NCPA - National Center for Policy Analysis

Tax Cuts Could Help Balance The Budget

August 3, 1996

In the debate over what drives economic growth, the focus on the deficit is misdirected, say the authors of Why America Needs a Tax Cut. The new Heritage Foundation study says:

  • Lawmakers should focus on the level of government spending, which takes resources out of the productive sector of the economy whether it is financed by taxes or by borrowing.
  • At the same time, robust economic growth will be difficult to achieve unless the burden of taxation is reduced and the fundamental problems of the tax code are fixed.
  • The most direct approach to increasing economic growth, suggest the authors, is across-the-board reductions in tax rates -- which are fair, since every taxpayer is given a tax cut of equal magnitude.

Also, tax rate reductions have a proven track record: lowering tax rates in the 1920s, 1960s and 1980s helped spur periods of strong economic growth.

Cutting tax rates supports higher economic growth by reducing both the cost of capital to businesses and the cost of working harder. The economy grows faster than it would otherwise because new businesses are being formed with cheaper capital and new workers are entering the labor force. This expands the tax base, producing higher revenue growth. The higher revenue from a strong economy combined with prudent, decisive spending cuts, makes balancing the federal budget entirely possible.

However, because the tax system presents so many problems, the book concludes by making the case for more fundamental tax reform. House Majority Leader Dick Armey (R-TX), Senator Richard Shelby (R-AL) and former presidential candidate Steve Forbes favor a flat tax that would treat all taxpayers and all income equally.

Source: Angela M. Antonelli and Christianna L. Shortridge, eds., Why America Needs a Tax Cut, October 3, 1996, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400.

 

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