deficit hawk, rationalize a tax cut? A successful fiscal policy must include two vital elements. Slowing the growth of government spending is one. But encouraging economic growth is a higher priority, for it also creates jobs and increases take home pay, as well as reducing the deficit through greater tax receipts. There aren't many problems that a 15% tax cut can cause that a 3.5% economic growth rate can't solve if you keep a handle on spending.
Ideas do have consequences. And Bob Dole's election could be the consequence of a proposal to cut taxes 15% across-the-board.