Wall Street Jour: Advice to Bush: Disregard Democratic Blather and cut Taxes:
December 19, 2000
Review & Outlook
The Bush Tax Cut
interactive.wsj.com.
It's almost too much too bear.
All those helpful Congressional Democrats and Beltway media
sirens this past weekend urging President-elect Bush to jettison his across-the-board tax plan in
favor of a few "bipartisan" tax tinkers. Move to the center, they say, which now all of a
sudden means abolishing the estate and marriage penalty taxes.
But shocking to behold, we now seem to be getting a President who thinks he should keep
his campaign promises. House Speaker Dennis Hastert also seemed to notice this late last
week, calling around town to say he didn't want to overstate his commitment to piecemeal tax
cutting.
Mr. Bush, when reporters asked him to throw in the towel on taxes this weekend, said he'd like
to talk to Congress and the Fed chairman first. Sounds prudent, insofar as there are plenty of
good reasons for Mr. Bush to stick to his campaign promise..
* Taxes are too high. Last year, federal tax revenue as a percentage of the economy reached
an historic peak -- 20.4% of GDP. And for no good national purpose, either. The country is not
fighting a war (nor is it required -- yet -- to fund social programs for decrepit boomers).
Worse, an increasing chunk of that revenue is coming from federal income taxes that rose to
9.9% of GDP last year from 7.8% in 1994. It's no wonder, then, that in 1997, the most recent
year for which we have data, the average federal income tax rate on all taxable returns was
15.3% -- the highest level since the mid-1980s.
And in fact, marginal rates are too high. They have climbed from the original Reagan tax
program's percentages of 15-28-33% to the Clinton tax hikes of 15-28-31-36-39.6%. These
high marginal rates are especially punitive because real bracket creep -- what happens as wages
and salaries increase with economic and productivity growth -- has been pushing more and more
people who aren't "the wealthy" into higher and higher brackets.
The de jure marginal rates actually understate reality; the 1990 tax bill's disallowed deductions
and phased-out exemptions make them even higher. In fact, tax revenue has grown faster than
national income for the past eight years.
Ergo: taxes should be cut.
* The economy is beginning to wobble. Economic forecasters are sniffing a recession;
they are busily lowering growth projections for next year. And for good reason; some of the data
is starting to look scary. Oil prices that two years ago were bouncing in the teens are now around
$30 a barrel and have been for nine months. Natural gas prices have almost quadrupled since last
year. Corporate and individual debt is high; and although consumers in the third quarter of this
year spent more than they earned, the fact that consumer debt is at its highest level in 20 years
doesn't bode well for consumer spending.
The impact of those dreary numbers can already be seen in high manufacturing inventories, weak
corporate profits, skidding stock market indices, hinky bond markets, softening bank credit,
climbing personal bankruptcies and faltering consumer confidence.
The Fed has done an admirable job of managing the money side of the economy, keeping the
rate of inflation low and steady. And Alan Greenspan has signaled his intent to lower interest
rates if the softening economy requires it. But monetary policy is not the only factor in the course
of the economy: tax and regulatory policies are up to the President and Congress, not the Fed.
One way to keep this long economic expansion going is to cut taxes; and it's an effective
one since consumer spending constitutes two-thirds of economic activity. Unlike sending tax
money to Washington to be spent, letting people keep their own money to spend (or save or
invest) is direct, immediate, efficient and more productive in terms of allocating resources to their
best use.
Ergo: taxes should be cut.
* Finally, who do you trust, Congress or your own eyes? For the past couple of years,
our tax overpayments have put the federal budget in surplus. And Congress, incited by this
surplus, has exceeded its own budget caps and increased its spending beyond the rate of
inflation. And they've just done it again, passing a humongous budget. Non-defense, discretionary
spending, according to Stephen Slivinski of the Cato Institute, will soar almost 13% this fiscal
year and allotments for pork also show a substantial plumping..
Since it's almost a form of entrapment to send money to Congress, the only solution is not to
send money in the first place. Cutting taxes represents an effective method for one of Alan
Greenspan's great goals in life: restraining the Congressional spending compulsion.
Ergo: taxes should be cut.
Sure, we have our own fave single targets: the Alternative Minimum Tax should be repealed
or indexed for inflation, brackets should be indexed to real wage growth and, yes, the estate and
marriage penalties should be abolished, and don't let us stop anyone from doing any of this in
Bush week No. 1 if the spirit is willing. But those are small-fry for the current state of the
economy.
Mr. Bush's big-fry solution on the table -- his reduction in marginal rates to 10-15-25-33% -- is
the most promising way now to cut taxes. Lowering marginal rates will restore incentives to start
new businesses that hire new workers, to invest and save, to work harder or look for better jobs
all across the income spectrum. Surely men and women of good will in both parties can come
together to prevent the economy from slip-sliding into a recession. |
