NCPA - National Center for Policy Analysis

WILLY-NILLY TAX CUTS

July 26, 2004

Thirty years ago, many congressional Republicans would not support tax cuts unless accompanied by spending cuts, lest the deficit rise as a consequence. But revenues rose automatically as inflation pushed taxpayers into higher tax brackets, fueling ever greater spending and slowing economic growth.

Jack Kemp and Ronald Reagan convinced Republications to break this cycle of tax-and-spend by cutting marginal tax rates. This revitalized the economy.

However, Republicans now promote tax cuts simply for their own sake, with no concern for their structure, economic impact or fiscal consequences, says Bruce Bartlett.

In the 1980s, both sides of the tax cut coin worked together:

  • Marginal tax rates were reduced for all taxpayers and the top rate was slashed from 70 percent to 28 percent.
  • Domestic spending was cut and the growth path of total spending, which had grown relentlessly for decades, slowed and finally began to fall.

Tax cuts starved the government beast, says Bartlett. The problem now is that Republicans cut taxes without any concern for their economic impact, while spending has not been restrained:

  • The vast bulk of tax cuts since 2001, in revenue terms, have gone for tax rebates, kiddy credits and other measures that have no impact on marginal incentives to work, save or invest.
  • True, rates have also been cut, but they are being phased-in slowly, thus pushing off their economic benefits into the future.
  • Today, federal revenues are just 15.8 percent of gross domestic product --well below their historical level of 18 percent -- but outlays have risen from 18.4 percent of GDP in 2000 to 20 percent this year.

Source: Bruce Bartlett, "Willy-Nilly Tax Cuts," National Center for Policy Analysis, July 26, 2004.

 

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