NCPA - National Center for Policy Analysis

Debt Reduction, Or Tax-Cuts And Growth?

July 21, 1997

Probably the greatest barrier to the Republican Party becoming a true majority party is its obsession with debt. Whenever Republicans get into power, it seems, they just can't control their impulse to do something about the national debt, no matter how ridiculous or wrong-headed it may be. Several times in the past this compulsion has led to disaster for the Republican Party. It is now threatening to happen again.

When the Great Depression struck in 1929, economic growth nosedived. Real gross domestic product fell 9 percent in 1930, 6.4 percent in 1931, and 13.3 percent in 1932. As a result, federal revenues collapsed from $4.1 billion in 1930 to $1.9 billion in 1932, causing the budget to go from a surplus in 1930 to a deficit of $2.7 billion 1932, equivalent to 4.6 percent of GDP (see figure).

Horrified by the rise in the deficit, Republican President Herbert Hoover's ill-advised reaction was to ram through one of the largest tax increases in American history. The Revenue Act of 1932 raised tax rates across the board, with effective tax rates on middle income taxpayers rising more than 10 times. Yet income tax revenues fell by 17 percent in 1933. The Republican Party was properly rewarded for this fiscal insanity by losing control of both the White House and the Senate in 1932.

In 1952, voters gave the Republicans another chance, granting them control of both Congress and the White House. With taxes at record levels due to the Korean War, voters were desperate for tax relief. But Republican President Dwight Eisenhower said there would be no tax cut as long as there was a budget deficit. The result? Republicans lost control of Congress in the next election and remained in the minority for 42 years.

The lesson of this is that the Republican obsession with debt has been very costly politically. Yet a number a House Republicans, led by Congressman Mark Neumann (R-Wis.), are traveling down the same disastrous path, proposing that the federal government run surpluses to pay off the national debt, even if it means higher taxes.

Fortunately, greater sense prevails in the Senate. Leading the charge against the debt repayment plan is Senator Spencer Abraham (R-Mich.), who says any surpluses should be returned to taxpayers in the form of tax cuts. In a letter to all Republican senators on July 11, Abraham pointed out that the Neumann plan would raise taxes on the American people, do nothing to reduce the size of government, and preclude tax reform. It is "a recipe for higher taxes and slower economic growth," Abraham warned. Based on past experience, it is a recipe for political defeat as well.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 21, 1997.

 

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