What's The Matter With Republican Tax Policy?

Commentary by Pete du Pont

Most Americans celebrate New Year's Day on January 1. But for the federal government, New Year's Day falls on October 1, because that is the beginning of the fiscal year. September, therefore, is the last month of fiscal year 1998 and it very likely will be the first since 1969 when the federal budget will be in surplus. According to the Congressional Budget Office, revenues will exceed spending by about $63 billion in fiscal year 1998, with large surpluses projected for future years as well.

Unfortunately, Republicans in Congress have yet to develop a strategy for dealing with an era of surpluses. For decades they have been railing against deficits, blaming them on the Democrats' profligacy. In short, attacking deficits was a convenient way of attacking the Democrats' economic policy. Deficits symbolized a government that spent too much, was too big and too intrusive.

But if deficits mean that the government is spending too much, then don't surpluses necessarily mean that the government is taxing too much? Apparently not, in the minds of many Republicans, who are adamant about using the budget surplus to pay off the national debt or at least pay off all the IOU's in the Social Security Trust Fund.

No doubt, there are many Republicans who sincerely believe that it is wrong to cut taxes as long as there is a penny of national debt outstanding. But for many who publicly oppose tax cuts, it is really just a rationalization. They are afraid to cut taxes because they do not want to be attacked by Democrats for tax give-aways to the rich, undermining Social Security or any of the other charges that always follow Republican tax cut efforts.

In this sense, the failure of Republicans to unite around tax cuts is a consequence of their failure to remember or understand the economic debates of the 1980s. At that time, under the leadership of Ronald Reagan, tax rates were slashed even though the government was still running deficits. Reagan justified this action on the grounds that the money really belonged to the people. The government was justified in taking it only for legitimate purposes, such as the national defense. Simply taking money from one person to give to another was not a legitimate purpose, in Reagan's view. Yet the vast bulk of federal spending is exactly that, known euphemistically as "entitlements." (Reagan also questioned whether anyone was ever "entitled" to a government check.)

Cutting taxes, therefore, was not only morally justified even in the presence of deficits, but a necessary component of a larger strategy of reducing the size of government. Cutting taxes forced the Congress to cut spending that it otherwise would not have cut. It showed taxpayers that there was a tangible benefit to downsizing government. And it returned resources to the private sector that could be used to fill gaps left by government cutbacks.

Predictably, Democrats attacked Reagan and the Republicans for cutting taxes precisely because they were successful. During the 1980s the private sector grew more rapidly than the government for the first time in decades. Government was being scaled back, albeit far more slowly than it should have been. Nevertheless, genuine progress was made.

Today, the goal of reducing government seems to have been completely lost as a goal of Republican policy. Thus it is no surprise that many Republicans are squeamish about tax cuts. What purpose do they serve except to bring forth liberal criticism, they think. Why not just leave government on automatic pilot and pay off the debt?

Those who favor this approach, however, ought to wonder why Democrats don't attack this idea as well. The reason is because they view the national debt the way a spendthrift views a credit line. They see payments to the credit line as just increasing the amount that can be borrowed and spent in the future. In short, paying off the national debt is fine for Democrats because it simply makes more resources available to them to spend in the future when they regain control of Congress. It is as if the Republican Congress is putting away money in a savings account for a Democratic Congress to spend at a later date.

For this year, at least, it appears that the debt hawks have won the day. There is not time to enact a significant tax cut before the end of the fiscal year and Bill Clinton would veto it anyway. But at some point congressional Republicans need to address the rising tax burden on the American people and rediscover the Reaganesque justification for tax cuts. Until then, they are unwittingly playing into the Democrats' hands.