Opinion Editorial | |
| Wednesday, December 8, 1999 | |
Increasing Growth is the Reason to Cut Taxes |
Governor George W. Bush's tax plan so far has garnered predictable criticism. Those on the left, who are opposed to tax cuts anytime anywhere, attacked it as fiscally irresponsible and a give-away to the rich. (Groups like Citizens for Tax Justice apparently define the rich as anyone who pays taxes.) Those on the right, such as GOP rival Steve Forbes, charge that Bush's tax cut is too small and insufficiently bold.
Most of these attacks can be dismissed as political posturing. One legitimate area of criticism, however, has to do not with the substance of Bush's tax cut, but with the way he chose to present it. In my judgment, he made an error in not attributing higher economic growth to his proposal. Bush has thereby denied himself of an important argument for why we need a tax cut, and opened himself up to unnecessary criticism about its size and impact on the budget.
In his proposal, Bush says that the baseline economic assumption used is 2.7 percent growth in real gross domestic product over the next five years. This is odd because the U.S. economy has been growing at a 3.6 percent rate since 1992 -- almost a full percentage point faster than the Bush plan assumes. Thus it appears as if Bush's plan is actually going to cause a drop in economic growth.
Bush rationalizes his modest growth estimate on the grounds that it is actually a bit higher than the 2.5 percent rate estimated by the Congressional Budget Office. However, the CBO is notorious for underestimating growth and must constantly revise its numbers upwards. In January, for example, the CBO predicted 2.3 percent real growth this year. Economists now think that number will be closer to 3.8 percent.
Lowballing growth may be justified when making spending projections, but it is very inappropriate when making revenue estimates. The problem is two-fold. First, assuming no change in growth from a tax cut or tax increase makes it appear that the government will lose more revenue than it actually will from the former and raise more from the latter. This creates a bias against tax cuts and in favor of tax increases.
The second problem is that politicians hamstringing themselves with static revenue estimates deny themselves the main argument in favor of tax cuts; namely, that they will raise growth, lower unemployment and increase family incomes. Thus Bush essentially is saying that it makes no difference to the economy whether his tax plan is enacted or not. Given that inertia is going to make passage of any tax cut difficult, Bush's unilateral disarmament in abandoning the growth issue could end up being fatal politically.
Bush's approach is all the more strange given that the last Republican presidential nominee, former Senator Bob Dole, used dynamic scoring for his 15 percent tax rate reduction in 1996. Sen. Dole was deeply skeptical about the growth effects of tax cuts. Yet his economic advisers --many of whom are also Bush's advisers -- were able to convince him that faster growth from his tax cut would reduce its revenue loss by 27 percent. Indeed, even liberal economists, such as Lawrence Chimerine of the Economic Strategy Institute, concede that tax cuts like Bush's will only lose 65 cents for every $1 of gross revenue loss.
Given that Bush's chief economic adviser, former Federal Reserve Board Governor Lawrence Lindsey, is predicting an economic slowdown, it is all the more puzzling that he chose not to make growth an argument in favor of his tax cut. Growth may not be the only reason for a tax cut, but it is an important one.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 8, 1999.
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